On June 16, the Senate Finance Committee released its draft portions of “The One Big Beautiful Bill Act,” following passage by the House of its version of the bill on May 22 (covered in our prior Alerts here and here). Like the House bill, the Senate proposal includes several key provisions, summarized below, particularly relevant for tax-exempt organizations, but diverges from the House bill in several crucial respects, some of which are favorable to tax-exempt organizations. At this stage, the Senate bill remains a proposal and could change significantly before it is passed. Ultimately, both the House and the Senate will need to agree on a final version of the bill, leaving much to be resolved. The provisions described in this Alert are part of a large bill that contains numerous controversial legislative proposals.
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 eligible 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:
- Students Counted: Like the House bill, the Senate proposal would narrow which students are counted for purposes of the asset per student thresholds, making it more likely for schools with high numbers of international students to become subject to the endowment tax, and potentially at a higher rate. Like the House bill, the proposal counts only students who are citizens or nationals of the United States, permanent residents of the United States, or who are able to provide evidence from the Immigration and Naturalization Service that they are in the United States for other than a temporary purpose with the intention of becoming a citizen or permanent resident (thereby excluding, for example, international students on temporary student visas and undocumented students).
- Schools Covered: Under the Senate proposal, a school would not be subject to the excise tax unless it participated in a federal student financial aid program under Title IV of the Higher Education Act of 1965 during the preceding taxable year.
- Religious Exception: The Senate proposal would adopt the exclusion included in the House bill for certain religiously affiliated institutions that were established after July 4, 1776, have continuously maintained an affiliation with a church, and maintain a published institutional mission that includes religious tenets, beliefs, or teachings.
- Additional Types of Income Subject to Tax: Like the House bill, the Senate proposal 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, the Senate proposal would subject schools to certain new reporting requirements related to the endowment tax.
- Effective Date: Like the changes in the House bill, the proposed changes in the Senate proposal 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 to prevent avoidance of such tax 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, the Senate proposal 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.
Private Foundation Net Investment Income Tax Left Unchanged
- The Senate proposal would leave the net investment income tax for private foundations unchanged at 1.39%, diverging from a proposal in the House bill that would have increased the rate of this tax to up to 10%.
“Parking” Tax Not Included
- The Senate proposal would not reinstate the tax on qualified transportation fringe benefits and parking facilities used in connection with qualified parking, which had resurfaced in the House bill after having been repealed in 2019.
Research Income Exclusion from UBTI Not Modified
- Unlike the House bill, the Senate proposal would not modify the exclusion from unrelated business taxable income (“UBTI”) for research income of research organizations.
Key Charitable Deduction Provisions
- Corporations: Like the House bill, the Senate proposal would add a new floor on charitable deductions for corporations. As under the House bill, 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, the Senate proposal would reinstate a charitable deduction for non-itemizers for cash contributions to certain qualifying charities, but would increase the cap on such deductions from $150 ($300 for joint returns) in the House bill to $1,000 ($2,000 for joint returns) and make the deduction permanent.
- The Senate proposal 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 proposal would also permanently extend the 60% of adjusted gross income contribution limitation for cash gifts made to certain qualifying charities.
Additional Areas of Interest Not Addressed in Senate Proposal
The Senate proposal does not include any of the following provisions relevant to tax-exempt organizations that had been included in the initial Ways and Means draft of the House bill and subsequently dropped, or other reform proposals that had been rumored for potential inclusion in the legislation:
- Organizations That Provide Material Support to Terrorist Organizations: The “Nonprofit Killer Bill” that would provide the Treasury Secretary with broad discretion to suspend the tax exemption of organizations the Secretary designates as providing material support or resources to a terrorist organization did not reappear in the Senate proposal.
- Name and Logo UBTI: The Senate proposal would not subject name and logo royalties to taxation as UBTI.
- Tax-Exempt Bonds and Tax-Exempt Hospitals: The Senate proposal would not repeal the ability of Section 501(c)(3) organizations to borrow through the use of tax-exempt bonds nor would it modify any tax exemption requirements for nonprofit hospitals.
- Mandatory Distribution Requirements: The Senate proposal would not impose any mandatory distribution requirements on the endowments of colleges and universities or other charitable organizations.
