College and University Endowment Tax in the OBBBA

At a Glance

• On July 4, 2025, President Trump signed the “One Big Beautiful Bill Act,” enacting substantial changes to many areas of law, including both U.S. federal income tax law and the laws governing postsecondary institutions.
• The Act imposes graduated taxes on certain private postsecondary institutions based on the value of their “net investment income,” which includes but is not limited to endowment funds, on a per-student basis.
• The Act includes “federally-subsidized royalty income” and other income sources in its formulation of tax liabilities for affected institutions, and also imposes new reporting requirements.
• The Department of the Treasury is also directed to promulgate regulations designed to “prevent avoidance of such tax through the restructuring of endowment funds or other arrangements.”

On July 4, 2025, President Trump signed the “One Big Beautiful Bill Act” (OBBBA or the Act), enacting substantial changes to many areas of law, including both U.S. federal income tax law and the laws governing postsecondary institutions.¹ This alert summarizes the Act’s university endowment tax provision and briefly highlights changes from current law, including the endowment tax provisions of the Tax Cuts and Jobs Act of 2017 (the TCJA). We have also published a comprehensive review of the OBBBA’s higher education provisions.

Endowment Tax Provisions and Affected Postsecondary Institutions

Unlike the TCJA, which imposed a 1.4% endowment tax on applicable universities with more than 500 students, the OBBBA imposes a set of graduated tax rates on the “net investment income” of all institutions that hold at least $500,000 in per-student endowment and have at least 3,000 students in the applicable taxable year. Specifically:

In contrast to earlier versions of the Act, the OBBBA does not exclude religious institutions from the tax. Affected institutions are those which (1) had at least 3,000 tuition-paying students in the preceding taxable year, (2) have at least 50% of their students located in the United States, (3) hold at least $500,000 in endowment funds per student, and (4) are not state colleges or universities. For purposes of determining an institution’s endowment per student, student headcount is defined as “the daily average number of full-time students attending such institution,” such that part-time students are taken into account on “a full-time student equivalent basis.”

Expanded Tax Basis Includes "Federally-Subsidized Royalty Income"

Relative to current law, the OBBBA substantially expands the definition of the “net investment income” basis on which an institution’s endowment tax obligation is based. In addition to the existing net investment income tax that many institutions are subject to through TCJA, the OBBBA also includes any “Federally-Subsidized Royalty Income” within its definition of net investment income. “Federally-Subsidized Royalty Income” is defined to include the royalty proceeds of any “patent, copyright, or other intellectual or intangible property from which such royalty income is derived,” if (1) such patent, copyright, or other IP or intangible property “resulted from the work of students or faculty members in their capacities as such with the applicable educational institution,” and (2) “any Federal funds were used in the research, development, or creation” of the royalty-producing asset.

In addition, if a postsecondary institution makes institutional loans available to its students, the Act requires that any interest income on such loans be included as part of the gross investment income through which an institution’s net investment income is determined. Finally, the OBBBA also requires that the assets and net investment income of any “related organizations” also be included in the numerator of the endowment-per-student calculation for purposes of determining the applicable tax rate. For purposes of this provision of the Act, a “related organization” is any organization that (1) controls, or is controlled by, the postsecondary institution; (2) is controlled by one or more individuals who also control the institution; or (3) is a “supported organization” or similar organization for the benefit of the institution.² The Act provides only two explicit limits on the net investment income attributed to each pertinent postsecondary institution, namely: (1) any such amount shall not be double-counted — that is, it must only be attributed to one educational institution; and (2) assets and net investment income which are “not intended or available for the use or benefit of the educational institution” shall not be taken into account (unless the organization is controlled by the institution itself, or by a “supported organization” or similar organization as described above).

Taken together, these provisions could substantially expand the tax exposure of many private institutions, particularly those with federally supported research divisions (and resulting IP) or with affiliated private foundations or supporting organizations.

Effective Date, Reporting Requirements and Future Regulations

The revised tax obligations imposed by the OBBBA apply to taxable years beginning after December 31, 2025. In connection with those eventual filings, the OBBBA imposes two new reporting requirements for all institutions subject to its endowment excise tax. Such institutions must include on their tax return both (1) the number of tuition-paying students used to calculate the per-student endowment figure, and (2) the institution’s total number of students (again, with part-time students accounted for on a prorated basis). Finally, the Act directs the U.S. secretary of the treasury to promulgate regulations to “prevent avoidance” of the above-described endowment tax. In particular, the OBBBA requires that such regulations “prevent avoidance of such tax through the restructuring of endowment funds or other arrangements designed to reduce or eliminate the value of net investment income or assets subject to the tax imposed by this section.”

Comments and Conclusion

Please note that this brief summary focuses exclusively on the Act’s endowment tax provisions and does not address other OBBBA revisions to the Internal Revenue Code, nor to the Higher Education Act, which may be of material interest to colleges and universities. Our education team has published a comprehensive review of the OBBBA’s higher education provisions.

Please do not hesitate to let us know if you have any questions or concerns or would like to discuss the content of this memorandum and the provisions it describes.