Type: Article

Coauthored by:
Mallory Dennis, Executive Director, Client CIO Group, TIFF Investment Management
Gregory W. Hayes, CPA, Partner, MST

Overview

On May 22, 2025, the House passed the One Big Beautiful Bill Act, which introduces a tiered excise tax structure on net investment income (NII) for private foundations.1 This marks a departure from the longstanding flat 1.39% rate and introduces implications for foundation operations, investment strategy, and grantmaking.

Private foundations with larger asset bases may face higher excise tax rates under the new tiered structure, but for most, the financial impact will be modest and manageable with thoughtful planning. The key is not to overreact, but to understand how the new rules interact with spending, investment, and grantmaking decisions.

What’s New for Private Foundations

For a broader overview of the bill’s structure and legislative context, see TIFF’s earlier white paper: ‘Big Beautiful Bill’ Refines Endowment & Foundation Taxes with Tiers (May 21, 2025). A summary of the tiered tax framework referenced in the paper is provided below:

Tiered Excise Tax Rates2

The bill replaces the flat 1.39% excise tax with a four-tier system based on total asset value:

Key Distinctions:

• No exclusions for assets used in direct charitable activity, which may increase taxable assets.
• Related entities’ assets may be aggregated to determine the applicable tier, which may put an institution into a higher tax tier.
• Valuation is based on year-end assets, which may increase unpredictability and raise the risk of unintentionally moving into a higher tax tier.

Clarifying the 5% Payout Rule

Under current IRS guidance, the excise tax on net investment income continues to be treated as a qualifying distribution for purposes of satisfying the 5% minimum payout requirement. While the total distribution obligation remains unchanged, the composition of that payout may shift — allocating a greater share to tax liabilities rather than to charitable grantees.

This structural nuance, though not new, takes on greater significance under the tiered excise tax regime. Foundations subject to higher tax rates may find that a more substantial portion of their required payout is absorbed by excise tax, effectively reducing the funds available for direct philanthropic activity. This dynamic underscores the importance of integrating tax exposure into both grantmaking and spending policy decisions.

While the 5% payout is a statutory minimum, foundations may choose to distribute more. In the context of higher excise tax obligations, exceeding the minimum may be necessary to sustain current levels of charitable activity.

Implications for Foundations

Grantmaking

Higher excise taxes will reduce the portion of the 5% payout available for direct charitable grants. Foundations may need to reassess their grantmaking strategies, adjusting discretionary commitments, prioritizing core grantees, or shifting toward fewer but larger grants to maximize impact under tighter financial constraints.

Spending Policy

For foundations in higher tax tiers, spending policy decisions become more complex. Some may choose to exceed the 5% minimum payout to sustain current grantmaking levels. While this can preserve programmatic continuity and support to grantees, it may increase pressure on long-term endowment sustainability.

At the same time, tax planning to manage excise tax exposure becomes a critical part of spending strategy. Because tier placement is based on year-end asset values, market volatility can lead to unanticipated tax increases. This dynamic introduces new constraints on available resources and may reduce the portion of the payout available for direct charitable activity.

Foundations should evaluate how spending decisions interact with tax liability, investment performance, and corpus preservation to ensure alignment with both mission-driven goals and financial resilience.

Investment Strategy

Maintaining higher spending while absorbing increased taxes could erode principal over time if not offset by stronger investment returns. Foundations may seek to revisit their strategic asset allocation to ensure it continues to support both spending needs and long-term capital preservation. Modest increases in risk tolerance or shifts toward asset classes with higher expected returns could help offset the incremental tax burden. The key is to evaluate portfolios holistically and consider the net of fee, after-tax outcomes over time.

Liquidity planning also becomes more important under this new regime. Foundations must ensure sufficient flexibility to meet grant and tax obligations without disrupting long-term investment strategy. Because tier placement is based on year-end asset values, market volatility can introduce unpredictability. Scenario modeling can help assess how different market and spending paths may affect tax liabilities and portfolio sustainability.

Next Steps: A Measured Approach

The introduction of a tiered excise tax structure is a meaningful policy change, but the impact is expected to be modest.

This context is important: most foundations — including those served by TIFF and MST — are unlikely to experience a significant increase in tax burden. The actual impact on net returns will be modest — often a fraction of a percent — and can be offset by thoughtful planning and strong investment performance.

