Nonprofits Facing New Taxes Buried Deep In Reconciliation Bill

By Sam Brunson, CPA

Tucked quietly within the pages of the federal budget reconciliation bill lay several proposals impacting exempt organizations. Touted as a reform filled with sweeping tax cuts, the bill contains several provisions that may increase the tax burden of some not-for-profit organizations. Other provisions may impact the level of donations a charitable organization can expect to receive from individual and corporate donors.

Here’s a summary of the most significant provisions of the bill impacting exempt organizations.

New Or Expanded Taxes On Private Foundations And Other Exempt Organizations

1. Unrelated business income tax on certain transportation fringe benefits

It’s not déjà vu — this really has happened before. The proposed reform would reinstate the Tax Cuts & Jobs Act provision from 2017 that was retroactively repealed in December 2019. Under this provision, exempt organizations would include in unrelated business income the amounts paid or incurred for qualified transportation fringe benefits, or any parking facility used in connection with qualified parking.

New to the current proposal is an exclusion for churches and church-affiliated organizations.

2. Unrelated business income tax on certain research income

The bill has proposed removal of the exclusion from income of research activities if the results are not made available to the public for free.

3. Tiered net investment income tax on Private Foundations

Net investment income tax is nothing new to private foundations. Currently, these exempt organizations pay an excise tax on their net investment income at a flat rate of 1.39%. The proposed bill sets forth a tiered structure that would require private foundations to pay tax on their net investment income as follows:

4. Tiered net investment income tax on Private Colleges and Universities

Under current provisions, certain educational institutions (excluding state colleges and universities) are subject to an excise tax of 1.4% on their net investment income. The proposed reform would create a tiered tax rate schedule based on the “student adjusted endowment” which is, in the simplest terms, the fair market value of the institution’s assets (excluding exempt purpose assets) divided by the number of eligible students.

Under certain circumstances, assets of a related organization would be included in the institution’s assets when computing the student adjusted endowment.

The definition of net investment income is also expanded to include interest from student loans made by the education institution as well as any federally subsidized royalty income. Under certain circumstances, net investment income of a related organization is to be included in the institution’s net investment income as well.

5. Excise tax on compensation over $1 million

Under current law, tax exempt organizations are subject to an excise tax on compensation in excess of $1 million paid to any of its top five covered employees.  The proposed reform would expand the excise tax to apply to compensation of all employees who receive in excess of $1 million, not just the top five.

New Or Revised Limits On Charitable Contributions

1. 1% floor for charitable contributions from corporations

Under current provisions, corporations are allowed a deduction for charitable contributions, limited to 10% of the corporation’s taxable income for the year. Contributions in excess of the 10% ceiling can be carried forward five years. These rules would remain unchanged.

The proposed reform would create a 1% floor in addition to the 10% ceiling. If total contributions do not exceed 1% of the corporation’s taxable income for the year, no deduction is allowed. Contributions not allowed in the current year due to failure to meet the 1% floor can be carried forward for five years but may not be considered in determining if the 1% floor is met in subsequent years.

2. Other relevant revised limits

The proposed reform would revise the overall limitation on itemized deductions, the calculation for such limitation omitted here. In combination with the increase to the standard deduction through 2028, it is expected that taxpayers will increasingly utilize the standard deduction.

Charitable Donation Deductions And Tax Credits

1. Above-the-line deduction for non-itemizers

The proposed bill contains a reinstatement of the charitable contribution deduction for individual taxpayers who do not itemize. This reform was originally enacted by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 but was limited to tax years 2020 and 2021. The new reform reinstates the deduction, albeit with lower limits.

Under the current proposal, taxpayers would be allowed an above-the-line deduction of up to $150 for a single taxpayer and up to $300 for joint filers for tax periods between 2025 and 2028. Like the previous provision, donations to donor-advised funds and supporting organizations are not eligible.

2. Tax credits for contributions to scholarship granting organizations

The bill contains a new tax credit for individuals who make certain contributions to a scholarship granting organization. The credit is limited to the greater of 10 percent of AGI or $5,000.

A scholarship granting organization is an organization described in Internal Revenue Code Section 501(c)(3) (excluding private foundations) and substantially all of the activities of the organization are providing scholarships for qualified elementary or secondary education expenses of eligible students. For purposes of this credit, eligible students are subject to median household income limitations.

The contribution cannot be taken as both a deduction and a credit and the credit must be reduced by the amount of any credit taken on a state tax return. This credit is also limited to a volume cap (currently proposed at $5 billion, applied on a first-come, first-served basis).

The bill is currently with the U.S. Senate for reconciliation, which means the Senate need only a simple majority vote for the bill to pass. Though there is some disagreement amongst senators regarding certain aspects of the bill, the proposals impacting exempt organizations do not appear to be a part of the discussion. It is important that nonprofit managers be aware of these proposed portions and stay tuned for any updates as it progresses.

The Senate’s changes will go back to the House of Representatives with the intention of having a finalized bill to President Donald J. Trump for signature by July 4, 2025.

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Sam Brunson, CPA is senior tax manager at Wipfli LLP. Her email is sbrunson@wipfli.com