On Dec. 20, 2019, President Trump signed the Further Consolidated Appropriations Act, 2020, which partly funds the federal government through fiscal year 2020. The act also contains changes to the Internal Revenue Code (IRC) that impact tax-exempt organizations. In addition to repealing the increase in unrelated business taxable income (UBTI) for certain fringe benefits enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA), the spending act also adjusts the excise tax rate imposed on the net investment income (NII) of certain private foundations.
Previous lawPrior to the new act, IRC Section 4940(a) imposed a 2% excise tax on the NII of tax-exempt private foundations, with a reduced rate of 1% for any taxpayer meeting the distribution requirements provided in Section 4940(e). IRS Form 990-PF, Part V, provided a worksheet to help taxpayers determine whether they qualified for the reduced rate.
New lawThe new act decreases the standard rate to 1.39% and eliminates the rule allowing a reduced rate for qualifying taxpayers. The changes are effective for all tax years beginning on or after Dec. 21, 2019.
What does CohnReznick think?The simplified excise tax on the NII of certain private foundations will result in some taxpayers paying more while others pay less on their next tax return. However, all taxpayers will save the time and cost associated with determining qualification for the lower rate. Further, private foundations can now make distribution decisions without concern over how they will impact their tax rate under IRC Section 4940(e).
Subject matter expertise
CPA, MST, Partner & Exempt Organizations Tax Services Leader
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