Congress Passes Final Tax Package: Key Provisions for Tax-Exempt Organizations

On July 3, the House of Representatives approved “The One Big Beautiful Bill Act” as approved two days earlier by the Senate. The final version of the bill contains several provisions relevant to tax-exempt organizations. The bill now goes to the president for his signature.

Major Changes to College and University Endowment Tax

• Tax Rate: The bill makes numerous changes to Code Section 4968, the private college and university “endowment tax” enacted in 2017. Instead of the existing flat 1.4% excise tax rate, there will be a multi-tiered rate structure based on a school’s “student adjusted endowment” (a term that effectively equals the school’s investment assets per student), with larger endowments subject to a higher rate of tax. The tiers and rates are as follows:
  

  School’s Student Adjusted Endowment	Rate
  Between $500,000 and $750,000	1.4%
  Between $750,000 and $2,000,000	4%
  Above $2,000,000	8%

• New Exception for Smaller Schools: Under current law, a school is not subject to the excise tax unless it has at least 500 tuition-paying students. Under the final bill, that threshold increases to at least 3,000 tuition-paying students, resulting in smaller schools not being subject to the excise tax regardless of endowment size.
• Additional Types of Income Subject to Endowment Tax: The final bill subjects to the endowment tax certain items of income previously excluded from taxation under the Section 4968 regulations – namely, student loan interest and royalty income from intellectual property developed by students and faculty members using federal funding.
• Reporting Requirements: The final bill subjects schools to certain new reporting requirements related to the endowment tax, including reporting the school’s number of tuition-paying students.
• Effective Date: The amendments to Section 4968 apply to taxable years beginning after December 31, 2025. Additionally, the Secretary of the Treasury is directed to issue “regulations or other guidance as may be necessary to prevent avoidance of” the endowment tax, “including…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.

Expansion of Executive Compensation Excise Tax

• The final bill expands the group of individuals covered by the excise tax on compensation above $1 million paid by certain tax-exempt organizations under Section 4960 to include all employees and former employees of the organization, not just the top five most highly compensated employees of the organization in the current year and prior years. However, unlike the earlier versions of the legislation, the final bill retains language contained in current Section 4960 that limits the population of individuals covered to those who were employees of the organization during taxable years beginning after December 31, 2016. The amendment applies to taxable years beginning after December 31, 2025.

Key Charitable Giving Provisions

• Corporations: The final bill adds a new floor on charitable deductions for corporations. No deduction is permitted until contributions exceed 1% of taxable income, and new restrictions are imposed on the ability of corporations to carry forward disallowed charitable deductions to future years.
• Individuals:
  • The final bill reinstates and makes permanent a charitable deduction for non-itemizers for cash contributions to certain qualifying charities and raises the cap on such deductions to $1,000 ($2,000 for joint returns).
  • The final bill introduces a new floor on charitable deductions for individuals who itemize deductions, permitting such deductions only to the extent they exceed 0.5% of the individual’s adjusted gross income for the year. The final bill also permanently extends the 60% of adjusted gross income contribution limitation for cash gifts made to certain qualifying charities.

These provisions apply to taxable years beginning after December 31, 2025.

Provisions Not Included in the Final Bill

Many provisions relevant to tax-exempt organizations were a part of draft legislation discussed in our prior Alerts¹ and were not enacted. These include:

• Increasing the net investment income tax imposed on private foundations.
• Reinstating the “parking tax” that would have taxed the provision of qualified transportation fringe benefits -- including employee parking -- as unrelated business taxable income.
• Treating income from name and logo royalties as unrelated business taxable income.
• The “Nonprofit Killer Bill” that would have provided broad discretion to the Secretary of the Treasury to suspend the tax-exempt status of organizations deemed to have provided material support or resources to a terrorist organization.

If you have any questions about the legislation, please contact Kendi Ozmon, Franziska Hertel, or Gil Ghatan.