Significant Changes for Tax-Exempt Organizations Included in House Ways and Means Committee Tax Package

On May 12, the House Ways and Means Committee released its draft portions of “The One Big Beautiful Bill,” the expected tax package intended to extend expiring provisions of the 2017 Tax Cuts and Jobs Act (“TCJA”) and to implement other priorities of President Trump and the Republican-controlled Congress. The proposed package includes several key provisions, summarized below, particularly relevant for tax-exempt organizations. It is important to note that at this stage, these changes remain proposals and could change significantly before a bill makes its way through both the House and Senate and is ultimately signed by the President. Up next, the House Ways and Means Committee will conduct a markup of the bill before it is sent to the full House for consideration.

Major Changes to College and University Endowment Tax

• Tax Rate: As anticipated, the proposed legislation would make numerous changes to Code Section 4968, enacted as part of the TCJA. Instead of the existing flat 1.4% excise tax rate, there would be a four-tiered rate structure based on a school’s “student adjusted endowment” (a new term that effectively equals the school’s investment assets per eligible student), with larger endowments subject to a higher rate of tax:

Rate	School’s Student Adjusted Endowment
1.4%	Between $500,000 and $750,000
7%	Between $750,000 and $1,250,000
14%	Between $1,250,000 and $2,000,000
21%	Above $2,000,000

• Students Counted: The legislation would narrow which students are counted for purposes of the asset per student thresholds, making it more likely for schools with high numbers of international students to become subject to the endowment tax, and potentially at a higher rate. The proposal counts only students who are citizens or nationals of the United States, permanent residents of the United States, or who are able to provide evidence from the Immigration and Naturalization Service that they are in the United States for other than a temporary purpose with the intention of becoming a citizen or permanent resident (thereby excluding, for example, international students on temporary student visas and undocumented students).
• Religious Exception: While the legislation would expand the tax and pick up more schools, it would simultaneously create a new exclusion for certain religiously affiliated institutions that were established after July 4, 1776, have continuously maintained an affiliation with a church, and maintain a published institutional mission that includes religious tenets, beliefs, or teachings.
• Income Newly Included: Certain items of income previously excluded from taxation under the Treasury regulations issued under Section 4968 would be subject to tax – namely, student loan interest and royalty income from intellectual property developed by students and faculty members using federal funding.
• Anti-Abuse Rule: The Secretary of the Treasury would be directed to issue “regulations or other guidance to prevent avoidance of such tax through the restructuring of endowment funds or other arrangements designed to reduce or eliminate the value of net investment income or assets subject to” the endowment tax.
• Reporting Requirements: Schools would be subject to certain new reporting requirements related to the endowment tax.
• Effective Date: The proposed changes would apply to taxable years beginning after December 31, 2025.

Major Changes to Private Foundation Net Investment Income Tax

• Tax Rate: Following the same approach as the proposed changes to the endowment tax, the tax on net investment income for private foundations would be adjusted from the current 1.39% single-tier tax to instead have four rate tiers depending upon the foundation’s assets:

Rate	Foundation’s Asset Value
1.39%	Less than $50,000,000
2.78%	Between $50,000,000 and $250,000,000
5%	Between $250,000,000 and $5,000,000,000
10%	Above $5,000,000,000

• Assets Counted: The asset thresholds would be based on a private foundation’s total assets (not just investment assets), without reduction for liabilities, and would also take into account the assets of certain related organizations.
• Effective Date: The proposed changes to the private foundation net investment income tax would take effect for taxable years beginning after the date of enactment.

Unrelated Business Taxable Income (“UBTI”)

• The proposed package includes several key changes to the UBTI rules:
  • Parking Tax: Reinstatement of the tax on qualified transportation fringe benefits and parking facilities used in connection with qualified parking first put in place by the TCJA and then later repealed, now with a carve-out for religious organizations.
  • Name and Logo: Name and logo royalties would give rise to UBTI despite the longstanding carve-out from UBTI for royalty income.
  • Research: Modification of the UBTI exclusion for research income of research organizations to limit the exclusion only to income from research that is fundamental research, the results of which are freely available to the general public (and not all research performed for any person).

Executive Compensation Excise Tax

• The group of individuals covered by the excise tax on compensation above $1 million paid by certain tax-exempt organizations, included in Section 4960 and enacted as part of the TCJA, would be expanded and it appears the intent is to include all employees and former employees of the organization and of any related person or governmental entity, and not just the top five most highly compensated employees of the organization in the current year and prior years.

Organizations That Provide Material Support to Terrorist Organizations

• Aspects of the “Nonprofit Killer Bill” introduced during the prior Congress were made a part of the tax package and would provide the Treasury Secretary with broad discretion to suspend the tax exemption of organizations the Secretary designates as providing material support or resources to a terrorist organization. The suspension of tax exemption would be effective upon the designation of the organization as a terrorist-supporting organization (although the organization could appeal the designation).

Key Charitable Deduction Provisions

• Corporations: The tax package would add a new floor on charitable deductions for corporations. No deduction would be permitted until contributions exceed 1% of taxable income, and the proposal would impose new restrictions on the ability of corporations to carry forward disallowed charitable deductions to future years.
• Individuals: The proposal would reinstate a charitable deduction for non-itemizers, capped at $150 ($300 for joint returns) for cash contributions to certain qualifying charities.

Notably, the proposed House package does not repeal the ability of Section 501(c)(3) organizations to borrow through the use of tax-exempt bonds nor does it modify any tax exemption requirements for nonprofit hospitals. Early indications from the Ways and Means Committee had suggested these might be elements of proposed tax legislation.

This is a developing matter and we will be working to keep you updated as the proposed legislation continues to evolve. If you have any questions about the proposed legislation, please contact Kendi Ozmon, Franziska Hertel, or Gil Ghatan.