The One Big Beautiful Bill Act: Implications for Tax-Exempt Organizations and Charitable Giving

As enacted, the Act reflects significant changes from earlier versions of the legislation covered in previous alerts and omits several provisions that would have considerably impacted tax-exempt organizations. This alert highlights certain key provisions in the Act relevant to tax-exempt organizations.

Executive Compensation Excise Tax

Section 4960 of the Internal Revenue Code currently imposes an excise tax on exempt organizations that pay more than $1 million in remuneration or that make an excess parachute payment to any “covered employee.” Prior to the Act, a “covered employee” generally included any employee (or former employee) of an “applicable tax-exempt organization” if the employee is one of the five highest compensated employees for the current taxable year, or was a covered employee in a prior year beginning after December 31, 2016.[1] The Act expands the definition of a “covered employee” by removing the requirement that the employee is (or was) one of the five highest compensated employees.”[2]

College and University Endowment Tax

Section 4968 of the Code currently imposes a flat 1.4% excise tax of the net investment income of certain private colleges and universities that have at least 500 tuition-paying students and at least $500,000 per student in assets.

The Act replaces the flat 1.4% excise tax rate in Section 4968 with a three-tiered structure based on the institution’s student adjusted endowment:

• Institution’s student adjusted endowment between $500,000 and $750,000: 1.4%.
• Institution’s student adjusted endowment between $750,000 and $2,000,000: 4%.
• Institution’s student adjusted endowment above $2,000,000: 8%.

The new tiered tax structure applies to private colleges and universities that have at least 3,000 tuition-paying students and at least $500,000 in “student-adjusted endowment.” The institution’s “student adjusted endowment” is determined based on the total fair market value of the institution’s assets (other than assets used directly in carrying out the institution’s exempt purposes) per student.[3] For purposes of determining the institution’s total assets, the assets and net investment income of any related organization of the institution will be treated as assets of the institution.[4] A related organization is any organization that controls or is controlled by the institution, is controlled by one or more persons that also control the institution, or is a supported or supporting organization with respect to the institution.[5]

Charitable Deductions

• Individual Taxpayers: The Act permanently reinstates a charitable contribution deduction for non-itemizing taxpayers, capped at $1,000 ($2,000 for joint returns) for cash contributions to certain qualifying charities.[6] For itemizing taxpayers, the Act creates a 0.5% floor on charitable contributions and permits disallowed charitable deductions to carry forward only to the extent they exceed this 0.5% threshold.[7]
• Corporate Taxpayers: The Act establishes a new floor on charitable deductions for corporations equal to 1% of taxable income, up to a maximum of 10% of taxable income for the year.[8] Charitable contributions exceeding 10% of the corporation’s taxable income for the year can carry forward for five years after the year the charitable contribution was first taken into account. Contributions disallowed by the 1% floor carry forward only from years the corporation’s contributions exceed the 10% ceiling.[9] Corporate taxpayers may wish to evaluate their charitable giving programs and structure contributions to charitable organizations to qualify as a trade or business deduction in lieu of a charitable deduction where possible.

The Act does not include the following provisions included in earlier versions on the legislation:

• Excise Tax on Net Investment Income: The Act does not include provisions that would have increased the net investment income tax on private foundations under Section 4940 of the Code.
• Unrelated Business Taxable Income: The Bill does not include any changes to unrelated business income tax.
• Excess Business Holdings: The Act does not include the provisions that would have amended excess business holdings of private foundations with respect to certain employee-owned stock.
• Termination of Tax-Exempt Status for Terrorist Supporting Organizations: The Act does not include the proposed modification to Section 501(p) of the Code, which would have added a definition of “terrorist supporting organizations” to Section 501(p) and provided the Secretary of the Treasury with the authority to designate an organization as a terrorist supporting organization without consulting with the Secretary of State and the Attorney General.

ArentFox Schiff’s Nonprofits and Associations and Government Relations practices are closely monitoring implementation of the Act. For additional guidance on how the Act affects your tax-exempt organization planning or charitable giving, please contact your AFS attorney or any of the authors of this alert.