You can stop counting those parking spaces now.
As part of the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (TCDTRA), churches, hospitals, social service agencies, and other not-for-profits no longer have to worry about who’s parking where.
The TCDTRA and the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), which also passed at the end of 2019, include numerous other changes impacting tax-exempt organizations, such as:
- A new tax rate on net investment income
- Relief for cooperative utilities
- Efforts to bolster retirement savings through 403(b) plans
Following is an overview of key changes and impacts for your tax-exempt organization.
UBI and Fringe Benefits
The TCDTRA repealed Internal Revenue Code (IRC) Section 512(a)(7)—a provision of the 2017 tax reform reconciliation act, also known as the Tax Cuts and Jobs Act (TCJA)—that classified transportation benefits, qualified parking facilities, and on-premises athletic facilities as unrelated business income (UBI).
IRC Section 512(a)(7) left many tax-exempt organizations scrambling in 2018 to determine the number of reserved employee and visitor parking spaces they had—as well as estimate how the remaining unreserved spots were used on any given business day. Based on a formula determined in part by employee use of the parking lot, expenses associated with parking could be considered taxable income to the organization.
What It Means for Your Organization
Those administrative headaches may have been for naught, but at least the TCDTRA is providing relief for any taxes already paid. The repeal of the provision is retroactive to December 22, 2017, which is when the TCJA passed.
This means any tax-exempt organization can claim a refund or credit for unrelated business income tax (UBIT) paid on any qualified transportation or on-site athletic facility fringe benefits.
How to File for a Refund or Credit
According to guidance issued by the IRS in January 2020, tax-exempt organizations should file an amended Form 990-T for 2017 or 2018 to claim a refund or credit for UBIT paid in those years.
If the amended return is only being filed to claim a refund or credit—or adjust information due to the repeal of IRC Section 512(a)(7)—the words “Amended Return—Section 512(a)(7) Repeal” should be written at the top of Form 990-T. A statement must also be attached stating the line numbers on the original return that were changed and the reason for each change.
In general, any amended return should be filed within three years from the time the original Form 990-T was filed or two years from the time the tax was paid, whichever is later.
The IRS guidance only applies to federal tax filings. Any state or local filings for which these benefits were reported as UBI would need to be addressed through a separate amended return or process specific to the state or locality.
New Excise Tax Rate
The TCDTRA also established an across-the-board 1.39% excise tax on net investment income for private foundations. The new flat rate replaces the two-tier excise tax under which private foundations were previously taxed at either 1% or 2%.
The 1% rate had applied to those private foundations whose qualifying distributions equaled or exceeded a certain threshold. The calculation involved a five-year average of the ratio of adjusted qualifying distributions to the net value of noncharitable-use assets. The average distribution ratio for the five-year base period was then multiplied by the net value of noncharitable-use assets for the current tax year. Added to that amount was 1% of the current year’s net investment income. That total was then compared to the qualifying distributions for the current year. If qualifying distributions equaled or exceeded the total, the private foundation would pay the lower 1% rate on its net investment income.
Some private foundations undertook extensive planning to ensure they met the threshold for the 1% excise tax. Now, the administrative work behind these calculations is unnecessary.
The new excise tax rate goes into effect for taxable years beginning after December 20, 2019, which was the date the legislation was passed. Private foundations that follow a calendar year—or whose fiscal years begin before December 20, 2019—will still fall under the two-tier excise tax system as they prepare their tax returns during 2020.
While planning for estimated payments for 2020, however, private foundations should use the new 1.39% tax rate.
Relief for Cooperative Utilities
The TCDTRA also repealed a provision that counted government grants as nonmember income for IRC Section 501(c)(12) telephone and electric cooperatives. Generally, these organizations are required to receive 85% or more of their income from members to maintain their exemption.
Under the new law, certain government grants made to these cooperatives for disaster relief, or for utility facilities or services, won’t be considered when applying the 85% member income test. This provision is retroactive to taxable years beginning after 2017.
Changes to 403(b) Retirement Plans
The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) provided sweeping changes to retirement plans, including provisions to make it easier for small, tax-exempt organizations to set up and maintain workplace retirement plans.
Although much of the focus of the SECURE Act centered on 401(k) plans and individual retirement accounts (IRAs), the new law also included several changes impacting 403(b) plans. The following employees are eligible to participate in a 403(b) plan:
- Employees of 501(c)(3) tax-exempt organizations
- Employees of public-school systems who are involved in the day-to-day operations of a school
- Employees of cooperative hospital service organizations
- Civilian faculty and staff of the Uniformed Services University of the Health Services
- Employees of public-school systems organized by Native American tribal governments who are involved in the day-to-day operations of a school
- Certain ministers
One provision of the SECURE Act provides an increase in the retirement-plan start-up-cost tax credit from up to $500 per year to up to $5,000 per year. The tax credit is for organizations with up to 100 employees.
The new plan must have at least one participant who isn’t a highly compensated employee and must include employees who weren’t receiving substantial retirement benefits through another plan. The tax credit is available over a three-year period.
Another provision creates a new tax credit of $500 per year to 403(b) plan sponsors that add an automatic enrollment feature.
The SECURE Act includes provisions that allow 403(b) plan participants to preserve their life income investments and avoid surrender charges and fees if certain changes occur. When a lifetime income investment option is no longer an investment option under a 403(b) plan, the new law allows the plan to undertake the following:
- A direct rollover to an eligible retirement plan or IRA
- Distribution of a lifetime income investment in the form of a qualified plan distribution annuity.
If a 403(b) plan is terminated, the SECURE Act now allows for the distribution of an individual custodial account in kind to a participant or beneficiary—eliminating a potentially large tax hit along with surrender charges or fees. The individual custodial account will be maintained on a tax-deferred basis as a 403(b) custodial account until it’s paid out.
The SECURE Act gives the US Treasury Department six months to issue guidance on this provision, which will be retroactive for all taxable years beginning December 31, 2018.
Birth or Adoption Distributions
The SECURE Act provides a penalty-free early withdrawal from a 403(b) plan of up to $5,000 for qualified birth or adoption distributions. Although there will no longer be a 10% penalty for early withdrawal, the distribution is still be subject to applicable income taxes.
The legislation increases the age for required mandatory distributions from a retirement plan from age 70 1/2 to 72.
We’re Here to Help
For questions about how the new laws may affect your organization’s filings in the coming year, contact your Moss Adams professional.