Last Minute Nonprofit Tax Relief
At the close of 2019, Congress passed legislation that has a significant impact on nonprofits. On December 20, 2019, the Further Consolidated Appropriations Act, 2020, also known as H.R. 1865, became law. This act includes two provisions that significantly impact nonprofits:
- The simplification of the excise tax on net investment income; and
- The retroactive repeal of the unrelated business income tax on qualified transportation fringe benefits.
- Excise Tax Simplification. Private foundations have long sought simplification of the investment excise tax regime. The prior law required private foundations to pay a 2% excise tax on net investment income. If the private foundation made distributions sufficiently above the required minimum distribution amount, the tax was reduced to 1%.
As of fiscal year 2020, the new law fixes the excise tax rate at a flat 1.39% regardless of a foundation’s level of distributions. In the past, many foundations carefully monitored their distributions to ensure qualification for the 1% excise tax. In light of the new flat tax, this will no longer be necessary.
- Qualified Transportation Fringe Benefits Repeal. After an outcry from the sector, the act repealed the unrelated business income tax on qualified transportation fringe benefits. The repeal is retroactive to the original date of enactment (December 2017). Therefore, if this tax affected your nonprofit, consider filing an amended 990T to claim a refund for taxes paid or incurred after December 31, 2017.
New Inflation Adjusted Rates
The IRS has announced new, inflation-adjusted rates and limits for 2020. They are as follows:
- Low-Cost Article. The Internal Revenue Code excludes proceeds from the distribution of low-cost articles provided as thank you gifts in connection with fundraising. Low-cost articles are typically items provided in appreciation for a charitable donation. Examples include mugs, stickers, fridge magnets, t-shirts, and the like. The amount that qualifies as a low-cost article is tied to inflation and, therefore, changes every year. For the 2020 tax year, a low-cost article is defined as an article costing $11.20 or less, an increase of ten cents from 2019.
- Other Insubstantial Benefits. The IRS has ruled that donors who receive something in return for their payments (a quid pro quo gift), may still deduct the entire amount donated if:
- for a contribution of $25 or more, the contributor did not receive something in return that costs more than $5, or the rate of a low-cost article, as described above; or
- the fair market value of all the benefits provided to the donor in connection with the donation is not more than 2% of the amount donated, or $50, whichever is less.
The $5/$25/$50 amounts are adjusted annually for inflation. For the 2020 tax year, the insubstantial benefit amounts have been increased to $11.20, $56, and $112, respectively.
- Lobbying Expenditure Notice Exemption. Certain tax-exempt organizations are required to provide their members and supporters with a reasonable estimate of any portion of their dues or other payments related to nondeductible lobbying expenses. The organization must submit the required estimate at the time it assesses its members or supporters, or at the time their dues (or similar amounts) are paid.
In 1998, the IRS ruled that 501(c)(4) social welfare organizations and 501(c)(5) agricultural and horticultural organizations are exempt from this notification requirement if more than 90% of their annual dues (or similar payments) are $75 or less. This yearly limit is indexed for inflation and has increased to $119 for the 2020 tax year.
- Mileage. The mileage deduction rate for volunteer or charitable use of a vehicle remains unchanged at 14 cents per mile.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.