Posted by Income Taxes and Bookkeeping LLC

Repeal of Special Estimated Tax Payments

Repeal of Special Estimated Tax Payments

Congress retroactively repealed the 2017 Tax Act that imposed income taxes on unrelated business income tax on non-profits that provided employees with qualifying transportation benefits. The taxpayer certainty and disaster tax relief act 2019 (2019 Act) entered into force on 20 December 2019 as part of the Consolidated Appropriations Loan Act 2020, passed to tackle disaster fixes, and provide technical changes needed to clarify other recent changes in tax legislation. In addition to repealing Section 512 (a)(7) of the Federal Revenue Code (parking fees), the 2019 law amended Section 4940 to collapse the two-way investment income tax rate structure imposed on private foundations at a fixed rate of 1.39%.

Repeal of Parking Tax

The 2017 Tax Law amended Section 512 (a) of the Federal Tax Code to require tax-exempt corporations to improve their unrelated business taxable income (UBTI) by the amount paid or incurred for eligible additional transportation benefits provided to employees. These additional benefits include public transportation permits and employee parking. As a result, many exempt organizations were required to submit a 990-T form for the first time, including organizations that are not involved in any business or business organization or organization.

With its repeal, non-profit organizations that notified qualifying transportation fringes on IRS Form 990-T as UBTI and paid the taxes attributable to such income between January 1st of 2018 and December 31st of 2019, should note that they generally have three years from the date of filing the return to claiming the return. 

It is hoped that the internal revenue service will "issue guidance on the appropriate steps organizations should take in the reimbursement process so that they can receive money owed without delay and other hardships," as requested by U.S. Reps Richard Neal, D-MA and John Lewis, D-GA, in a letter sent to the IRS this year. Also, nonprofits should ensure that subsequent tax return documents or estimated tax calculations do not include additional qualified transportation fringe benefits as UBTI.

Simplification of the tax on Net Investment Income

Although exempt from federal income tax under Section 501(a) of the Federal Tax Code as organizations described in Section 501(c)(3) of the Federal Tax Code, private foundations are subject to a special net investment tax under special tax rules, which applies to private foundations. In general, net investment income exceeds gross investment income, including interest, dividends, rents, and royalties plus net income from capital gains, over provisions. These allowable deductions are expenses incurred for the production or receipt of gross investment income or the management of properties held to produce that income. Before adopting the 2019 law, the tax was equal to 2% of the foundation's net investment income, with the possibility of reducing the tax to 1% in certain circumstances.

Over the years, several bills have been introduced in Congress to simplify the private foundation tax on net investment income, replacing the current two-tier tax with a single rate. 

For example, in 2014, U.S. Representative Dave Camp, Republican from MI, chairman of the House Forms and Resources Committee, released a draft to discuss a reform bill during the fiscal year 2014, which included the tax's replacement at a single rate of 1%. The two-tier rate was established to encourage private foundations to increase their qualifying distributions to qualify for the tax rate of less than 1%. Still, it also increased the burden and complexity of tax compliance.

The 2019 law amended Section 4940 of the Internal Revenue Code to reduce both rates to a fixed rate of 1.39%, effective for years beginning after 20 December 2019. The new rate of 1.39% was considered "income neutral" by the federal government based on the amount of taxes generally paid by private foundations in the past. This change translates into tax savings for private foundations that were not eligible for the 1% rate. However, private foundations that have fulfilled their obligation to pay the rate under 1% will see an increase in taxes for this change. In general, private foundations should benefit from reducing the complexity and burden of calculating the tax on net investment income and forecasting estimated tax liabilities.

In the case of a Disaster 

The 2019 law, in addition to abolishing the parking tax and changing the rate of net investment income, also provided for a temporary suspension of the percentage limits of deductions for individuals and businesses for qualified support contributions to humanitarian aid made between 1 January 2018 and 18 February 2020.



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