Recent Tax Law Changes Impacting Tax Exempt Organizations
Net Investment Income Tax on Private Foundations Simplified
The 2020 appropriations legislation signed into law by President Trump on December 20, 2019 streamlines the excise tax most private foundations are required to pay on their net investment income. The former two-tiered regime taxed private foundations’ net investment income at a default 2% tax rate. However, private foundations that made charitable distributions during the taxable year that were equal to or greater than their prior 5-year average for such distributions (with the average weighted based upon the value of the foundation’s assets in a given taxable year) paid a reduced tax rate of 1%. In effect, the availability of this reduced tax rate permitted private foundations to distribute 1% of their net investment income to charitable organizations rather than pay that same 1% to the federal government.
However, under the new regime applicable for taxable years beginning on or after December 20, 2019, the two-tiered structure has been eliminated and private foundations are subject to a flat 1.39% tax rate on their net investment income, thus eliminating the availability of and the requirements to qualify for a lower tax rate. Private foundations that were unable to qualify for the lower 1% rate under the prior regime will see significant tax savings as a result of this change in the law. However, private foundations that regularly qualified for the lower 1% rate will experience an increase in their tax rate and the elimination of the tax rate incentive to maintain or increase the level of their charitable distributions each taxable year.
Unpopular “Parking Tax” on Exempt Organizations Repealed
The 2020 appropriations legislation also repealed a highly criticized addition to the Tax Code made by the 2017 Tax Cuts and Jobs Act, referred to as the “parking tax.” The “parking tax” taxed exempt organizations if they provided free parking, free transit passes, and/or free parking passes to their employees.
The repeal of this provision is retroactive to the date of its enactment. As a result, tax-exempt organizations that paid this tax are eligible for a refund, and those that should have paid the tax but failed to do so are relieved of that obligation. Furthermore, the IRS recently issued guidance on the procedure for making a refund claim which can be reviewed by clicking the link below:
New Electronic Filing Requirement for Section 501(c)(3) Exempt Status Applications
Beginning January 31, 2020, nonprofits seeking federal tax-exempt status under Section 501(c)(3) (i.e. public charities, private foundations, and supporting organizations) must file their exemption applications (IRS Form 1023) electronically at www.pay.gov. Nonprofits will no longer be permitted to file by paper, although a 90-day grace period has been authorized during which paper applications will be accepted.
Previously, the IRS did not provide an electronic filing option for nonprofits seeking exempt status under Section 501(c)(3) unless the organization’s annual gross receipts and/or the total value of its assets made it eligible to apply with the streamlined version of the application (IRS Form 1023-EZ). The required user fee for filing the IRS Form 1023 application electronically remains unchanged at $600, although this amount now must be made by credit card, debit card, or electronically from a bank account. Based on the statistics it has monitored since implementing electronic filing for the IRS Form 1023-EZ, the IRS anticipates that electronic filing of IRS Form 1023 will improve application processing times without impacting the exemption approval and rejection rates.
If you have questions concerning this topic or other matters related to recent tax law changes, please contact Casey Rickard, tax lawyer with Branscomb Law, at crickard@branscomblaw.com or (361) 886-3800.
