Two years after an ill-advised transportation benefits tax on nonprofits was included in the Tax Cuts and Jobs Act (TCJA), Congress appears on the cusp of repealing the provision.
A bipartisan tax bill was agreed to by House and Senate negotiators late last night that would retroactively repeal the tax that nonprofits and churches have been working to eliminate ever since the TCJA was approved in December 2017. The appropriations bill also includes a streamlined excise tax on foundations, which has been a priority of foundations for years.
A TCJA provision imposed an unrelated business income tax (UBIT) on expenses of nonprofits that provide employees with transportation benefits, which include things like transit passes and parking.
“Justice delayed is still justice,” said David Thompson, vice president of public policy for the National Council of Nonprofits in Washington, D.C. “We’re delighted that our elected leaders agreed to agree for a change. It’s regrettable, though, that it took so long to repeal a tax that never made sense to anyone and that forced thousands of front-line nonprofits to divert two years of attention and millions of dollars away from their missions,” he said. “That was time and money that would have been better spent helping people in local communities. Special praise goes to the thousands of nonprofits across the country who mobilized to tell Congress to fix the costly mistake.”
In a best-case scenario, Thompson said the bill would be approved by Congress and signed by President Donald J. Trump by the end of this week. He emphasized that the repeal will be retroactive so those organizations that have paid it will get the money back, though that process is not yet clear. What’s not retroactive is the expense that charities might have incurred to calculate the tax, he added.
Independent Sector estimated the transportation tax and associated administrative cost likely impacted nonprofits by an average of about $12,000.
“Assuming this deal gets signed into law, it’s a good day for charities,” said Steve Taylor, senior vice president of public policy for United Way Worldwide (UWW). In addition to the repeal of the transportation tax, Taylor pointed to an increase of $3.5 million for AmeriCorps, a $5-million increase for the emergency Food and Shelter Program, and $7-million increase for the Volunteer Income Tax Assistance (VITA) program.
Lots of tax policy advocates were disappointed that the tax deal was relatively modest, Taylor said, but it’s actually good news that there may be another tax bill next year or in 2021. That could be a vehicle for a universal charitable deduction or Earned Income Tax Credit and Child Tax Credit expansion, he said.
“What the repeal shows is that when the charitable sector all comes together around an issue, Congress will listen,” Taylor said. “That’s good news for our efforts to expand the charitable deduction.”
About half of the expired tax provisions for 2017 and 2018 are in the bill, Thompson said, with about 30 in all. Among them are some disaster relief provisions and streamlining of the foundation excise tax, which has been a top priority of the private foundation world for a decade. A 1.39-percent tax would replace the current two-tiered tax and would be revenue neutral.
The tax measures were attached to H.R. 1865, the National Law Enforcement Museum Commemorative Coin Act [Further Consolidated Appropriations Act, 2020] but there is no revenue offset for the repeal of the tax on transportation benefits.
The language of a bill sponsored by U.S. Sens. Chris Coons (D-Del.) and James Lankford (R-Okla.), the Lessening Impediments from Taxes (LIFT) for Charities Act (S. 632), was incorporated into the legislation. It was the clearest and cleanest bipartisan bill on the transportation tax repeal, Thompson said. A companion bill in the House (H.R. 1223) was the only one of several bills to repeal the tax that specified how to cover the loss of $1.8 billion in tax revenue, raising the corporate income tax from 21 percent to 21.03 percent.
“Several of us have worked for months to correct a small provision in the 2017 tax reform bill that required some churches and nonprofits to pay a tax on employee benefits, which could include items that have never been previously accounted for, such as a parking space,” Lankford said in a news release. “Most nonprofits were neither equipped to handle the additional administrative burdens or compliance costs, nor intended to be a source of revenue for the federal government,” he said.