On May 22, the U.S. House of Representatives passed H.R. 1, the One Big Beautiful Bill Act (OBBB), the budget reconciliation bill that includes tax provisions built upon the budget resolution instructions approved by Congress on April 10. The Joint Committee on Taxation provided an explanation of these provisions, estimating a cost of $3.8 trillion over a decade if enacted. On June 16, the Senate Finance Committee released the text for its portion of the tax and spending package, outlining how the Senate might revise key provisions as reconciliation negotiations move forward.
The proposed tax changes affect multiple sections of the IRC and apply to a broad range of taxpayers. Highlighted below are select key provisions that could impact tax-exempt organizations. Additional measures within the broader legislative package also could be relevant to your organization.
Current law
Under IRC Section 4960, a 21% excise tax is imposed on applicable tax-exempt organizations (ATEOs) that pay remuneration in excess of $1 million or excess parachute payments to covered employees. Covered employees are defined as the five highest-paid individuals (including former employees) of an ATEO for the current taxable year or any preceding taxable year beginning after Dec. 31, 2016. Certain medical service pay and payments from related entities are excluded or apportioned under specific rules.
Proposal overview
The 21% excise tax on excess remuneration as outlined in IRC Section 4960 is expanded by broadening the definition of a covered employee. This revision would include any current or former employee of an applicable tax-exempt organization, regardless of compensation rank or prior designation. This change broadens the pool of individuals subject to the $1 million remuneration cap and excess parachute payment rules and simplifies compliance by eliminating the need to track covered status across multiple years.
Effective date
Taxable years beginning after Dec. 31, 2025
Senate version impact
This provision currently remains unchanged in the Senate version of the bill.
Qualified transportation fringe benefits (such as employee parking, transit passes, and commuter vehicle expenses) are not included in unrelated business taxable income (UBTI) for tax-exempt organizations. Although IRC Section 512(a)(7) – enacted by the Tax Cuts and Jobs Act of 2017 (TCJA) – temporarily required such benefits to be treated as UBTI, the provision was retroactively repealed in 2020.
Proposal overviewIRC Section 512 is amended to require that tax-exempt organizations increase their UBTI by the amount paid or incurred for qualified transportation fringe benefits (such as employee parking costs and transit benefits) or any parking facility used in connection with qualified parking for which a deduction would be disallowed under IRC Section 274 if the organization were taxable, aligning treatment between not-for-profit and for-profit employers.
However, this increase does not apply to qualified transportation fringe benefits, including qualified parking expenses, that are directly connected to a separate unrelated trade or business. Such expenses already are nondeductible under IRC Section 274 and must be considered in computing UBTI attributable to that activity. If an organization operates multiple unrelated trades or businesses, fringe benefit expenses are treated as a separate unrelated business under IRC Section 512(a)(6) and cannot be aggregated with other UBTI activities.
Churches, their integrated auxiliaries, and the exclusively religious activities of religious orders that are not required to file Form 990, “Return of Organization Exempt From Income Tax,” would be exempted, as well as certain church-affiliated organizations exempt from filing by statute. This is a change from the previous iteration of this provision included in the TCJA. The U.S. Department of the Treasury is directed to issue regulations or other guidance necessary to implement this provision, including specific guidance on the appropriate allocation of costs associated with parking facilities.
Effective dateTaxable years beginning after Dec. 31, 2025
Senate version impact
This provision currently remains unchanged in the Senate version of the bill.
Under IRC Section 4968, certain private colleges and universities with large endowments are subject to a 1.4% excise tax on net investment income if the institution meets the following criteria in the preceding tax year:
Replaces the flat 1.4% excise tax on net investment income with a tax rate structure based on an institution’s “student-adjusted endowment” – the value of endowment assets per eligible student. The new structure imposes the following excise tax rate based on the institution’s student-adjusted endowment:
Student Adjusted Endowment (per student) | Excise Tax Rate (House) | Excise Tax Rate (Senate) |
$500,000 - $749,999 | 1.4% | 1.4% |
$750,000 - $1,249,999 | 7% | 4% |
$1,250,000 - $1,999,999 |
14% | |
$2,000,000+ | 21% | 8% |
Revised definition of “eligible students”
Only students who qualify for federal financial aid under Section 484(a)(5) of the Higher Education Act (such as U.S. citizens, permanent residents, or those legally present with intent to stay) are counted in the student-adjusted endowment calculation.
Exemption for qualified religious institutionsChurch-affiliated institutions that meet certain criteria (founded after July 4, 1776, have continuous church affiliation, and uphold a religious mission) might be exempted from the excise tax entirely.
Broadened investment income definitionUnder the proposal, the definition of net investment income would be expanded to include these additional sources:
Institutions must report the number of eligible students for the adjusted endowment calculation and the total student count based on attendance in IRC Section 4968(e).
Effective date
Taxable years beginning after Dec. 31, 2025
Senate version impact
The Senate version revises the endowment tax by significantly reducing the higher excise tax rates, adding a requirement that applicable educational institutions must have participated in a Title IV program under the Higher Education Act in the preceding year to qualify, and adding an additional reporting requirement for tuition-paying students.
Under IRC Section 4940(a), private foundations exempt under IRC Section 501(a) are subject to a flat 1.39% excise tax on net investment income, defined as the sum of gross investment income and capital gains less allowable deductions related to the production of that income.
Proposal overviewThe proposal replaces the single 1.39% excise tax rate with graduated rate levels based on the aggregate FMV of foundation assets at the end of the taxable year. The applicable excise rates based on aggregate FMV of assets are as follows:
Aggregate FMV of Foundational Assets | Excise Tax Rate on Net Investment Income |
Less than $50 million | 1.39% (no change) |
$50 million - $249,999,999 | 2.78% |
$250 millions - $4,999,999,999 | 5% |
$5 billion or more | 10% |
The excise tax rate is determined based on gross asset values without adjustments for charitable-use assets with no deductions for liabilities. This provision impacts private foundations with assets exceeding $50 million and takes effect immediately upon the bill’s enactment. Assets from related organizations count toward aggregate FMV of assets if the foundation controls or is controlled by the related entity, or if they are jointly controlled. However, there is no double-counting of assets among private foundations, and only those assets intended or available for the use or benefit of the private foundation are included unless the related entity is under its control.
Effective date
Taxable years beginning after the date of enactment. Note: This provision could have an immediate impact on certain fiscal year private foundations.
Senate version impact
This provision currently has been removed from the Senate version of the bill.