Chairman's mark contains exempt organization tax proposals

ARTICLE | May 13, 2025

Authored by RSM US LLP

Executive summary

The Ways and Means Committee will markup President Trump’s promised “One, Big, Beautiful Bill” on Tuesday, May 13, 2025, and released its proposals across 389 pages on the afternoon of May 12. The Joint Committee on Taxation (JCT) provided its description of these proposals, and the Committee separately provided its explanation.

There are eight provisions directly affecting exempt organizations and two provisions that would directly impact the charitable contribution deduction (including reinstating a partial nonitemizer charitable deduction and instituting a 1% floor for corporate charitable deductions). Unless otherwise noted, the provisions, if enacted, would take effect for tax years beginning after Dec. 31, 2025. Read more about provisions affecting individuals and businesses.

Unrelated business income

The initial proposals include three changes to the determination of unrelated business income (UBI), including:

• Qualified parking expenses: The proposal would reintroduce section 512(a)(7), which includes as unrelated business income any expenses associated with qualified transportation fringe benefits. The 2017 tax law previously enacted a similar provision, which was retroactively repealed in early 2019. However, the 2025 provision specifically excludes churches and their affiliated organizations.
• Name & logo royalties: The proposal would add new sections 513(k) and 512(b)(20), which would require income derived from the sale or licensing of an exempt organization’s name or logo be included in unrelated business income.
• Research in the public interest: The proposal would also modify the section 512(b)(9) research exclusion from unrelated business income to apply only to the extent income is derived from fundamental research that is made freely available to the general public.

Excess compensation excise tax (section 4960)

The proposal modifies the definition of a covered employee under section 4960 to include any current or former employee. This proposal would generally subject any compensation over $1 million to the section 4960 excise tax, beyond the organization’s cumulative list of Top 5 highest compensated employees. The proposal, however, does not include any changes to the exclusions for the provision of medical services.

Private foundations

The proposals also include provisions specific to private foundations:

• Net investment income tax: The section 4940 excise tax on a private foundation’s net investment income would increase for foundations with assets over $50 million from 1.39% up to 10% as follows:
  

  Foundation asset size	Tax rate
  = $50 million	1.39%
  > $50 million and = $250 million	2.78%
  > $250 million and = $5 billion	5.00%
  > $5 billion	10.00%

  For purposes of determining the foundation’s asset size, assets held by organizations related to the private foundation will be treated as assets of the private foundation. However, assets that are not intended or available for the use or benefit of the private will not be taken into account unless the private foundation controls the related organization.

  As proposed, the increase in taxes would be effective for tax years beginning after the date of enactment.

• Excess business holdings: According to JCT’s explanation, voting stock repurchased by a business enterprise will not affect a private foundation’s excess business holdings under section 4943 if the voting stock (1) is not readily tradable on an established securities market; (2) is purchased by the business enterprise on or after Jan. 1, 2020, from an employee stock ownership plan (ESOP); and (3) is held by the business enterprise as treasury stock, cancelled, or retired.

College and university endowment excise tax (section 4968)

The proposal would increase the college and university endowment excise tax for private colleges and universities that have non-charitable use assets that are over $750,000 per student from 1.4% up to 21% as follows:

In computing the endowment size, only students that meet the eligibility requirements under section 484(a)(5) of the Higher Education Act of 1965 would count. According to JCT’s explanation, that section requires the student “be a citizen or national of the United States, a permanent resident of the United States, or able to provide evidence from the Immigration and Naturalization Service that he or she is in the United States for other than a temporary purpose with the intention of becoming a citizen or permanent resident.” The proposal would also require additional Form 990 reporting regarding the number of students.

However, the proposal would exclude “qualified religious institutions” from the excise tax. Such institution must have been established after July 4, 1776; been established by, or in association with, and continuously maintained an affiliation with a church (as described in section 170(b)(1)(A)(i)); and maintain a published institutional mission that is predicated upon religious tents, beliefs, or teachings.

Terrorist supporting organizations

The initial proposals would also extend section 501(p) to organizations that support terrorism by providing the Secretary of the Treasury with authority to suspend the organization’s exempt status. This provision echoes Section 4 of the Stop Terror-Financing and Tax Penalties on American Hostages Act (H.R. 9495) that passed the House of Representatives on Nov. 21, 2024.

RSM US takeaways

These proposals represent the beginning of the negotiation process. It is likely that there will be some modifications as the House considers the overall tax package, and the Senate may introduce different provisions. RSM will continue to monitor developments and provide the sector with relevant and timely updates as the legislative process continues to unfold.