Nonprofits Brace for Tax Shake-Up in House Budget Bill

The U.S. House of Representatives Ways and Means Committee released its budget reconciliation bill on May 12 and advanced it along party lines on May 14 to the Budget and Rules committees before a vote of the full House. Although the headlines focus on major items, such as eliminating taxes on tips, making the 2017 tax cuts permanent, and changes to HSAs, the bill contains several impactful and concerning line items for the nonprofit sector, highlighted below. Although it is unlikely that all the provisions below will make it into the final bill, it is time to pay close attention, as the Trump administration’s stated goal is to have it signed into law by July 4.

Sec. 110112. Reinstatement of partial deduction for charitable contributions of individuals who do not elect to itemize.

Current Law: Under current law, only taxpayers who itemize can deduct their charitable contributions.

Provision: This provision creates a temporary deduction for taxpayers who don’t itemize deductions up to $150 for single filers ($300 for married filing jointly) for charitable cash contributions for tax years 2025 through 2028. The charitable contribution must be made to a qualified charity and cannot be made to donor-advised funds or supporting organizations.

CBIZ Takeaway: This provision is a welcome, albeit temporary and limited, return of a universal charitable deduction for those who don’t itemize deductions. It directly benefits many public charities by incentivizing smaller cash contributions up to $150 ($300 for married filing jointly) through 2028. The explicit exclusion of contributions made to donor-advised funds and supporting organizations is a notable policy choice within this provision, potentially encouraging donors to give directly to operating charities.

Sec. 112020. Expanding the application of tax on excess compensation within tax-exempt organizations.

Current Law: IRC Section 4960 currently imposes an excise tax on excess compensation paid to certain highly compensated employees by applicable tax-exempt organizations. The excise tax rate is equal to the corporate tax rate multiplied by the sum of (1) any remuneration over $1 million paid to a covered employee for a taxable year, and (2) any excess parachute payment paid to a covered employee.

Provision: The new provision revises the definition of a covered employee to mean any employee or former employee as defined under IRC Section 4960(c)(2). An employee does not need to be one of the five highest-compensated employees or have previously been a covered employee of the organization to be considered a covered employee. As a result, a covered employee includes any employee of an applicable tax-exempt organization that receives remuneration over $1 million.

CBIZ Takeaway: This change appears to broaden the definition of “covered employee” under IRC Section 4960. Instead of applying the excise tax only to a limited group of the highest-paid employees (as is generally the case under current law), the provision seems to extend the tax to any employee (current or former) of an applicable tax-exempt organization whose remuneration exceeds $1 million. In larger organizations, this could increase the number of employees subject to the tax, imposing a significantly larger compliance burden and resulting tax burden.

Sec. 112021. Modification of excise tax on investment income of certain private colleges and universities.

Current Law: IRC Section 4968 currently imposes an excise tax on an applicable educational institution for each taxable year, equal to 1.4% of the institution’s net investment income for that year.

Provision: The new provision amends the current excise tax on net investment income framework for certain private colleges and universities under IRC Section 4968 with a tiered system based on an institution’s student-adjusted endowment (see table below). For purposes of calculating an institution’s student-adjusted endowment, this section amends such calculation by excluding students who do not meet the requirements under Section 484(a)(5) of the Higher Education Act of 1965.

This section also provides an exemption from being considered an applicable educational institution, provided the institution meets certain requirements related to being a qualified religious institution. Additionally, this section includes student loan interest income and certain royalty income to calculate a school’s net investment income.

CBIZ Takeaway: This is not a surprising provision, as it has been signaled by the administration previously. The number of schools subject to the tax was a small percentage of the total, and one wonders how many institutions will be impacted by the top bracket. Boards and management of educational institutions should pay close attention to how this provision evolves, as there may be tax planning opportunities in how taxable income and endowment per student calculations are ultimately decided.

Sec. 112022. Increase in rate of tax on net investment income of certain private foundations.

Current Law: Under current law, all private foundations exempt from taxation under IRC Section 501(a) are subject to an excise tax equal to 1.39% of the net investment income of such foundation for the taxable year.

Provision: The new provision amends the current excise tax on the net investment income framework for tax-exempt private foundations under IRC Section 4940(a) with a tiered system that maintains the current excise tax rate for private foundations with less than $50 million in total assets but applies higher excise tax rates on private foundations reporting $50 million or more in total assets (see table below).

