Two Tax Policies Affecting Foundations and Nonprofits in 2020

  • January 28, 2020
  • by Sally Ehrenfried

As we begin a new year and a new decade, it is important to take stock not only in where we have been, but where we are going. You may think this is an odd beginning for a public policy blog, so please bear with me.

Taking stock allows us to set new priorities and forge new paths. I hope as you plan for and execute on your 2020 priorities you will keep in mind the many external factors that impact your work and your day-to-day activities. And yes, public policy at the local, state, and federal levels can and will impact your ability to achieve your organization’s mission and day-to-day activities. I would like to highlight two examples of federal policy making from late December 2019 to illustrate this point:

Unrelated Business Income Tax

Harking back to December 2017, the House and Senate passed, and the President signed into law, the Tax Cuts and Jobs Act of 2017, also known as TCJA or Tax Reform 2017. TCJA, which took effect on January 1, 2018, ushered in the first comprehensive overhaul of the United States tax structure since 1986. TCJA included a number of changes for individuals, corporations, and social-good organizations. While there are too many changes to list here, a few examples are doubling the standard deduction for taxpayers, changing individual and corporate tax rates, changing the estate tax exemptions, and implementing an excise tax of college and university endowments.

One provision in TCJA which garnered little attention was a change to Unrelated Business Income Tax or UBIT for short. As defined by the IRS, UBIT is a tax on “income from trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption.” In this scenario, TCJA imposed a 21% tax on transportation fringe benefits that nonprofit organizations offered to their employees. This included parking and transit passes.

Nonprofits were required to pay taxes on these employee benefits beginning on January 1, 2018. While partial guidance from the IRS was issued in December 2018, organizations spent valuable time and financial resources calculating and paying taxes on these benefits. The next 24 months also included advocacy by sector associations, individuals, and organizations to repeal this tax on nonprofit organizations.

Fast forward to December 2019, Congress passes, and the President signs, an appropriations and tax package repealing UBIT for transportation fringe benefits for nonprofit organizations. This repeal is retroactive to the tax’s enactment date. Organizations that have filed and paid taxes are eligible for refunds on these taxes. If you have paid taxes on fringe transportation benefits, please consult with your tax professionals on how to request your refund. House Ways and Means Committee Chair Richard Neal, and House Oversight Subcommittee Chair John Lewis, have asked the IRS to expedite the processing of refunds on taxes paid on transportation fringe benefits.

Private Foundation Excise Tax

The private foundation excise tax was initially enacted with the Tax Reform Act of 1969. Through this excise tax, private foundations paid a maximum tax of 2% annually on their net investment income. The excise tax could also be paid out at 1%, using a complex formula based on the foundation’s distributions and its average percentage payout over the preceding five years.

Besides the complexity, the two-tiered process could penalize a foundation for granting more dollars during a time of need. For example, if a foundation increased its grantmaking to assist its community in recovering from a natural disaster, and then reverted back to its original grantmaking levels once the community’s needs were met, the foundation could be penalized and required to pay the 2% tax, because it reduced its grantmaking relative to the preceding years.

Included in the same appropriations and tax package as the UBIT fix was a simplification of the private foundation excise. Beginning with tax years after the date of enactment, December 20, 2019, the private foundation excise tax will be a flat rate of 1.39%. The dual rates are eliminated and foundations can distribute funding in times of community need — without the fear of being penalized at a later date.

So you see, public policy — whether it is the creation of new laws or changes to older ones — can and will have an impact on the social good sector, its work, and your organization’s day-to-day activities.