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The One Big Beautiful Bill (OBBB), passed by the 119th United States Congress contains numerous tax and spending regulation changes.  With the goal of adjusting how large endowments are treated under the tax code, the OBBB made specific changes to application of excise tax on certain private colleges and universities and revised both who is subject to the tax and how the tax is calculated. The new excise tax provisions apply to tax years beginning after December 31, 2025.

1. A Tiered Excise Tax Rate
Under prior law, applicable institutions paid a flat 1.4% excise tax on their net investment income (NII), as established by the Tax Cuts and Jobs Act of 2017. OBBB replaces this flat rate with a tiered rate structure tied to the size of a school’s student adjusted endowment.

Student Adjusted Endowment	Excise Tax Rate on Net Investment Income
$500,000 to $750,000	1.4%
Over $750,000 to $2,000,000	4.0%
Over $2,000,000	8.0%

Institutions with higher “student adjusted endowment” will be subject to a higher excise tax rate. Student adjusted endowment means the aggregate fair market value of the assets of the institution that are not directly used in carrying out of the institution’s exempt purpose, divided by the daily average number of full-time students attending the institution.  For this purpose, part-time students will be counted on a full-time student equivalent basis. The change is intended to create a more progressive structure compared to the prior one-size-fits-all rate.

2. Higher Threshold for Applicability
OBBB also modifies the eligibility criteria for which institutions are subject to the excise tax. The revised thresholds are:

• A minimum of 3,000 tuition-paying students (up from 500), and
• At least 50% of those students must be located in the United States

Public colleges and universities continue to be excluded from this tax. As a result of this change, many smaller private institutions that previously met the criteria will no longer fall under the scope of the tax.
 
3. Expanded Definition of Net Investment Income (NII)
OBBB also broadens the definition of net investment income, which is the base on which the excise tax is calculated. Under the new law, net investment income now includes interest income from institutional student loans and certain royalty income.
These changes broaden the taxable base for institutions that meet the new thresholds and may particularly affect research-intensive universities or those with active technology commercialization programs.

Next Steps
Institutions likely to be affected by these changes should begin reviewing:

• Their student-adjusted endowment levels to determine applicable excise tax tiers
• Revenue streams that may now fall under the expanded NII definition
• Asset classifications and reporting practices to ensure accurate compliance under the new framework

We recommend consulting with legal and tax advisors to assess exposure and develop a strategy for adapting to the new rules ahead of the 2026 tax year.

RJS LAW Can Help 
Our team of nonprofit attorneys, tax attorneys, international tax attorneys, and estate planning professionals can guide you through the new law’s complexities and tailor a plan that protects your assets, reduces tax exposure, and aligns with your personal and business goals. Whether you are creating a charity, restructuring your business, revising your estate plan, evaluating international holdings, or simply want comfort and security in a changing tax landscape, we are here to help you navigate the path forward and make sure you are taking full advantage of these new provisions.

The experienced attorneys at RJS LAW provide Tax Planning, Tax Controversy, International Tax, Probate, Nonprofit, and Estate Planning Services.  We can help you plan for your next vehicle purchase or perhaps help you plan for bigger and better things.  For a no-cost consultation, please contact us at 619-595-1655 or on the web at RJS LAW. 

Written by Chandara Diep, Esq., LL.M.