On May 12, 2025, the Republicans from the House Committee on Ways and Means released an updated draft tax bill. Several of the provisions in the draft would affect tax-exempt organizations. The bill will almost certainly undergo additional changes before it can be passed by both chambers of Congress. The discussion below summarizes the principal provisions affecting tax-exempt organizations.
Excise Tax Increase on Certain Private Foundations
Under current law, Section 4940 imposes an excise tax of 1.39% of the net investment income of private foundations. The bill would amend Section 4940(a) to increase the tax rate for private foundations depending on the aggregate fair market value of the assets (without reduction for liabilities) held by the private foundation as of the close of the applicable taxable year. The bill would keep the rate at 1.39% for private foundations with less than $50,000,000 of assets and increase the tax rate for all other private foundations. Private foundations with assets of at least $50,000,000 and less than $250,000,000 would be subject to a rate of 2.78%. Those with assets of at least $250,000,000 and less than $5,000,000,000 would be subject to a rate of 5%. Finally, private foundations with assets of at least $5,000,000,000 would have a rate of 10%. For these purposes, assets of organizations related to the private foundation are treated as assets of the private foundations. However, assets are not required to be taken into account by more than one private foundation, and assets that are not intended or available for the use of the private foundation are not taken into account, unless the private foundation controls the organization holding the assets. These amendments would apply to taxable years beginning after the date of enactment of the bill.
Excise Tax Increase on Certain Private Colleges and Universities
Section 4968 imposes an excise tax of 1.4% of the net investment income of certain private colleges and universities. The applicability of the current excise tax is predicated in part on the institution having an aggregate fair market value of assets at the end of the preceding taxable year (other than those assets which are used directly in carrying out the institution's exempt purpose) equal to at least $500,000 per student of the institution. The proposed bill would generally retain this concept but would apply the asset-per-student threshold, which the bill refers to as the “student adjusted endowment”, taking into account only certain “eligible students”. For this purpose, an eligible student generally would be defined to include a student that is a citizen or national of the United States, a permanent resident of the United States, or able to provide evidence from the Immigration and Naturalization Service that he or she is in the United States for other than a temporary purpose with the intention of becoming a citizen or permanent resident.
The proposed bill would retain the existing excise tax rate of 1.4% in the case of institutions with a student adjusted endowment in excess of $500,000 but not in excess of $750,000. Institutions with a student adjusted endowment in excess of $750,000 and not in excess of $1,250,000 would be subject to an excise tax rate of 7%. Those with a student adjusted endowment in excess of $1,250,000 and not in excess of $2,000,000 would be subject to an excise tax rate of 14%. Finally, those institutions with a student adjusted endowment in excess of $2,000,000 would be subject to a tax rate of 21%. The bill would exclude qualified religious institutions the excise tax, such that private religious colleges and universities generally would be exempt.
The bill would also amend Section 6033 to include requirements for applicable educational institutions to report certain information related to the excise tax. Net investment income is determined in a manner similar to Section 4940 (discussed above), except that there is an add-back for certain student loan income and certain federally subsidized royalty income. If passed in its current form, these amendments would apply to taxable years beginning after December 31, 2025.
Charitable Deductions for Corporations
Section 170(b)(2)(A) currently states that a corporation cannot take a deduction for a charitable contribution of greater than 10% of the corporation’s taxable income. The bill would add a floor, so that a corporation may take a deduction for a charitable contribution only to the extent that contributions for the taxable year exceed 1% of the corporation’s taxable income. Section 170(d)(2)(A) would be amended to state that if a deduction is disallowed for being greater than 10% of the corporation’s taxable income, the disallowed portion shall be taken into account as a charitable contribution in the succeeding taxable year. Section 170(d)(2)(B) would be amended to say that no contribution may be carried forward to any taxable year more than five years after the year the charitable contribution was made. The bill would add Section 170(d)(2)(C), which states that contributions that are disallowed because of the 1% floor are only carried forward from years in which the 10% limit is exceeded. There is also a special rule for net operating loss carryovers which states that the amount of charitable contributions carried forward shall be reduced to the extent that the carryforward would reduce taxable income and increase a net operating loss carryover.
Name and Logo Royalties Subject to UBIT
While a tax-exempt organization is exempt from federal (and in most cases state) income tax, it is taxable on income that is unrelated to its exempt purpose (unrelated business income tax or UBIT). Many tax-exempt organizations, in particular, colleges and universities, earn significant revenue from corporate sponsorships and licenses of their logos and intellectual property. The plethora of corporate-sponsored college football bowl games are a prime example.
In 1991, the IRS issued two important rulings involving the Cotton Bowl and the John Hancock Bowl holding that the corporate sponsorships were in the nature of advertising and thus included in UBIT. In 1997, Congress enacted section 513(i) to exempt qualified corporate sponsorship payments from UBIT provided that the corporate sponsor had no expectation of a substantial return benefit other than the use or acknowledgment of the corporate sponsor’s name and logo. Treasury promulgated Treas. Reg. Sec. 1.513-4 to implement these rules.
The bill as drafted intends to expand the inclusion of unrelated business income and would subject income from the sale or licensing of any name or logo of the organization (including trademarks or copyrights pertaining thereto) to the unrelated business income tax. The calculation of an organization’s unrelated business income would include “any” income derived from the sale or licensing of an institution’s name or logo. The Joint Committee on Taxation’s explanation to the proposed bill makes clear that the change is intended to override the general rule that excludes royalties from UBIT.
The proposed bill would implement the change by enacting new section 513(k) rather than amending existing section 513(i). As a result, it would appear that the bill intends to retain current law on qualified corporate sponsorships.
Expanding Application of Tax on Excess Compensation
Section 4960 imposes a tax on tax-exempt organizations equal to the corporate income tax rate multiplied by the compensation of “covered employees” in excess of $1,000,000. Currently, a covered employee is one of the five highest compensated employees of the organization, or someone who was a covered employee in taxable year 2017 or any later taxable year. The bill proposes to significantly expand the definition of covered employee to mean “any employee.”
Section 501(p)(8)
Under current law, Section 501(p) provides that the tax exemption provided under Section 501(a) can be suspended when an organization is designated or otherwise individually identified as a terrorist organization. Proposed Section 501(p)(8) adds provisions that permit the IRS to do the same for “terrorist supporting organizations.” A “terrorist supporting organization” is an organization that has been designated by the Secretary of Treasury as having provided material support or resources in excess of a de minimis amount to a terrorist organization during the prior three-year period. The statute does not expressly state that such material aid or resources must have been knowingly provided. In an improvement over a predecessor bill that passed the House of Representatives in 2024, there are exceptions for material support or resources that was approved by the Secretary of State with the concurrence of the Attorney General, and for humanitarian aid provided with the approval of the Office of Foreign Assets Control. A terrorist supporting organization is treated as a terrorist organization. Accordingly, any tax-exempt organization providing material support or resources to a terrorist supporting organization risks being itself designated as a terrorist supporting organization. Any proposed designation under proposed Section 501(p)(8) can be appealed to the IRS Independent Office of Appeals or to a federal district court of competent jurisdiction.
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