By Connie M. Lira, EA
On Dec. 20, 2019, the federal Further Consolidated Appropriations Act of 2020 retroactively repealed IRC Section 512(a)(7), also known as the parking tax. IRC Section 512(a)(7) took certain expenses related to employee pretax commuter benefits and costs associated with owning or leasing a parking lot and made those expenses taxable income, but only if they were not treated as nondeductible expenses against other sources of unrelated business income tax (UBIT). Yep, it was now possible for an expense to be treated as its own standalone UBIT. Because this UBIT was calculated by adding up expenses, there was little to no offsetting deductions allowed, meaning that if an entity had these costs the new UBIT often dropped straight to the bottom line and was subject to the new 21% flat tax rate (though different tax rates for trusts). The retroactive repeal not only removed the past and future tax liability in its entirety, but it also removed the sometimes significant logistical burdens surrounding identifying and calculating this UBIT. The retroactive parking tax repeal is universally agreed to be a great win for nonprofits, but just because the tax was taken off the books does not mean your work is done.
The IRS published a brief summary on Jan. 21, 2020, “How to Claim a Refund or Credit of Unrelated Business Income Tax (UBIT) or Adjust Form 990-T for Qualified Transportation Fringe Amounts.” It outlines the three simple steps necessary to amend a Form 990-T, it also put to rest the idea that any expedited refund procedures were coming. It essentially confirms that if an entity is owed a refund due to the repeal, the entity must file a standard amended Form 990-T to get it, with one variation: if the only reason for the amendment is the repeal then the phrase “Amended Return – Section 512(a)(7) Repeal” should be placed at the top of the amended return. Ideally, this phrase will lead to a faster processing time of these amendments versus other amended returns.
If 2019 estimates have already been paid, a 2019 Form 990-T should be filed to either request a refund or apply the estimates to a future period. If this return is not filed, the IRS will likely issue a notice in about a year asking for the 2019 Form 990-T, and the entity will need to reply to the notice and could at that time request a refund of the estimated payments. But why wait that long? You should avoid the delay, and the notice, and simply file the 2019 Form 990-T in a timely fashion.
Due to the challenges in understanding the parking tax issue when it first rolled out, many entities are also receiving notices about late filings and late payments. Even though the tax has been repealed, these notices still need a response. Now that we know no expedited refund procedures are coming, I recommend filing the amended return before responding to the notice if time allows; this way, you can indicate in the response that the amendment has been filed.
Keep in mind, just because there was a federal repeal doesn’t mean there was a state repeal. Many states automatically conform to the IRC, and many others conform to specific version of the IRC and/or varied adoption dates. Here is an example: for tax years beginning on or after Jan. 1, 2020, Iowa will automatically conform to the IRC, but for tax years beginning prior to Jan. 1, 2020, conformity varied and was not automatic. Iowa did previously conform to IRC Section 512(a)(7). Here is another example: Idaho adopted the IRC in effect on Jan. 1, 2020, but did not include any provision that it will automatically conform to future changes. The Iowa and Idaho returns can be amended to remove this UBIT and request a refund. In general, if you are unfamiliar with a state, best not to assume there is no UBIT issue just because there is no federal UBIT issue. Be aware states that typically automatically conform to the IRC are Arkansas, Alabama, Colorado, Illinois, Kansas, Louisiana, Massachusetts, Missouri, Montana, North Dakota, Nebraska, New Mexico, Oklahoma, Rhode Island, Tennessee, and Utah (and the District of Columbia). Whereas Delaware, Kentucky, New Jersey, Pennsylvania, and Texas do not tax UBI, and were therefore not impacted by IRC Section 512(a)(7) at all.
Accurately filing a return, amending a return, or responding to an IRS notice in a way that will efficiently resolve a matter involve skills that not everyone cultivates. The resolution of this repeal may result in additional costs and logistical challenges for our nonprofit communities, but remember there is value in quality services, both in technical skill and the emotional comfort, that is intrinsic to working with a trusted adviser. As always, work with entities to ensure that the value provided matches the costs.
Connie M. Lira, EA, is a director at CliftonLarsonAllen LLP in Plymouth Meeting, Pa. She can be reached at connie.lira@CLAconnect.com.
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