Accounting & Tax

Article Sam Stephenson

On July 4, 2025, President Trump signed into law the budget reconciliation bill originally named the One Big Beautiful Law Act. The law modified the excise tax imposed by Internal Revenue Code Section 4968 on net investment income of certain private colleges and universities. To understand this fully, let’s examine its key components.

Who pays the tax?

The law targets applicable educational institutions, which are defined as private colleges and universities with the following characteristics: 

  • Described in Section 481 of the Higher Education Act of 1965 (HEA)
  • Eligible to participate in a program under Title IV of the HEA
  • At least 3,000 tuition-paying students during the preceding taxable year
  • Over 50% of tuition-paying students located in the United States
  • At least $500,000 of student adjusted endowment (as defined below)

Simple math- 3,000 students multiplied by $500,000 of endowment per student- implies that the law targets institutions with at least $1.5 billion of assets. 

Public colleges and universities are excluded. The final bill also removed provisions passed by the House of Representatives that would’ve exempted religious-affiliated schools and schools that don’t receive federal aid from paying the tax. 

How is student adjusted endowment calculated? 

Student adjusted endowment is calculated by taking the value of the institution’s assets and dividing it by the number of its students. 

The value of assets is determined by taking the aggregate fair market value of the institution’s assets- other than those assets used directly in carrying out its exempt purpose- at the end of the preceding taxable year and adding the value of assets of related organizations. Assets not used directly in carrying out an institution’s exempt purposes include assets held for the production of income or investment (e.g., stocks, bonds, and interest-bearing notes) and property used for the purpose of managing the institution’s endowment funds (e.g., offices and equipment). Any reasonable method that’s consistently applied can be used to determine fair market value.

The number of students is determined by the daily average number of full-time students attending the institution. Part-time students are considered on a full-time student equivalent basis, e.g., a student attending school half-time is counted as 0.5.

A related organization has one or more of the following characteristics:

  • Controls the institution
  • Controlled by the institution 
  • Controlled by one or more people who also control the institution 
  • A supporting organization under IRC Section 509(a)(3) 

What income is included in net investment income subject to tax? 

In addition to the traditional net investment income calculation (e.g., capital gains, dividends, interest), the following income is included: 

  • Interest income from student loans made by the institution or any related organization
  • Royalty income derived from grants or payments between any federal agency and the institution, any related organization, or any student or faculty member used in the research, development, or creation of patent, copyright, or other intellectual or intangible property
  • Net investment income of any related organization

The law provides that assets and net investment income not intended or available for the use or benefit of the institution can be excluded unless the institution controls the organization or the organization is described in Section 509(a)(3) with respect to the institution for the taxable year.

How much is the tax on net investment income?

Can assets, endowment funds, or net investment income be rearranged or restructured to avoid the tax?

The law explicitly instructs the IRS to prescribe regulations or other guidance to prevent avoidance of tax through restructuring of endowment funds or other arrangements reducing or eliminating the value of net investment income or assets subject to the tax. Institutions should prepare for future IRS examinations or other measures aimed at evaluating compliance.

What else should I know?

The law requires institutions subject to the tax to report on Form 990, Return of Organization Exempt from Income Tax, both its number of tuition-paying students and total number of students. 

If you have any questions as to how the law may affect your organization, please contact your trusted Dean Dorton advisor. 

Article Sam Stephenson

For companies in the life sciences sector, choosing the right legal structure for your business is a critical step with lasting tax, fundraising, and strategic implications. Whether you’re launching a biotech startup, developing a new medical device, or scaling an established pharmaceutical company, your entity choice can impact everything from how you raise capital to how your company is taxed and what liability protections you receive.

Below, we outline the key entity types commonly used in the life sciences industry, along with their tax advantages, limitations, and strategic considerations.

Single-Member LLC

A single-member LLC is a simple, flexible structure for businesses with one owner. It is typically treated as a disregarded entity for federal tax purposes, meaning the business’s income and expenses flow directly through to the owner’s personal tax return.

Tax Considerations

  • No separate federal income tax return is required (unless the business has employees or excise tax obligations).
  • An Employer Identification Number (EIN) may still be required.
  • SMLLCs may qualify for the federal research credit, which supports companies conducting qualified R&D in fields like biotechnology, engineering, and physical sciences.

