2025 Tax Reform: What Nonprofit Leaders Need to Know

Although nonprofit organizations are generally exempt from federal income taxes, they may still be subject to other types of taxes, including unrelated business income tax and various excise taxes. 

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, enacted several provisions affecting exempt entities. Here’s what you need to know as a nonprofit leader.  

How Does the OBBBA Affect Nonprofits? 

The OBBBA affects taxation of nonprofit organizations by revising two excise taxes: one that affects private, nonprofit colleges and universities, and another that affects nonprofits with current or former employees who earn more than $1 million annually. Both provisions go into effect in 2026. 

Excise Tax on Endowments of Private, Nonprofit Colleges and Universities 

The excise tax on endowments applies to higher educational institutions that, in the prior taxable year: 

• Had at least 3,000 tuition-paying students (previously 500 tuition-paying students), 

• Had at least 50% of its tuition-paying students located in the United States (unchanged from prior law), 

• Had a student-adjusted endowment of at least $500,000 (unchanged from prior law), and 

• Are not a state college or university (unchanged from prior law). 

The law previously applied a 1.4% excise tax on the net investment income of qualifying institutions. Under the new law, the excise tax rate depends on the size of the institution’s student-adjusted endowment. 

Student-adjusted endowment range	Excise tax rate
$500,000–$750,000	1.4%
$750,001–$2,000,000	4%
$2,000,001+	8%

  
The new law introduces the term “student-adjusted endowment,” but it is functionally the same as the prior law. A student-adjusted endowment is simply the aggregate fair market value of the institution’s assets — except those used directly in carrying out the institution’s exempt purpose — divided by the number of students. 

However, the OBBBA redefines net investment income for purposes of this excise tax. Now, net investment income also includes federally subsidized royalty income, which is royalty income that meets these conditions: 

• The income was generated from intellectual property whose research, development, or creation was partially or wholly funded by the federal government. 

• The income would not otherwise be included in gross investment income. 

Insight: Taken together, the revised excise tax on endowments is expanded to focus on larger institutions (at least 3,000 students rather than at least 500 students) and to raise rates on institutions with the largest endowments (measured by the fair market value of assets per student). 

Excise Tax on Excess Employee Compensation 

The OBBBA revises just one paragraph of the Internal Revenue Code section that addresses excess compensation of nonprofit employees, but the change may have an outsized effect on some nonprofits. 

Previously, the excise tax on excess compensation and parachute payments applied only to employees who had been one of the organization’s five most highly compensated employees (former or current) in any year since 2017. Now, the excise tax applies to any nonprofit employee. 

The excise tax computation remains the same: 21% of the qualified employee’s income that exceeds $1 million. 

Insight: The seemingly small change may have a significant effect on the tax liability of certain nonprofits with several highly compensated executives. In the past, there was no excise tax for highly compensated employees who had never been among the five highest-paid individuals in the organization. Now, these nonprofits may owe a hefty excise tax on any employee earning more than $1 million during the year. 

What Did Not Make It Into the OBBBA? 

Initial iterations of the OBBBA included several changes to nonprofit tax law that didn’t make it into the final version of the bill. Here’s what was left out of the OBBBA: 

• Parking tax: The initial House version of the OBBBA would have reintroduced a provision from the Tax Cuts and Jobs Act of 2017 that would’ve required nonprofits to treat employer-provided transportation benefits (including parking) as unrelated business income (UBI), which subject to a 21% income tax rate. These benefits continue to be exempt from the unrelated business income tax (UBIT). 

• Tax on name and logo royalty income: The original House bill would’ve taxed a nonprofit’s royalty income from the use of its name and logo. It would have made this income subject to UBIT. 

• Tax on nonpublic research: In general, UBIT does not apply to the research income of a nonprofit whose primary purpose is to do research and make it freely available. Under this law, nonprofits that meet the requirements don’t owe UBIT on income from nonpublic research projects. The initial House version would’ve changed that, taxing any income from their nonpublic research. 

• Excise tax on private foundations: The House bill also would’ve tiered the excise tax rate on the net investment income of private foundations, similar to the enacted excise tax rates for the endowments of private, nonprofit colleges and universities. The provision would’ve raised the private foundation excise tax rate from its current flat 1.39% to as high as 10% for private foundations with more than $5 billion in assets. 

Smith + Howard: Evaluating the OBBBA’s Impact on Nonprofits 

The OBBBA is a major piece of legislation with far-reaching tax consequences, many of which we are still evaluating. Our expanded review of OBBBA can be found here. Although the nonprofit tax provisions do not take effect until 2026, our advisors are already helping our nonprofit clients plan for tax change. 

At Smith + Howard, proactive planning drives our strategy. Our nonprofit clients, which span independent schools, religious organizations, private foundations, service organizations, and more, benefit from our in-depth analysis of upcoming changes in the law and their circumstances to improve their tax situation.  

Contact an advisor to discuss how Smith + Howard can help your nonprofit prepare for the effects of tax reform and other changes.