The Further Consolidated Appropriations Act, 2020, retroactively repealed section 512(a)(7) of the Internal Revenue Code (“IRC”), which imposed unrelated business income tax (“UBIT”) of 21 percent on certain parking and transportation fringe benefits provided by tax-exempt organizations. This repeal is a much-welcomed relief, especially with tax reporting season quickly approaching.

Section 512(a)(7) was extensively criticized for the administration and tax burdens it inflicted on tax-exempt organizations, as well as for its lack of clarity and confusing IRS guidance. Section 512(a)(7) generally required tax-exempt organizations to include amounts paid for employee parking and/or qualified transportation fringe benefits as unrelated business income, which resulted in a 21 percent UBIT liability. Applicable organizations were required to file Form 990-T (some for the first time in their organizational history). Consequently, the increased cost of compliance and tax payments veered funds away from the organization’s exempt purposes.

Congress retroactively repealed section 512(a)(7) in its entirety as if it was never enacted in the first place. Accordingly, tax-exempt organizations that filed Form 990-T and paid UBIT on these parking and transportation fringe benefits may seek refunds for taxes already paid. Organizations may claim a refund or credit of the UBIT by filing an amended Form 990-T. If the amended return is being filed only to claim a refund, credit, or to adjust information due to the repeal of section 512(a)(7), the organization should write “Amended Return – Section 512(a)(7) Repeal” on top of Form 990-T, then follow the instructions for requesting a claim for refund or credit. Generally, an amended return must be filed within three years after the date the original return was due or three years after the date it was filed, whichever is later. Some states conform in whole or in part to the federal definition of UBIT. As such, refunds may also be available for organizations that had to pay section 512(a)(7)-related UBIT at the state and/or local level.

This repeal of IRC § 512(a)(7) is great news for tax-exempt organizations, as the old law brought financial strain and administrative uncertainty to some organizations. Organizations that made adjustments to their fringe benefit policies and/or procedures because of the old law may want to revisit these adjustments.