Alert
New Law Increases Excise Taxes for Tax-Exempt Organizations
Excise taxes on net investment income for certain private universities, will increase to as high as 8%, under HR1, the tax and spending package, signed into law by President Donald Trump on July 4, 2025.
However, the final law exempts small colleges from the excise tax.
The new law also contains several other provisions that affect tax-exempt organizations and doesn’t include other proposals that were in earlier versions of the bill.
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.
Under the new law, the rates will be:
- A 1.4% excise tax for private universities with 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
Applicable educational institutions are those that have:
- At least 3,000 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
The new law increased this threshold – it had been only 500 tuition-paying students under IRC Section 4968 and in earlier proposals of the new law.
Applicable educational institutions exclude state colleges or universities defined under IRC 511(a)(2)(B). Earlier proposals had also excluded qualified religious institutions, but this exclusion wasn’t part of the final law.
A student adjusted endowment is defined 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 students. Assets are valued as of the end of the previous tax year.
A new provision under the law is that net investment income will include interest income from student loans made by the university as well as any royalty income from intellectual property developed using federal funding. In addition, universities subject to the tax will be required to report the number of tuition-paying students and number of total students on their Form 990.
The endowment excise tax provisions 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 House proposal, the excise tax rate would have increased to as high as 10% for certain private foundations, based on their assets. The new law, however, contains no provisions to increase the excise tax for private foundations.
Excess Compensation Changes
The new law changes 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 previous law, a covered employee was 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.
Now, a covered employee is any employee or former employee who had been employed during tax years beginning after December 31, 2016. This change is effective for tax years beginning after December 31, 2025.
Charitable Deductions
The new law makes permanent the charitable deduction for individuals who don’t itemize deductions and increases the deduction to $1,000 for individuals and $2,000 for married filing jointly taxpayers. For taxpayers who itemize deductions, the new law allows charitable deductions only to the extent that they exceed 0.5% of adjusted gross income (AGI) for the year. In addition, the new law makes permanent the 60% AGI contribution limit for cash gifts.
For corporations, the new law imposes a 1% floor on taking a charitable contribution deduction. However, consistent with previous law, the charitable contribution deduction for corporations can’t exceed 10% of taxable income.
Energy Credits
The new law eliminates several clean energy credits, including:
- The investment tax credit as applied to wind and solar facilities if placed in service after December 31, 2026, unless construction begins before July 4, 2026
- The commercial clean vehicle credit for the purchase of electric vehicles, effective for vehicles acquired after September 30, 2025.
- The credit for charging stations, effective for property placed in service after June 30, 2026.
Other Provisions
The new law establishes a non-refundable tax credit of up to $1,700 for contributions made to public charities that mainly give scholarships to elementary and secondary school students. The credit is available to U.S. citizens and legal residents.
In addition, the final law didn’t contain the following provisions, which had been included in earlier versions of the bill:
- Treating qualified transportation fringe benefits as unrelated business taxable income
- Treating income from name and logo royalties as unrelated business taxable income
- 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.
We’re Here to Help
For more information on how these potential changes can impact your organization and how to adjust your tax planning, contact your firm professional.