Senate Tax Package Includes Major Changes to Endowment and Executive Compensation Excise Taxes

On July 1, the Senate approved its version of “The One Big Beautiful Bill Act,” containing several provisions relevant to tax-exempt organizations. Importantly, certain proposed amendments contained in draft legislation released by the Senate Finance Committee two weeks ago (covered in our prior Alert here) were removed from the approved bill following a determination by the Senate Parliamentarian that those provisions were outside the scope of what could be approved by the Senate under the reconciliation procedure. The Senate-approved legislation is substantially different from that approved by the House last month (covered in our prior Alerts here and here). The House must now approve the Senate’s version, or the two chambers must work to reconcile those differences, before the legislation can be sent to the President for signature.

Major Changes to College and University Endowment Tax

• Tax Rate: Like the House bill, the Senate proposal would make numerous changes to Code Section 4968, the “endowment tax” enacted in 2017. Instead of the existing flat 1.4% excise tax rate, there would 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. Compared to the House bill, the Senate bill would introduce fewer rate tiers and would provide for significantly reduced rate increases:
  

  School’s Student Adjusted Endowment	Rate in House Bill	Rate in Senate Bill
  Between $500,000 and $750,000	1.4%	1.4%
  Between $750,000 and $1,250,000	7%	4%
  Between $1,250,000 and $2,000,000	14%
  Above $2,000,000	21%	8%

• New Exception for Smaller Schools: One notable change from earlier versions of the legislation is to increase the number of tuition-paying students a school must have in order to be subject to the excise tax in the first instance. Under current law, a school is not subject to the excise tax unless it has at least 500 tuition-paying students, and under the House and Senate Finance Committee versions of the legislation, this threshold would have remained unchanged. Under the Senate-approved bill, that threshold would increase to 3,000 tuition-paying students, resulting in smaller schools not being subject to the excise tax regardless of endowment size.
• Key Provisions Not Included in Senate Bill: Following the ruling of the Senate Parliamentarian, the bill approved by the Senate no longer includes three key provisions that were included in the Senate Finance Committee proposal and in the House-approved legislation:
  • Counting International Students: The Senate bill would no longer exclude international students when counting a school’s investment assets per student for purposes of determining whether a school is subject to the excise tax and at what rate.
  • Religious Exception: The Senate bill no longer includes an exclusion from the excise tax for certain religiously affiliated institutions.
  • Participation in Title IV: The Senate bill no longer includes a requirement that a school have participated in a federal student financial aid program under Title IV of the Higher Education Act of 1965 during the preceding taxable year in order to be subject to the excise tax.
• Additional Types of Income Subject to Tax: Like the House bill and Senate Finance Committee proposal, the Senate bill would subject to 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: Like the House bill and Senate Finance Committee proposal, the Senate bill would subject schools to certain new reporting requirements related to the endowment tax.
• Effective Date: Like the changes in the House bill and Senate Finance Committee proposal, the amendments to Section 4968 would apply to taxable years beginning after December 31, 2025, although the Secretary of the Treasury would be 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

• Like the House bill and Senate Finance Committee proposal, the Senate bill would expand 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 proposals, the Senate 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.

Key Charitable Giving Provisions

• Corporations: Like the House bill and Senate Finance Committee proposal, the Senate bill would add a new floor on charitable deductions for corporations. No deduction would be permitted until contributions exceed 1% of taxable income, and new restrictions would be imposed on the ability of corporations to carry forward disallowed charitable deductions to future years.
• Individuals:
  • Like the House bill and Senate Finance Committee proposal, the Senate bill would reinstate and make permanent a charitable deduction for non-itemizers for cash contributions to certain qualifying charities. The cap on such deductions would be $1,000 ($2,000 for joint returns).
  • Like the Senate Finance Committee proposal, the Senate bill would introduce 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 Senate bill would also permanently extend the 60% of adjusted gross income contribution limitation for cash gifts made to certain qualifying charities.

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.