Fundraising & Liability

  • Funded through personal assets, loans, or grants.
  • Provides liability protection for the owner.

This structure is often used in the early stages of a company’s development before additional investors or owners come on board.

Partnership

A partnership involves two or more owners who agree to carry on a business for profit. Like a single-member LLC, partnerships are pass-through entities for tax purposes.

Tax Considerations

  • The partnership files an informational return, but the income is taxed at the partner level.
  • Partnerships can allocate income, deductions, and credits to maximize tax efficiency across partners.
  • Partners’ tax basis (i.e., their investment in the partnership) changes with liabilities and contributions, which can affect how distributions or losses are treated.
  • The research credit is passed through to partners in proportion to their ownership.

Fundraising & Liability

  • Can be funded similarly to single-member LLCs with personal assets, loans, or grants, in addition to equity and admission of new partners.
  • General partnerships may expose partners to liability; limited partnerships and LLPs offer more protection.

S Corporation

An S Corporation is a tax election made by a qualifying domestic corporation that allows income and losses to pass through to shareholders for federal tax purposes, but offers some aspects of a C-Corporation structure.

Tax Considerations

  • Avoids corporate-level taxation.
  • Potential savings on self-employment taxes for shareholders.
  • Shareholders must receive a reasonable salary for their work within the S-Corporation.
  • Shareholders are taxed on their share of income relative to their ownership percentage regardless of whether distributions are made.
  • The research credit is passed through to shareholders in proportion to their ownership.

Limitations

  • Only U.S. citizens or residents can be shareholders.
  • Cannot exceed 100 shareholders or issue more than one class of stock.
  • Venture capital and foreign investment are generally not permitted.

Fundraising & Liability

  • Limited in fundraising flexibility due to shareholder restrictions.
  • Offers limited liability protection, important for companies exposed to regulatory or product-related risks.

C Corporation

The C Corporation is the most common structure for high-growth life science companies, particularly those seeking venture capital or preparing for IPOs.

Tax Considerations

  • Pays a flat 21% federal income tax rate.
  • Subject to double taxation: profits are taxed at the corporate level and again when distributed as dividends.
  • Eligible for a range of deductions and credits, including the research credit and the general business credit.
  • Required to make quarterly estimated tax payments if tax liability exceeds $500.

Key Advantage – Section 1202 Stock

C Corps can issue Qualified Small Business Stock under Section 1202, which allows eligible shareholders to exclude up to 100% of capital gains from the sale of stock held for at least five years. This is a significant tax incentive for investors and founders in the life science industry.

Fundraising & Scalability

  • No restrictions on number or type of shareholders.
  • Can issue multiple classes of stock and offer equity-based compensation to employees.
  • Preferred structure for raising venture capital and issuing stock under SEC regulations.

Governance

  • Must maintain a formal structure with a board of directors and corporate officers.

Final Thoughts

For life sciences entrepreneurs, choosing the right entity structure is about more than just legal formalities – it can shape your company’s funding options, risk exposure, tax liability, and long-term growth.

Before making a decision, consult with tax and legal advisors who understand the unique needs of life sciences businesses. The right structure today can lay the foundation for tomorrow’s breakthroughs.

Article Autumn Hines

On May 12, 2025, the House Ways and Means Committee released its long-awaited draft of proposed tax legislation. If enacted, this could have the most significant impact on tax-exempt organizations since the Tax Cuts and Jobs Act. Below is a summary of highlights in the proposed legislation.

Increase in Rate of Tax on Net Investment Income of Certain Private Foundations

The draft bill proposes an increased excise tax on private foundations’ net investment income, which could impact grantmaking and the execution of exempt purpose activities.

