The One Big Beautiful Bill Act (The Act), a $3.4 trillion fiscal package, was signed into law on July 4, 2025. The Act cuts taxes, makes several expiring provisions in the 2017 Tax Act permanent, reduces spending in key areas such as Medicaid, and reverses many clean energy provisions made into law by the prior Administration. The Act not only contains many tax provisions affecting businesses and individuals, but it also affects tax-exempt organizations. This article will focus on those tax provisions directly and indirectly affecting tax-exempt organizations.
Tax-exempt organizations are directly impacted by the changes to the investment income tax on private universities and colleges and the excess compensation tax, both originally enacted in the 2017 Tax Act. Other changes that will impact tax-exempt organizations are those relating to the clean energy credits and charitable giving.
Investment Income Tax on Private Universities & Colleges
Current law under IRC Section 4968 imposes an investment income tax on private colleges and universities that have at least 500 tuition paying students and have investment assets of at least $500,000 per student. The current tax rate on the investment income is a flat 1.4%.
The Act changes the qualification of an entity subject to the tax and switches to a tiered tax rate system from the flat rate of 1.4%. Effective for tax years beginning after December 31, 2025, private colleges and universities are subject to the tax if they have 3,000 tuition paying students instead of the current 500. This will reduce the number of organizations subject to the tax. However, The Act also expands the items considered investment income subject to the tax, which will now include some forms of student loan interest and royalty income on federally funded research.
The Act’s tiered rate structure is as follows:
- 1.4% if the student adjusted endowment is more than $500,000 and not more than $750,000
- 4% if the student adjusted endowment is more than $750,000 and not more than $2 million
- 8% if the student adjusted endowment is more than $2 million
Careful planning will need to be the focus of those organizations subject to the tax as the new rate structure could increase the tax significantly.
Excess Compensation Tax
Current law imposes a 21% flat tax on those applicable tax-exempt organizations and their related organizations on remuneration paid over $1million (or an excess parachute payment) to a “covered employee.” For tax years beginning after December 31, 2025, The Act significantly broadens the applicability of the tax by applying it to all employees of the organization, instead of the five highest compensated (covered employees). Employees also included in the tax are any former employees employed after 2016. This change can really impact the tax-exempt organizations with several highly paid employees, especially those organizations that employ or have employed individuals within related organizations. Once the details of this provision are released, careful analysis should be carried out to calculate the impact of these changes.
Charitable Giving
Several provisions in The Act affect charitable giving, including making permanent the 60% adjusted gross income limitation on charitable deductions by individuals. Also, the permanent reenactment of the nonitemizer charitable deduction takes effect for tax years beginning after December 31, 2025. This deduction allows individuals that claim the standard deduction to take an additional deduction of cash contributions made to certain charities up to $2,000 MFJ ($1,000 for all other taxpayers). New provisions of charitable giving in The Act include:
- 1% floor on deduction of charitable contributions by corporations (still subject to the 10% taxable income limitation)
- 0.5% floor on deduction of charitable contributions by individuals (still subject to the 60% of AGI limitation)
- Tax credit for contributions by individuals to scholarship granting organizations (new nonrefundable credit up to $1,700)
Other Provisions
The direct pay provisions that allow tax-exempt organizations to benefit from the clean energy tax credits and major production and investment credits survived the passage of the Act, although many clean energy credits were repealed. These credits include the qualified commercial clean vehicle credit, alternative fuel vehicle refueling credit and the technology neutral clean electricity investment tax credit. In addition, the transferable deduction for installation of energy efficient property by tax-exempt organizations will sunset in 2026.
The qualified opportunity zone program was made permanent in The Act allowing the designation of new opportunity zones every 10 years. The low-income housing credit and new markets credit have also been enhanced under The Act.
As discussed, The Act affects tax-exempt organizations. However, several provisions were cut from the bills such as reinstating the parking tax as unrelated business income (UBI), increasing the tax rate for private foundations on their investment income and limiting the UBI research exclusion to only research income of publicly disclosed fundamental research. These provisions did not make it into the final version of The Act.
With close to 900 pages, the Act contains several provisions. Those affecting tax-exempt organizations only comprise a small percentage of The Act but can have a significant impact. Tax-exempt organizations should review these new provisions to plan the upcoming changes.
If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
And don’t miss our upcoming webinar, “The One Big Beautiful Bill Act: Key Tax Changes & Implications,” on July 18. Learn more and register HERE.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
