On May 22, the House of Representatives passed H.R. 1, the "One Big Beautiful Bill," which includes potentially significant changes for tax-exempt organizations. The Senate is currently evaluating H.R. 1, and potentially significant changes are expected before it is presented to President Trump. The proposed changes are far-reaching, especially for colleges and universities and private foundations.
Expansion of University Excise Tax
Currently, the Internal Revenue Code (Code) imposes a 1.4% excise tax on the net investment income of endowments held by private colleges and universities if the endowment exceeds $500,000 per student. H.R. 1 would expand the excise tax on college and university investment income by significantly increasing the excise tax rate. The proposed rates are:
- 4% for assets between $500,000 to $750,000 per student.
- 7% for assets between $750,000 and $1.25 million per student.
- 14% for assets between $1.25 million and $2 million per student.
- 21% for assets above $2 million per student.
Private Foundations
Excise Taxes. Currently, private foundations are assessed an excise tax on net investment income of 1.39%. This rate applies regardless of the total assets of the private foundation. H.R. 1 creates a new tiered rate structure at the following rates:
- Assets below $50 million: 1.39%.
- Assets between $50 million and $250 million: 2.78%.
- Assets between $250 million and $5 billion: 5%.
- Assets above $5 billion: 10%.
It is important to note that organizations exempt under Code Section 501(c)(3) do not have the same ability to offset investment income as for-profit taxpayers.
Excess Business Holdings. H.R. 1 provides a new, narrow exception for the limitation on holding voting stock in excess of 20%, or 35% in certain circumstances. Specifically, certain voting stock repurchased by a business enterprise is excluded when calculating a private foundation's permitted holdings.
All Code Section 501(c)(3) Organizations
Excess Compensation for Executives. H.R. 1 would expand the excise tax on executive compensation levied under Code Section 4960 (see prior alert and update) to all current or former employees with compensation over $1 million.
Unrelated Business Taxable Income. The bill clarifies that income from scientific research is exempt from tax only if the research is publicly available.
Charitable Giving
Charitable Deduction for Non-itemizers. Allows non-itemizers to deduct $150 ($300 for married couples filing jointly) for charitable giving until 2029.
Corporate Charitable Contributions. Creates a 1% floor for corporate charitable giving, which would require corporations to donate at least 1% of their taxable income in order to qualify to take a charitable deduction. This works in conjunction with the 10% ceiling, which is unchanged, and may allow for a carryforward for charitable giving under 1% and over 10%.
Due to the significant impact the proposed changes could have, tax-exempt organizations should be aware of the provisions that could impact them and monitor developments as they unfold at the federal level. Please contact Taft's Nonprofit and Tax-Exempt Organizations team with any questions.
This update is part of Taft's White House Toolkit. Please reference the toolkit for additional cross-practice coverage of federal legislative and regulatory activity that may affect businesses or organizations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