Foundations should consider the following:

• Model potential tax tier outcomes based on projected year-end asset values to understand exposure and plan accordingly.
• Review spending and investment policies to ensure they remain aligned with long-term goals, especially in light of slightly reduced net returns.
• Communicate proactively with grantees about any potential implications for funding, particularly if multi-year commitments are involved.
• Evaluate investment structure and tax efficiency. The data shows that well-constructed portfolios can continue to deliver strong after-tax outcomes even with a modest increase in excise tax. It may not be necessary to make any meaningful changes to the current approach.

In summary, this is a moment for strategic reflection. Foundations that take a proactive but balanced approach will be well-positioned to navigate the new landscape without compromising their mission or long-term sustainability.

TIFF and MST will continue to monitor developments and provide guidance as the bill progresses through the Senate.

This piece was written in partnership with Gregory Hayes, CPA, Partner at MST. Greg specializes in accounting and strategic tax planning for private foundations and brings expertise to the evolving regulatory landscape.

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.

Summary

• The proposed tax changes may cause impacted investors to look for ways to avoid paying taxes on gains by selling secondaries sales in H2 2025 or early 2026. For endowments, the proposed changes would apply to taxable years beginning after December 31, 2025. Many endowments’ tax year would begin on July 1, 2026, meaning any gains realized on or before June 30, 2026, would not be taxed.
• Investors previously unwilling to accept a discount for an LP secondary sale may now be motivated to sell today at a discount instead of paying a tax in the future.
• Those most motivated to sell are LPs who believe they will be paying high taxes, in particular the 21% rate.
• The higher the unrealized gains, the larger the discount an LP would be willing to accept to avoid paying a tax.
• The average LP buyout secondary sold for 94% in 2024.1

Overview

The proposed tax tiers in the ‘Big Beautiful Bill’ raise the excise tax on net investment income to upwards of 21% for endowments and 10% for private foundations. If enacted, these new tax rates may cause impacted investors to take certain investment actions to avoid paying the tax before the changes are in place.

Because of the magnitude of the tax at the highest tier, investors are incentivized to realize large gains before the tax is in place. Potential strategies may include completing an LP secondary sale, or the sale of a real estate property.

Although LP secondary sales are often sold at a discount, with a potential tax looming, investors may be willing to take that discount today versus pay the tax in following years.

LPs who would be the most motivated to sell:

• Would be in the highest bracket (tax rate is high)
• Have an asset with high unrealized gains with low cost basis (large amount of gains subject to tax)
• Limited future potential asset value growth (less downside in selling today versus in the future)

Several Ivy League schools already have secondaries out for sale. Could we see others in the proposed 21% or even the 14% tier come to market? Those potentially in the 21% tier include Princeton, Stanford and MIT, some potential 14% tier include New England Small College Athletic Conference (NESCAC) peers Amherst College, Bowdoin College and Williams College, along with Pomona College, Grinnell College, California Institute of Technology and Swarthmore College.2

The Math

The proposed tax tiers are applied to net investment income of an endowment or foundation, meaning realized gains (i.e., the value above the cost basis) will be taxed at the new rate.

For secondaries, pricing is typically a discount to net asset value. Before the tax, the discount may have not been attractive as the alternative was to continue to hold and pay a marginal 1.4% on gains in the future. However, if the alternative is now paying a tax in the future, paying a certain discount today is more attractive.

Example: Selling a Secondary at 20% Discount vs. Paying Tax

In the example below, we assume there is an LP interest worth $100.

LP Secondary Sale: Today, a secondary sale would require an estimated 20% discount to current value, meaning the seller would lose $20 in the sale, receiving only $80.

Current 1.4% Tax: That same $100 LP interest is actually comprised of $50 of unrealized gains and $50 of cost basis (a 2x value). When realized, only the $50 gain is taxed, creating a 70 cent loss for this investor. The investor takes home $99.30.

Proposed 21% Tax: Under the new proposed regime, that same LP interest now losses $10.50 to tax, leaving the investor with $89.50.

In the current tax regime, there is still a large differential between the discount loss and the tax loss. Our example shows the minimal impact of the current 1.4% tax.

However, with the proposed tax rates, suddenly it costs a lot to realize gains. In our same example, proceeds from a secondary sale are now closer to the post-tax proceeds. Investors are doing to same math to see if it is more beneficial for them to sell anything today versus in the future.

Depending on the tax tier and the size of unrealized gain as a multiple of cost basis, an investor would be indifferent to paying a certain discount versus paying the tax. The table below illustrates the secondary discount at which an LP investor would be indifferent, based on the various tax tiers and the size of the unrealized gain.

