House GOP Tax Proposal Targets Nonprofits

On May 12, 2025, the House Ways and Means Committee released a draft version of the Republican-led tax bill, "The One, Big, Beautiful Bill" (the "Bill"), which is designed to advance President Trump's tax reform agenda. The proposal includes several provisions with significant implications for nonprofit organizations, including specifically private foundations and colleges and universities.

Below is a summary of the most relevant provisions affecting the nonprofit sector:

Increase in Excise Tax on Investment Income of Private Colleges and Universities (Endowment Tax)

Current Law: Internal Revenue Code ("IRC") § 4968 imposes a 1.4% excise tax on the net investment income of certain private colleges and universities, i.e., their endowment income. Under current law, its applicability is limited to private colleges and universities that meet certain criteria related to enrollment size (must have at least 500 tuition paying students), have more than 50% of their students located in the United States, and the aggregate fair market value of their endowment is at least $500,000 per student.

Proposed Change: The Bill replaces the flat 1.4% rate with a tiered rate structure based on a school's "student-adjusted endowment" value. When calculating the size of an institution's endowment, eligible students would generally include only those who are U.S. citizens or nationals, lawful permanent residents, or individuals who can demonstrate that they are in the United States for a purpose other than temporarily and intend to become citizens or permanent residents.

The proposal also expands the scope of net investment income to include student loan interest income, certain royalty income, and net investment income of related organizations. An exception is provided for qualified religious institutions. The proposed tiered tax rates are as follows:

Increase in Excise Tax on Private Foundation Investment Income

Current Law: IRC § 4940 imposes a 1.39% excise tax on net investment income of private foundations.

Proposed Change: The Bill would raise the net investment income tax on larger private foundations substantially, up to 10% at the highest rate. A tiered tax rate system would apply based on the total assets of the foundation, including those of "related organizations." An organization will be considered "related" to a private foundation if the organization controls or is controlled by the private foundation or is controlled by one or more persons who also control the private foundation, potentially sweeping many other organizations into the calculus (as currently drafted, a "related organization" is not limited to another private foundation or other exempt organization).

Expanded Scope of "Excess Compensation Tax" for Nonprofits

Current Law: IRC § 4960 imposes a 21% excise tax on applicable exempt organizations paying compensation exceeding $1 million to any of an exempt organization's five highest-paid "covered employees."

Proposed Change: The Bill broadens the definition of a "covered employee" to include any current or former employee of an applicable tax-exempt organization receiving over $1 million in compensation, which includes deferred compensation and severance arrangements, rather than limiting it to an organization's five highest-paid covered employees. This provision will affect large organizations, including hospitals and colleges and universities, that have a significant number of employees who receive compensation over $1 million (e.g., physicians providing non-medical services, investment managers and coaching staff.). Finally, the Bill expands the application of the excise tax to employees of governmental entities, likely eliminating what many viewed as an unintended exception for state colleges and universities.

Changes to Determination of UBTI

Qualified Transportation Fringe Expenses as UBTI

Current Law: The amount paid or incurred by a tax-exempt organization for any qualified transportation fringe benefit is exempt from unrelated business taxable income.

Proposed Change: Amends IRC § 512 to treat amounts paid or incurred by a tax-exempt organization for qualified transportation fringe benefits (e.g., parking, transit passes) as unrelated business taxable income ("UBTI"). This provision revives the dreaded "parking tax" from the Tax Cuts and Jobs Act, which was repealed after outcry from the nonprofit sector. This time, however, churches and church-affiliated organizations are excluded.

Name and Logo Royalties as UBTI

Current Law: The royalty income from the sale or licensing by a nonprofit organization of its name or logo is exempt from unrelated business taxable income.

Proposed Change: Amends IRC §§ 512 and 513 to eliminate the exclusion of royalty income from the sale or license of a nonprofit's name or logo from UBTI, subjecting such income to the corporate income tax rate (currently 21%). This would have a significant impact on colleges and universities that often derive substantial revenue from licensing arrangements as well as those nonprofits that engage in cause marketing campaigns or that license their names and/or logos in connection with certifying that businesses meet certain standards.

Nonpublic Research Income No Longer Exempt From UBTI

Current Law: IRC § 512(b)(9) exempts from UBTI all income from research performed by a nonprofit organization whose primary purpose is to carry on research that is freely available to the public, including income from private research.

Proposed Change: Amends IRC § 512(b)(9) to classify income from nonpublic research as UBTI for nonprofits whose exempt purpose is to conduct publicly available research. Only income from research freely available to the public will remain exempt.

Suspension of Tax-Exempt Status for Terrorist Supporting Organizations

Current Law: Existing IRC § 501(p) suspends the tax-exempt status of any organization that is designated as (A) a "terrorist organization," "foreign terrorist organization," or organization or person providing material support to terrorism pursuant to various other statutes and orders (including section 212(a)(3)(B)(vi)(II) or 219 of the Immigration and Nationality Act, an Executive Order which is related to terrorism and issued under the authority of the International Emergency Economic Powers Act or section 5 of the United Nations Participation Act of 1945, and section 140(d)(2) of the Foreign Relations Authorization Act, Fiscal Years 1988 and 1989).

Proposed Change: This provision adopts language from prior proposed legislation, H.R. 9495 (dubbed by some as the "Nonprofit Killer Bill"), with some adjustments. It modifies IRC § 501(p) to grant authority to the Secretary of the Treasury to suspend the tax-exempt status of any organization designated as a "terrorist supporting organization." An organization may be designated a terrorist support organization if the Treasury Secretary determines that within the prior three years the organization provided more than a de minimis amount of material support or resources to a designated terrorist organization. Exceptions are provided for support or resources that were provided with the approval of the Secretary of State with the concurrence of the Attorney General or humanitarian aid provided with the approval of the Office of Foreign Asset Control. Organizations designated a terrorist supporting organization will receive notice and have 90 days to: (i) rebut the determination to the Secretary's satisfaction, or (ii) file a complaint in U.S. District Court challenging the suspension.

1% Floor for Corporate Charitable Deduction

Current Law: IRC § 170(b)(2)(A) permits corporations to deduct charitable contributions up to 10% of taxable income.

Proposed Change: Corporations will only be permitted to deduct charitable contributions that exceed 1% of taxable income, up to the existing 10% cap.

New Individual Tax Credit for Education Scholarship Contributions

Proposed Change: Establishes a new individual tax credit (beginning in 2026) for donations to organizations providing scholarships to K-12 students from households earning 300% or less of area median gross income and who are eligible to attend public schools. The credit program expires after 2029.

Temporary Deduction for Non-Itemizers' Charitable Contributions

Current Law: Only taxpayers who itemize are able to deduct their charitable contributions.

Proposed Change: Permits non-itemizing taxpayers to deduct up to $150 (single) or $300 (married filing jointly) for cash contributions to qualified charities, excluding donor-advised funds and supporting organizations. The change would be effective beginning for the 2025 tax year through 2028.

Conclusion

The Bill proposes sweeping changes to the tax treatment of nonprofit organizations, with broad implications for operational planning, compensation structuring, endowment management, and charitable giving. A markup of the bill was initiated on May 13, and changes are expected as it moves through the House and eventually to the Senate.

DWT's Foundations & Nonprofits Team and our Education Industry Group are monitoring these developments closely and are available to help clients assess the implications and adapt to a shifting legislative landscape.