On Tuesday, May 12, the House Ways and Means Committee released a draft of the Title XI budget reconciliation bill and a summary.
The draft includes several provisions that would impact tax-exempt organizations, including private foundations and institutions of higher education. Among the most notable provisions are the following:
Provisions impacting unrelated business taxable income (UBTI):
- Section 112025: The draft bill proposes that royalty income from any sale or licensing by a tax-exempt organization of its name or logo will be treated as UBTI.
- Section 112026: This provision amends Internal Revenue Code (IRC) Section 512 to increase UBTI by including the income generated from non-public research by an organization whose tax-exempt purpose is to provide publicly available research.
- Section 112024: This provision would reinstate the Section 512(a)(7) “parking tax” which increased UBTI by including the amount paid or incurred for any qualified transportation fringe benefits.
Provisions regarding excess compensation:
- Section 112020: This provision expands the application of tax on excess compensation within tax-exempt organizations. The provision specifically revises the definition of a “covered employee” to mean any employee (including any former employee) of an applicable tax-exempt organization who received remuneration in excess of $1 million.
Provisions impacting higher education institutions:
- Section 112021: Currently, IRC Section 4968 imposes an excise tax on applicable educational institutions at a flat rate of 1.4% of the net investment income. The draft amends the current excise tax by adding a tiered system based on student-adjusted endowment as follows.
- The first tier is a 4% rate for institutions with student-adjusted endowments of at least $500,000 and less than $750,000.
- The second tier is a 7% rate for institutions with student-adjusted endowments of at least $750,000 and less than $1,250,000.
- The third tier is a 14% rate for institutions with student-adjusted endowments of at least $1,250,000 and less than $2,000,000.
- The fourth tier is a 21% rate for institutions with student-adjusted endowments of $2,000,000 or more.
For purposes of calculating an institution’s student-adjusted endowment, the section excludes students who do not meet the requirements under Section 484(a)(5) of the Higher Education Act of 1965 which states that a student “must be a citizen or national of the United States, a permanent resident of the United States”.
The draft bill also includes student loan interest income and certain royalty income for the purposes of calculating a school’s net investment income.
Provisions impacting private foundations:
- Section 112022: Currently, private foundations are taxed on their net investment income at the rate of 1.39%. This section revises the tax rate based on a foundation’s total assets.
- The first tier is a 1.39% rate for foundations with total assets of less than $50,000,000.
- The second tier is a 2.78% rate for foundations with total assets of at least $50,000,000 and less than $250,000,000.
- The third tier is a 5% rate for foundations with total assets of at least $250,000,000 and less than $5,000,000,000.
- The fourth tier is a 10% rate for foundations with total assets of $5,000,000,000 or more.
Provisions impacting charitable giving:
- Section 112028: This provision establishes a 1% floor on deductions of charitable contributions made by corporations. In the case of a corporation with charitable contributions exceeding the 10% limit, the provision allows taxpayers to add the amount disallowed under the 1% floor to the amount carried over to the subsequent year.
- Section 110112: This section would allow individuals who do not itemize deductions on their personal returns to still take a deduction for charitable contributions of $150 ($300 for married filing jointly). The contributions cannot be made to Donor Advised Funds or supporting organizations. This section would only be applicable for tax years 2025 to 2028.
The Schneider Downs Not-for-Profit tax team is following the development of the proposed tax bill and will publish updates as they become available.
Please note: This article was written before the final version of the bill became law, so some information may no longer be current.
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