Conclusion

In particular the highest tier of 21%, the proposed endowment tax tiers are poised to influence investment behaviors and change financial trade-offs. As impacted investors seek to optimize their financial outcomes in light of the impending tax changes, the market may witness a surge in secondary transactions — reshaping the landscape of endowment and foundation investment strategies.

It is imperative for stakeholders to closely monitor these developments and consider the implications for their own investment portfolios and tax planning strategies. TIFF will continue to provide updates on the ever-evolving landscape and perspective on how nonprofits can navigate the potential financial challenges.

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.

Overview

• The House Ways & Means1 Committee released its draft language for the ‘Big Beautiful Bill,’ which includes a number of components impacting nonprofit organizations. The components impacting investment pools are related to new or additional taxes.
• The Endowment Tax proposal aims to expand eligibility and how much those eligible pay. It includes a tiered rate structure based on asset-per-student amounts, and the inclusion criteria would narrow which students can be included in the calculation, for example excluding international students on temporary student visas.
• The Private Foundation Tax proposal mirrors the Endowment Tax proposal, moving from the current single 1.39% rate to a tiered rate determined by asset levels. Importantly, the tiers are determined by a foundation’s total assets, not just investment assets.
• The Joint Committee on Taxation estimates these two initiatives will raise $22.6B over the next 10 years.
• If passed, these new taxes will pressure higher education institutions and private foundations to reconsider their investment strategies and budgets.
• It is important to remember in the United States, bills often undergo many changes before becoming legislation. The original 2017 House tax bill proposed a 1.4% excise tax for private institutions with at least 500 tuition-paying students and endowment assets exceeding $100,000 per full-time student.1 This would have affected approximately 140 to 155 institutions, instead of the 56 it did in 2023 when that $100,000 was increased to $500,000.2

Endowment Tax Refined

This refined proposal expands who is subject to the endowment tax and creates a wider range for the amount of the tax.

• Rate: Increases from a single 1.4% rate to a tiered system with the highest rate set at 21%. An endowment will pay a single rate on all net investment income.
• Tier Determination: Endowed assets per student will determine what tier of tax an endowment will pay. See Chart 1 below for the tiers and rates.
• Student Count for Tier Calculation: Narrows the students that can be included, specifically excluding international students.3

While everyone anticipated a higher tax rate, they were not anticipating the exclusion of international students. This exclusion favors US citizens, permanent residents, or those not here on a temporary basis. It disproportionately and negatively impacts institutions with large international populations, such as those with graduate programs, which tend to have a larger percentage of international students.

We have already written about the three original proposals in February/March 2025 when they were released. Please refer to The Impact of Proposed Endowment Tax Changes and Endowment Tax – Part 2: Impact on the Endowment.

The Joint Committee on Taxation estimates this will generate $6.69 billion over 10 years.4

Case Study: International Exclusion May Push UPenn into 14% Tier

The exclusion of international students in the student count for tier determination is important. The University of Pennsylvania had 29% international students enrolled in Fall 2024. Utilizing the total number of enrolled (or even just full-time students), Penn would be in the 7% tax tier. However, with the international students excluded, Penn is now in the 14% tax tier–double the tax of the lower tier it would have previously qualified for if its full student population was counted, and 10 times its current tax of 1.4%.

Private Foundation Tax to be Tiered

This proposal increases the amount of tax certain foundations will pay in the future. Today all foundations pay a 1.39% tax.

• Rate: Increases the 1.39% single-tier tax to four rate tiers with the highest rate set at 10%. A foundation will pay a single rate, based on its tier, on all net investment income.5
• Tier Determination: the total foundation’s assets will determine what tier of tax an endowment will pay, not just investment assets. Total foundation assets include all assets, with no reduction for liabilities, and would also take into account assets of certain related organizations.

The Joint Committee on Taxation estimates this will generate $15.88 billion over 10 years.6

Summary

For institutions, a new or increased tax, depending on the tier, has varying level of impact–from small (1.4%/1.39%) to significant (21% for endowments or 10% for foundations). Impacted institutions may need to consider how the reduction in invested assets, and thus reduced spending, may necessitate changes to the budget or investment pool. TIFF has discussed the potential impact and implications of the endowment tax previously, summary of which is:

• Budget Implications: Institutions may need to reconsider their budget if suitable long-term replacements are not feasible for lost budgetary support from the investment pool.
• Investment Implications: If an institution is in a high enough tax tier, it may need to consider changing its approach, potentially increasing its risk tolerance or shifting asset allocation to incur less investment income.

These proposed changes and the associated implications create a challenging time for the nonprofit community. TIFF remains committed to helping organizations determine the right investment strategy for their unique situation.

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.