Alert
Increased Excise Taxes for Not-for-Profit
Excise taxes on net investment income for private universities, and potentially other not-for-profit organizations, would increase under tax bills now making their way through Congress. Excise tax rates could climb as high as 21% for private universities and 10% for private foundations, under one of the bills.
The US House of Representatives narrowly passed a comprehensive reconciliation bill, HR 1—called the One Big Beautiful Bill Act—that includes significant proposed tax changes and spending cuts, on May 22, 2025.
The US Senate Finance Committee released its own version of the tax bill on June 16, 2025, with Senate Republicans hoping to pass the bill by July 4, 2025. The House and Senate must then reconcile any differences between the two bills and both houses must approve the reconciled bill before a final version can be sent to the President. Additional changes to the bill are expected in this process.
The two bills contain provisions that affect tax-exempt organizations but differ in their impact.
Colleges and Universities
Internal Revenue Code (IRC) Section 4968, which was enacted as part of the Tax Cuts and Jobs Act (TCJA) of 2017, established a 1.4% excise tax on net investment income of applicable educational institutions.
Both the House bill and Senate bill would increase rates for the excise tax, although the House bill proposes higher rates.
The rates, under both bills, are based on the amount of a college or university’s student adjusted endowment. The proposals apply to applicable educational institutions that have:
- At least 500 tuition-paying students in the preceding tax year
- More than 50% of those students located in the United States
- A student adjusted endowment of at least $500,000
Applicable educational institutions exclude state colleges or universities defined under IRC 511(a)(2)(B) or qualified religious institutions.
Under the House bill, the excise tax on net investment income would be at the following rates:
- A 1.4% excise tax for a student adjusted endowment of more than $500,000 and less than $750,000
- A 7% excise tax for an endowment of more than $750,000 and less than $1,250,000
- A 14% excise tax for an endowment of more than $1,250,000 and less than $2 million
- A 21% excise tax for an endowment of more than $2 million
Under the Senate bill, the rates would be:
- A 1.4% excise tax for a student adjusted endowment of at least $500,000 and less than $750,000
- A 4% excise tax for an endowment of more than $750,000 and less than $2 million
- An 8% excise tax for an endowment of more than $2 million
A student adjusted endowment is defined in both bills as the aggregate fair market value of an institution’s assets, other than those assets used directly in its exempt purpose, divided by the number of eligible students. Assets are valued as of the end of the previous tax year.
A qualified religious institution is any college or university that:
- Was established after July 4, 1776
- Was established by and has continuously maintained an affiliation with a church or a convention or association of churches
- Maintains a published mission that is predicated on religious tenets, beliefs, or teachings
The endowment excise tax provisions would apply to taxable years beginning after December 31, 2025.
Private Foundations
Since 2020, private foundations have paid a 1.39% excise tax on their net investment income. Under the proposed House bill, the excise tax rate would increase for certain private foundations, based on their assets. The Senate bill proposes no change to the excise tax under IRC 4940(a).
Under the House bill, the new excise tax rates would be:
- A 1.39% excise tax for assets less than $50 million
- A 2.78% excise tax for assets of at least $50 million and less than $250 million
- A 5% excise tax for assets of at least $250 million and less than $5 billion
- A 10% excise tax for assets of at least $5 billion
The asset amount is based on the aggregate fair market value of all assets of the private foundation at the end of its tax year, without reduction for any liabilities.
The private foundation provisions would apply to taxable years beginning after the enactment of the law.
Excess Compensation Changes
Both bills would change the definition of covered employee in relation to the 21% excise tax imposed on remuneration over $1 million paid in a tax year by an applicable tax-exempt organization to a covered employee.
Under the current law, a covered employee is one of the five highest compensated employees of the organization for the tax year or was a covered employee for any preceding tax year beginning after December 31, 2016.
The House bill defines a covered employee as “any employee (including any former employee) of an applicable tax-exempt organization or any related person or governmental entity.” The Senate bill definition is similar but doesn’t include “or any related person or governmental entity.”
Other Provisions
The House bill contains other provisions that affect tax-exempt organizations, including:
- Treating qualified transportation fringe benefits as unrelated business income tax
- Clarifying language in the IRC to state that scientific research is exempt from unrelated business income tax only if the research is freely available to the public
The Senate bill contains none of these provisions.
Comparison of the Bills
The following chart offers a snapshot of what’s in the two bills:
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For more information on how these potential changes can impact your organization and how to adjust your tax planning, contact your firm professional.