United States: Good Riddance To The Parking Tax And The Two-Tiered System For Calculating A Private Foundation's Tax On Investment Income

On December 20, 2019 the President signed into law the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (the "Act").  The Act retroactively repealed the controversial parking tax that was enacted in 2017. The Act also simplified the private foundation excise tax on investment income.

Repeal of the Tax-Exempt Organization Parking Tax

Beginning on January 1, 2018, the costs of providing transportation fringe benefits to employees of tax-exempt organizations have been subject to a 21% Federal unrelated business income tax (“UBIT”).  The fringe benefits subjected to tax included public transit pass benefits, qualified bicycle commuting reimbursement benefits and the controversial employer-provided parking benefits. The tax applied equally to public charities, private foundations, hospitals, independent schools, colleges and universities. 

In addition, an organization operating in a state with a state-level unrelated business income tax, like Connecticut, had to pay state unrelated business income taxes on the costs of those fringe benefits.

The Act retroactively repealed Internal Revenue Code Section 512(a)(7), which contained the tax on transportation fringe benefits, including the controversial tax on employer-provided parking.  Thus, in addition to no longer having to pay this tax, organizations that have already paid the tax for 2018 and 2019 may seek refunds.

Simplification of the Private Foundation Excise Tax on Investment Income

Historically, Internal Revenue Code Section 4940 has subjected private foundations to a 2% Federal excise tax on their investment income.  The 2% tax rate could be reduced to 1% if a private foundation satisfied certain annual distribution requirements. Determining if the annual distribution requirements were satisfied was complicated and time-consuming.  

The Act simplifies the excise tax on investment income by eliminating the current two-tiered system (2% or 1%) and replacing it with a single flat rate of 1.39%. The new 1.39% rate is effective for tax years beginning after December 20, 2019 (January 1, 2020 for calendar year private foundations).

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