Implications of Proposed Tax Bill for Tax-Exempt Organizations

The House Ways and Means Committee approved a sweeping tax bill on May 14 with proposed changes that would significantly impact tax-exempt organizations. 

A summary of the key proposed changes follows.

Private Foundations and Colleges/Universities

• Increase in Excise Taxes on Private Foundation Investment Income Replace the current excise tax rate of 1.39 % on net investment income of private foundations with a tiered rate structure based on the foundation's asset size. Private foundations with assets below $50 million would continue to be subject to the current excise tax of 1.39%. However, private foundations with assets of more than $5 billion would see the tax rate increase to 10%, those with assets between $250 million to $5 billion would see the tax rate increase to 5%, and those with assets between $50 million and $250 million would pay 2.78%. This amendment would apply to taxable years beginning after the date of enactment. This may provide time to consider planning strategies, including the acceleration of gain to be taxed at the lower rate. 
• New Excise Tax Structure for College and University Endowments:  Under current tax law, only certain colleges and universities are subject to the 1.4% excise tax on their net investment income. The proposed tax bill introduces a new tiered excise tax that would be imposed on the investment income of private colleges and universities that have at least 500 students, with the majority of the students located in the U.S. The tax rate would be based on the institution's "student-adjusted endowment" value, ranging from 1.4% to 21% for the largest endowments (over $2 million per student). Certain “qualified religious institutions,” defined as institutions established after July 4, 1776, that have maintained a continuous church affiliation and religious mission, would be excluded. This change could potentially decrease funds available for colleges and universities to award financial aid and scholarships to students and to fund research. 
• Revised Definition of "Covered Employees" for Excise Tax on Executive Compensation: The excise tax on compensation exceeding $1 million paid by tax-exempt organizations would be revised to include all current and former employees, regardless of whether they were among the five highest-compensated employees. This change would also impact deferred compensation and severance arrangements.

Unrelated Business Taxable Income (UBTI) (Taxed at Current Income Tax Rates)

• Qualified Transportation Fringe Benefits Treated as UBTI: Amounts paid or incurred by tax-exempt organizations for qualified transportation fringe benefits (e.g., parking, transit passes) would be treated as UBTI. This proposal revives a previously repealed provision from the Tax Cuts and Jobs Act, although churches and church-affiliated organizations would now be excluded.
• Name and Logo Royalties Subject to UBTI: The royalty income derived from the licensing of a tax-exempt organization's name or logo, currently exempt from UBTI, would become taxable.
• Stricter Rules for Exemption of Research Income from UBTI: The exemption for income from research conducted by exempt organizations would be narrowed. Only income from research whose results are freely available to the public would be exempt from tax. Income from nonpublic research would be treated as UBTI for organizations whose primary purpose is to conduct publicly available research.

The original version of the bill passed by the House Ways and Means Committee included provisions adding name and logo royalties to UBTI and giving the Treasury Secretary authority to revoke an organization’s tax-exempt status based on its “support” for “terrorist organizations.” Both those provisions were removed from the bill as part of a substitute amendment at the House Rules Committee.