Expanded application of excise tax to covered employees

Section 70416 of the One Big Beautiful Bill Act (OBBBA) expands the scope of the excise tax under IRC § 4960, effective for tax years beginning after December 31, 2025.

Under prior law, a 21% excise tax applied to remuneration exceeding $1 million or excess parachute payments made by an applicable tax-exempt organization (ATEO) or its related entities to “covered employees,” defined as the five highest-compensated individuals in a given year and any individual previously designated as a covered employee post-2016.

The OBBBA eliminates the five-highest threshold, redefining “covered employee” to include any individual who was employed by the ATEO at any time after December 31, 2016, regardless of compensation level, employment status, or whether they are currently receiving remuneration.

Key implications:

• Historical review of employment and compensation records dating back to 2017 is now essential.
• IRS guidance is anticipated to clarify application mechanics, particularly around the expanded definition and exceptions.

This change will likely increase the number of individuals subject to the excise tax and may require restructuring of compensation arrangements to mitigate exposure.

Excise tax on investment income of private colleges & universities

Section 70415 revises the excise tax regime under IRC § 4968, which applies to the net investment income of certain private colleges and universities. The OBBBA introduces a tiered rate structure and tightens the eligibility criteria for institutions subject to the tax, effective for tax years beginning after December 31, 2025.

Key Changes to Excise Tax Structure

The prior flat 1.4% excise tax is replaced with a graduated rate schedule based on an institution’s student-adjusted endowment:

• 1.4% for institutions with a student-adjusted endowment > $500,000 and ≤ $750,000
• 4% for institutions with a student-adjusted endowment > $750,000 and ≤ $2 million
• 8% for institutions with a student-adjusted endowment > $2 million

The student-adjusted endowment is defined as the fair market value of non-exempt-use assets (i.e., assets not used directly in carrying out the institution’s exempt purpose), divided by the number of tuition-paying students.

Expanded Scope and Definitions

• The definition of “applicable educational institution” (AEI) is narrowed: institutions must now have at least 3,000 tuition-paying students, up from the previous 500-student threshold
• The amendment expands the definition of net investment income to include:
  • Interest income from student loans
  • Royalty income from federally funded research, both previously excluded under Treasury regulations

Nonitemizer partial deduction for charitable contributions

Section 70424 of the OBBBA permanently reinstates and expands the above-the-line charitable contribution deduction for individual taxpayers who do not itemize. This provision revives and enhances the temporary measure originally enacted under the CARES Act of 2020.

Key Provisions

• Deduction Limits: The maximum allowable deduction is increased to $2,000 for married taxpayers filing jointly (up from $600) and $1,000 for all other filers (up from $300)
• Eligible Contributions: Only cash contributions to public charities qualify. Contributions to donor-advised funds, supporting organizations, and most private non-operating foundations are excluded.
• Carryforwards: Contributions carried forward from prior years do not qualify for this deduction.
• Effective Date: Applies to tax years beginning after December 31, 2025.

Individual charitable contributions 0.5% floor

Section 70425(a) introduces a new floor limitation under IRC § 170(b)(1) for individual taxpayers who itemize deductions. Effective for tax years beginning after December 31, 2025, individuals may now deduct charitable contributions only to the extent that aggregate contributions exceed 0.5% of adjusted gross income (AGI) .

Key Provisions

0.5% AGI Floor: Itemized charitable deductions are disallowed for the first 0.5% of AGI. This threshold applies across all types of charitable contributions, regardless of the recipient organization or the form of property donated 1.

Existing AGI-Based Limitations Preserved: The traditional percentage limitations (e.g., 60% for cash to public charities, 30% for appreciated property, etc.) remain in effect and operate in tandem with the new floor.

Carryforward Rules:

Contributions disallowed solely due to the 0.5% floor may be carried forward for up to five years.

However, no carryforward is permitted if the aggregate contributions do not exceed the applicable AGI-based ceiling in the current year.

Permanent 60% of AGI limitation on individual charitable contributions deduction 

Section 70425(b) makes permanent the 60% of AGI limitation for cash contributions to public charities, originally enacted under the Tax Cuts and Jobs Act (TCJA) and previously set to expire at the end of 2025. This provision applies to tax years beginning after December 31, 2025.

Key Provisions

• The 60% limitation applies to cash contributions made by individuals to:
  • Public charities described in §170(b)(1)(A), and
  • Certain private foundations described in §170(b)(1)(F).
• The provision codifies and extends the TCJA-era enhancement, ensuring that taxpayers may continue to deduct up to 60% of AGI for qualifying cash gifts.

1% floor on deduction of charitable contributions by corporations

Section 70426 introduces a new limitation under IRC § 170(b)(2)(A) that materially alters the deductibility of charitable contributions by C corporations, effective for tax years beginning after December 31, 2025.

Key Changes

• 1% Floor Introduced: Corporations may now deduct charitable contributions only to the extent that aggregate contributions exceed 1% of taxable income (as defined in §170(b)(2)(D))
• 10% Ceiling Retained: The overall cap on deductible charitable contributions remains at 10% of taxable income.
• Carryforward Rules Modified:
  • Excess contributions above the 10% ceiling may still be carried forward for up to five years.
  • However, contributions disallowed solely due to the 1% floor are not eligible for carryforward unless the total contributions exceed the 10% ceiling

Exceptions Preserved

• The amendment does not affect the treatment of qualified conservation contributions made by:
  • Certain corporate farmers and ranchers, and
  • Native Corporations under §170(b)(2)(B).