New law increases excise taxes for tax-exempt organizations

Excise taxes on net investment income for certain private universities, will increase to as high as 8%, under HR1, the tax and spending package, signed into law by President Donald Trump on July 4, 2025.

However, the final law exempts small colleges from the excise tax.

The new law also contains several other provisions that affect tax-exempt organizations and doesn’t include other proposals that were in earlier versions of the bill.

Colleges and universities

Internal Revenue Code (IRC) Section 4968, which was enacted as part of the Tax Cuts and Jobs Act (TCJA) of 2017, established a 1.4% excise tax on net investment income of applicable educational institutions.

Under the new law, the rates will be:

• A 1.4% excise tax for private universities with a student adjusted endowment of at least $500,000 and less than $750,000
• A 4% excise tax for an endowment of more than $750,000 and less than $2 million
• An 8% excise tax for an endowment of more than $2 million

Applicable educational institutions are those that have:

• At least 3,000 tuition-paying students in the preceding tax year
• More than 50% of those students located in the United States
• A student adjusted endowment of at least $500,000

The new law increased this threshold – it had been only 500 tuition-paying students under IRC Section 4968 and in earlier proposals of the new law.

Applicable educational institutions exclude state colleges or universities defined under IRC 511(a)(2)(B). Earlier proposals had also excluded qualified religious institutions, but this exclusion wasn’t part of the final law.

A student adjusted endowment is defined as the aggregate fair market value of an institution’s assets, other than those assets used directly in its exempt purpose, divided by the number of students. Assets are valued as of the end of the previous tax year.