The Senate Finance Committee unveiled a new version of the Republican tax bill on June 16, and it breaks from the House-passed bill in important ways for tax-exempt organizations.
The Senate bill removes and dials back several unfavorable provisions in the House bill aimed at tax-exempt entities. The House bill would replace the 1.4% endowment tax rate with graduated brackets based on the size of the endowment per student, reaching a top rate of 21% (while providing a new exception to the tax for certain religious universities). The Senate bill would instead increase the top rate to just 8%.
The Senate bill retains a House provision that would expand the excise tax on executive compensation exceeding $1 million to include all current and former employees.
The Senate bill removes House bill provisions that would:
- Replace the 1.39% excise tax on private foundations with graduated brackets based on assets, reaching a top rate of 10%
- Include qualified transportation fringe benefits such as parking and transit in unrelated business taxable income (UBTI)
- Narrow the exception from UBTI for research income so it applies only to research freely available to the general public
Next Steps
Republicans are racing to enact their reconciliation bill before a self-imposed July 4 deadline, though there are signs that date could be slipping. The House passed its version in a 215 to 214 vote on May 22. The Senate is now considering significant changes as it prepares for a potential floor vote, and further changes to the provisions that affect tax-exempt organizations are possible. Negotiations are complicated by the fact that Senate Republicans are simultaneously trying to resolve differences among their own members while crafting a compromise that can pass back through the House.
The new Senate version represents the latest iteration of the bill, but it is far from final. Republicans will continue to negotiate until an actual Senate floor vote.
BDO Insight
The inclusion of the “parking tax” in the House bill had been heavily criticized and its removal in the Senate bill will be a relief to many tax-exempt organizations. The expansion of the excise tax on compensation over $1 million to all employees could be painful for large and sophisticated organizations that compete with the private sector to attract and retain top talent.
Tax-exempt organizations are currently navigating significant financial challenges, and the proposed tax bill could present additional difficulties in managing their funding and activities to serve their communities effectively.
Tax-exempt organizations should closely monitor the progress of this bill through Congress and assess the potential financial and operational impact the changes would have on their organizations. For insights from BDO’s professionals on the full tax bill and its implications, including key takeaways for tax-exempt entities, read our article “Senate Proposes Major Changes to House Tax Bill” and explore our Nonprofit & Education hub for additional resources tailored to nonprofit organizations.