From mandatory e-filing to a change in the excise tax rate for private foundations, there is no question that significant changes are on the way for tax-exempt organizations in 2020. GHJ Nonprofit tax expert Lizbeth Nevarez offers an in-depth overview of the many changes and important actionable steps for tax-exempt organizations below:
Repeal of Employee Parking Tax
On Dec. 20, 2019, the Further Consolidated Appropriations Act, 2020, was passed by Congress. This Act repeals part of the 2017 Tax Cuts and Jobs Act where the treatment of employee parking and commuter expenses is considered unrelated business income for tax-exempt organizations. The repeal of this tax is retroactive and tax-exempt organizations will be entitled to receive a refund for taxes paid after December 31, 2017. The IRS will issue guidance as to how organizations can claim the refund – either through amending the Form 990-T to claim the refund or the IRS may set up a streamlined process for this. Tax-exempt organizations will no longer need to continue making estimated payments and can claim refunds for estimated payments made thus far. The repeal of the employee parking tax is likely the most exciting news for nonprofits who found themselves burdened with additional administrative and filing requirements, as well as a tax liability, following the enactment of the 2017 Tax Cuts and Jobs Act.
The Taxpayer First Act, enacted July 1, 2019, requires tax-exempt organizations to electronically file information returns and related forms. The new law affects tax-exempt organizations for tax years beginning after July 1, 2019. This mandate includes both Form 990 and Form 990-PF. The IRS will be issuing notices to organizations who have previously filed paper returns to inform them of the new filing requirements. The IRS is providing some transitional relief to small organizations who file Form 990-EZ as the mandate will be postponed for one year for those organizations.
Organizations with a fiscal year ending July 31, 2020 will be the first filers to fall within the mandate. This makes the first mandatory e-filing due date Dec. 15, 2020. Tax-exempt organizations using the calendar year will fall under the mandatory e-file requirement in 2021. If organizations are filing a short tax year, the IRS will still allow them to paper file the returns as their systems are not yet programmed to receive these types of forms.
The IRS currently only accepts paper-filed Form 990-T and Form 4720. The IRS still needs to convert these returns to electronic format. The IRS plans to have these forms available for electronic filing in 2021.
Change in Excise Tax Rate on Net Investment Income
Changing the excise tax rate on net investment income for private foundations to a flat rate has been under consideration for several years, and Congress has finally passed a provision to address this. The Further Consolidated Appropriations Act, 2020 includes a provision where the excise tax on net investment income will be a set flat rate of 1.39 percent. The tax rate will be effective for tax years beginning after Dec. 20, 2019. The Further Consolidated Appropriations Act, 2020 eliminates the regulation in which private foundations would qualify for a reduced rate, from two percent to one percent, if they met certain qualifying distribution requirements.
The motivation behind the change is the hope that it will incentivize private foundations to increase their yearly grant distributions. Private foundations with a calendar year will have the new rate in effect for their 2020 tax year. However, note that for financial statements prepared under Generally Accepted Accounting Principles, the effect of this rate change on deferred excise taxes will be (for private foundations with a calendar year) recognized in their 2019 fiscal year. This is because the effect of a change in tax rates is recognized in the period that includes the enactment date.
Schedule B Disclosure
In July 2018, the IRS issued Rev. Proc. 2018-38, which modified the reporting requirements for tax-exempt organizations under IRC 501(a) other than organizations described in IRC 501(c)(3) Public Charities. Such organizations would no longer be required to report the names and addresses of their contributors on Schedule B of their Form 990 or 990-EZ. This brought a lawsuit to the Federal Court in Montana, where a judge ruled that this type of change would require a regulation change and should undergo the proper rulemaking procedure and allow for public commenting. Tax-exempt organizations who relied on the revenue procedure and did not report the names and addresses of donors will be given penalty relief for relying on it.
The IRS issued proposed regulations REG-102508-16 in Sept. 2019, and public commenting was due by Dec. 9, 2019. Final regulations regarding Schedule B reporting may be issued in 2020, and tax-exempt organizations may choose to apply the final regulations to returns filed after September 6, 2019.
Many changes are on the horizon for tax-exempt organizations for 2020. To better understand these changes and their implications, contact the GHJ Nonprofit Team.