The Internal Revenue Service (“IRS”) recently introduced several changes that could have a material impact on not-for-profit organizations in 2020 and beyond. This article will highlight a few of these new developments and offer insight into how your nonprofit can adapt.
Repeal of the Tax on Transportation Fringe Benefits
Under Internal Revenue Code Section 512(a)(7), introduced as part of the Tax Cuts and Jobs Act, not-for-profit organizations have been required to pay a 21% tax on transportation fringe benefits paid or incurred on behalf of their employees. Effective December 22, 2019, this provision was repealed retroactive to the date of its inception (December 22, 2017).
This action creates a refund opportunity for not-for-profit organizations that paid unrelated business income tax (“UBIT”) relating to employee transportation fringe benefits for 2017, 2018, 2019 or 2020. On January 22nd, the IRS issued guidance for amending 2017 and 2018 Forms 990-T that reported this tax on the original filing. If the amendment is filed due solely to the repeal of this code section, filers are advised to write “Amended Return-Section 512(a)(7) Repeal” on the top of this form.
For both 2017 and 2018, taxpayers should revise their originally filed Forms 990-T by eliminating the transportation benefits reported under Section 512(a)(7). On the line related to tax payments (line 45g for 2017 and line 50g for 2018), the organization should report the tax that was due on the originally filed return to properly calculate the refund amount. It is important to note that there is a statute of limitations for filing refund claims. In general, the limit is the later of:
- three years from the time the original return was filed; or
- two years from the time the tax was paid.
In addition to pursuing refunds, we strongly advise that not-for-profit organizations cease payment of any further estimated tax payments related to this tax.
Change to Private Foundation Excise Tax Rate
Internal Revenue Code Section 4940 imposes an excise tax on net investment income earned by tax-exempt private foundations. For years beginning before December 21, 2019, the tax rate was 2% unless the foundation made a certain amount of distributions for charitable purposes, in which case the tax rate was reduced to 1%. Effective for tax years beginning after December 21, 2019, the excise tax has been changed to a flat rate of 1.39% on net investment income.
Additional Reporting Requirement for 50l(c)(4) Social Welfare Organization
A new social welfare organization seeking tax-exempt status under Internal Revenue Section 501(c)(4) must file Form 8976 (Notice of Intent to Operate under section 501(c)(4)) online within 60 days of its creation. While this filing requirement has been applicable for any social welfare organization formed after July 8, 2017, it is important to remind newly formed 501(c)(4) organizations of this continuing requirement. In addition, this form does not replace a social organization’s requirement to apply for its tax exempt status with Form 1024.
Guidance Regarding Charitable Donations of Virtual Currency
The IRS recently issued two Frequently Asked Questions (“FAQs”) regarding the reporting requirements surrounding charitable contributions of virtual currency (for example, Bitcoin).
Charitable organizations receiving virtual currency as donations should report the items as noncash contributions on their annual Form 990 filing. In addition, the nonprofit may be required to complete Schedule M (Noncash Contributions) with its annual Form 990. If the donation exceeds $5,000 in fair market value, the organization must provide an authorized signature on the donor’s Form 8283 (Noncash Contribution), which is filed with the taxpayer’s income tax return.
If the organization disposes of the virtual currency within 3 years of the donation, it must file Form 8282 (Donor Information Return). A copy of the form must be furnished to the donor of the currency.
If you have any questions about the IRS rules affecting tax exempt organizations, or need help meeting your nonprofit’s tax or reporting obligations, contact a Friedman professional today.