  • 1.39% in the case of a private foundation with assets of less than $50,000,000
  • 2.78% in the case of a private foundation with assets of at least $50,000,000 and less than $250,000,000
  • 5% in the case of a private foundation with assets of at least $250,000,000 and less than $5,000,000,000, and
  • 10% in the case of a private foundation with assets of at least $5,000,000,000

Modification of Excise Tax on Investment Income of Certain Private Colleges and Universities

A tax would be imposed on the net investment income of an “applicable educational institution”:

  • 1.4% in the case of an institution with a student endowment in excess of $500,000 and less than $750,000
  • 7% in the case of an institution with a student endowment in excess of $750,000 and less than $1,250,000
  • 14% in the case of an institution with a student endowment in excess of $1,250,000 and less than $2,000,000, and
  • 21% in the case of an institution with a student endowment in excess of $2,000,000

See our article on how this proposed tax bill could impact colleges and universities for a more in-depth explanation of terms.

Unrelated Business Income Increased by the Amount of Certain Fringe Benefit Expenses for Which Deduction is Disallowed

The proposed bill would include qualified transportation fringe benefits and parking facilities disallowed under IRC section 274 in an organization’s unrelated business income for the year. This provision was initially included in the Tax Cuts and Jobs Act and was subsequently repealed.

Name and Logo Royalties Treated as Unrelated Business Taxable Income

The proposed bill would include the sale or licensing of an organization’s name or logo as an unrelated trade or business regularly carried on by the organization.

1% Floor on Deduction of Charitable Contributions Made by Corporations

The proposed bill would include a 1% floor on corporate charitable deductions and allow corporations to carry the unused tax benefit forward 5 years, which could help increase charitable giving.

Reinstatement of Partial Deduction for Charitable Contributions of Individuals Who Do Not Elect to Itemize

While the standard deduction was increased, which could impact individuals’ ability to deduct charitable contributions, the proposed bill reinstates the deduction for those who do not itemize. The deduction would be reduced from $600 to $300 ($150 for married filing separate and single filers).

Termination of Tax-Exempt Status of Terrorist-Supporting Organizations

This provision would allow the Treasury to revoke the exempt status of organizations deemed to provide “material support or resources” that support terrorist activities.

While the above provisions are just some highlights, there is other proposed legislation that may impact tax-exempt organizations, such as an extension of excise tax on executive compensation for employees earning over $1 million, changes to the excess business holdings rule for private foundations, updates to the exclusion for publicly available research income, termination of certain energy credits, and other individual and business income tax provisions.

Although the bill is in draft format, we will watch closely as it moves through Congress. If you have any questions about how the proposed legislation may impact your organization, please contact your trusted Dean Dorton advisor.

Article Autumn Hines

The recently released draft of the House Ways and Means Committee’s proposed tax bill included a significant impact on colleges and universities. The 2017 Tax Cuts and Jobs Act imposed a 1.4% excise tax on the investment income of an “applicable educational institution.” The proposed bill expands the excise tax, as detailed below.

  • 1.4% in the case of an institution with a student endowment in excess of $500,000 and less than $750,000
  • 7% in the case of an institution with a student endowment in excess of $750,000 and less than $1,250,000
  • 14% in the case of an institution with a student endowment in excess of $1,250,000 and less than $2,000,000, and
  • 21% in the case of an institution with a student endowment in excess of $2,000,000

Applicable Educational Institution

An “applicable educational institution” is described as an eligible educational institution (as defined in IRC section 25A(f)(2)):

  • Which had at least 500 tuition-paying students during the preceding tax year,
  • More than 50% of the tuition-paying students of which are located in the U.S.,
  • Which is not a state college or university or a qualified religious institution, and
  • The “student adjusted endowment” of which is at least $500,000.

Student Adjusted Endowment

“Student adjusted endowment” means the aggregate fair market value of the institution’s assets (determined as of the end of the preceding tax year, other than those assets used directly in carrying out the institution’s exempt purpose) divided by the number of eligible students of the institution. An eligible student meets the requirements under Section 484(a)(5) of the Higher Education Act of 1965.

The institution’s net investment income is determined under rules similar to the rules of IRC section 4940(c).

The proposed bill also includes the aggregation of related organizations. A related organization is defined as any organization that:

  • Controls, or is controlled by, such institution,
  • Is controlled by one or more persons who also control such institution, or
  • A supported organization (as defined in IRC section 509(f)(3)) or an organization described under IRC section 509(a)(3).

Although the bill is in draft format, we will watch closely as it moves through Congress. If you have any questions about how the proposed legislation may impact your organization, please contact your trusted Dean Dorton advisor.