CBIZ Takeaway: This provision significantly increases the excise tax on net investment income for larger private foundations. The new tiered system, with rates climbing as high as 10% for foundations with $5 billion or more in assets, represents a clear shift from the tax’s original purpose of covering administrative costs to becoming a central revenue-generating mechanism. These higher rates will create greater “tax drag” on foundations, potentially reducing the funds available for charitable grants and necessitating careful review of investment strategies by foundation boards and management.

Sec. 112023. Certain purchases of employee-owned stock disregarded for purposes of foundation tax on excess business holdings.

Current Law: Under current law, the combined holdings of private foundations and all their disqualified persons are limited to 20% of the voting stock in a business enterprise that is a corporation. Holdings in excess of the holding percentage are subject to a 10% excise tax, which is increased to 200% if the holdings are not reduced by the end of the taxable year.

Provision: This provision amends IRC Section 4943 and states that shares of stock repurchased by a company from a retiring employee who participated in the company’s employee stock ownership plan (ESOP) are treated as outstanding for purposes of calculating the share of that company owned by a private foundation.

CBIZ Takeaway: This provision offers a favorable adjustment for private foundations that hold stock in companies with ESOPs. By treating shares repurchased by the company from retiring ESOP employees as still outstanding, the calculation of the private foundation’s ownership percentage is effectively lowered. This helps prevent the foundation’s holdings from unintentionally exceeding the 20% limit for excess business holdings, thereby allowing them to avoid the associated excise tax in these specific circumstances.

Sec. 112024. Unrelated business taxable income increased by amount of certain fringe benefit expenses for which deduction is disallowed.

Current Law: Under current law, the amount paid or incurred for any qualified transportation fringe benefit is exempt from unrelated business taxable income.
Provision: This provision amends IRC Section 512 to increase the unrelated business taxable income of a tax-exempt organization by including the amount paid or incurred for any qualified transportation fringe benefit.

CBIZ Takeaway: One hopes that members of the House or Senate will recall this provision from the TCJA in 2017 and how it ultimately had to be repealed due to the difficulty in administration and the widespread confusion it caused. However, if this provision makes it through to the final law, it will be time to revisit the parking lot tax and transit benefit calculations.

Sec. 112025. Name and logo royalties treated as unrelated business taxable income.

Current Law: Under current law, the income from the sale or licensing by an organization of its name or logo is exempt from unrelated business taxable income (UBI).

Provision: This provision amends IRC Sections 512 and 513 to increase the UBI of a tax-exempt organization by including the income from any sale or licensing by an organization of its name or logo.

CBIZ Takeaway: This provision represents a targeted narrowing of the royalty exception within the UBI Code sections. Income derived specifically from the sale or licensing of a nonprofit’s name or logo, previously often treated as exempt royalty income, would now be subject to tax. This change will require many nonprofits, particularly those with sponsorship or partnership agreements that include significant brand usage, to identify and report this revenue as taxable income, increasing tax and compliance complexity. Modifying the royalty exception was also part of early versions of the 2017 TCJA bill, which ultimately did not become law, so it will be interesting to see if this provision suffers the same fate.

Sec. 112026. Exclusion of research income limited to publicly available research.

Current Law: Under current law, 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, is exempt from UBI.

Provision: This provision amends IRC Section 512 to include in the unrelated business taxable income of a tax-exempt organization the income generated from non-public research, provided that the organization’s tax-exempt purpose is to provide publicly available research, thereby treating such income as UBI.

CBIZ Takeaway: This proposal narrows a specific exemption previously applicable to research organizations focused on public research. While the full scope of affected organizations and revenue is not yet clear, the change directly incentivizes those nonprofits currently conducting both public and non-public research to shift toward full public dissemination to stay exempt from UBI.

Sec. 112028. 1% floor on deduction of charitable contributions made by corporations.

Current Law: Under current law, corporate taxpayers are generally allowed a deduction for charitable contributions up to a limitation equal to 10% of taxable income.

Provision: This provision establishes a floor equal to 1% of taxable income, allowing corporations to deduct their charitable contributions. In the case of a corporation with charitable contributions exceeding the 10% limit, the provision will enable taxpayers to add the amount disallowed under the 1% floor to the amount carried over to the subsequent year.

CBIZ Takeaway: The provision adds a layer of complexity to calculating the charitable contribution deduction, particularly for larger donors. Corporations might reconsider the timing and amount of substantial donations to manage the impact of the 1% floor.

The budget reconciliation bill is still in motion, and details will likely shift. Count on us to update you as key changes emerge. If your not-for-profit needs tax assistance or has questions about the proposal, connect with a CBIZ not-for-profit finance professional.