Article Autumn Hines

The Department of Revenue issued an announcement on Wednesday, January 22, 2025, advising taxpayers that a new tax portal is projected to launch on March 14, 2025. DOR advises business taxpayers to log in to OneStop to print historical data and verify their email address and contact information to ensure they receive their login credentials and instructions. Taxpayers will be unable to access their records in OneStop beginning on February 26. Here is a link to Instructions for Printing Historical Tax Return Information from OneStop.

What do Business Tax Filers Need to Know?

Beginning March 14, 2025, business tax filers will use the new MyTaxes portal instead of OneStop to access information and file taxes for Sales & Use, Corporation Income (Corp)/Limited Liability Entity (LLE), Telecom, Withholding, Utilities Gross Receipts License Tax (UGRLT), Non-Resident Withholding (NRWH), Commercial Mobile Radio Service (CMRS), Tire and Transient.

  • MyTaxes will also replace E-Tax, the UGRLT and Telecom filing system and WRAPS, the Withholding Returns and Payment System. 
  • In the first week of March 2025, OneStop, E-Tax, and WRAPS users will receive an email with login credentials and instructions for MyTaxes.
  • Beginning February 26, the Kentucky Department of Revenue will pause operations for two weeks to prepare for the transition. From February 26 to March 14, business tax filers cannot file returns or receive refund payments in the old system, OneStop, or the new system, MyTaxes.

What do Individual Income Tax Filers Need to Know?

  • Beginning February 26, the Kentucky Department of Revenue will pause operations for two weeks to prepare for these transitions.
  • Individual income tax filers can file tax returns via typical methods during the transition period. However, refunds will not be processed between February 26 and March 14.
  • If you anticipate a refund and would like it promptly, we recommend filing as soon as possible once the Kentucky Department of Revenue begins accepting returns on January 27, 2025. 

The full announcement, which includes an FAQ section, is at this link.

Article Autumn Hines

The moratorium on processing new Employee Retention Credit (ERC) claims, which began last September, will continue for the foreseeable future. The IRS announced this information in a June 20 news release, which also provided an update on the status of its ERC processing.

The IRS’s announcement provides little solace to taxpayers with legitimate claims that have waited months for those claims to be processed. The IRS has emphasized that taxpayers with pending claims do not need to take any action at this time and should await further notification from the agency. The agency emphasized those with ERC claims should not call IRS toll-free lines because additional information is generally not available on these claims as processing work continues.

According to the IRS, it analyzed more than one million ERC claims following last fall’s moratorium, which indicated an extremely high rate of improper claims. As a result of this review, the IRS intends to deny tens of thousands of high-risk claims in the coming weeks. These claims, which constitute 10-20% of the total claims analyzed, show clear signs of falling outside the guidelines for the credit established by Congress. Another 60-70% of claims show an unacceptable level of risk, and the IRS intends to gather more information on claims falling in this category.

The remaining 10-20% of claims show a low risk. The IRS, committed to a thorough and fair process, and will begin “judiciously” processing claims received before the moratorium that show no warning signs. It anticipates that the first payments to these taxpayers will go out later this summer. The IRS, however, cautioned that its processing speed will be “dramatically slower” than during the pandemic, given the need for increased scrutiny.

Meanwhile, no claims submitted during the moratorium, which began on September 15, 2023, will be processed at this time. IRS Commissioner Danny Werfel stated that ending the moratorium might trigger a flood of new claims from ERC promoters. The IRS intends to consult with Congress on potential legislative action before deciding on the future of the moratorium, including possibly ending new claims entirely and seeking an extension of the statute of limitations to give the agency more time to pursue improper claims. According to the IRS, ERC claims have continued to be submitted at the rate of more than 17,000 per week since the start of the moratorium, resulting in a current ERC inventory of 1.4 million.

The IRS, understanding the complexity of ERC claims, has continued to urge taxpayers to work with a trusted tax professional when evaluating their eligibility for the ERC. This guidance is to ensure that employers are supported and guided through the process. The agency is also considering reopening its Voluntary Disclosure Program, which ended in March, at a reduced rate for taxpayers with previously processed claims who wish to avoid future compliance action by the IRS.