The One Big Beautiful Bill Act, signed into law on July 4, contains several provisions that could affect the future of not-for-profit organizations.
One provision creates a permanent cash contribution deduction for non-itemizers. This deduction is limited to $1,000 for single filers ($2,000 for those married filing jointly) and notably, this deduction does not apply to contributions made to supporting organizations under Section 509(a)(3) of the Tax Code and to donor-advised funds.
Additionally, a limitation on charitable contributions for taxpayers who itemize deductions was created by imposing a floor equal to 0.5% of the taxpayer's contribution base for that taxable year.
These provisions will likely increase contributions from individuals who do not itemize, as non-itemizers are not subject to the 0.5% limitation on their contributions.
Taxpayers who itemize deductions will feel the impact of this provision the most. For example, a married couple with an adjusted gross income of $500,000 will have their charitable contributions reduced by $2,500 because of it. The remaining amount of charitable contributions may not provide a tax benefit to the couple if they need to use a portion of the remaining charitable contributions to exceed the standard deduction limit for married filing jointly taxpayers. Effectively, those contributions have no tax benefit to the MFJ couple. This can further restrict an individual's tax benefit of charitable contributions.
Not-for-profit organizations need to be aware of this impact on their individual contribution base. In this situation, taxpayers who want to maximize the tax benefit of their charitable contributions may want to set up a donor-advised fund to "stack contributions." The taxpayer could fund the DAF in one year with contributions they would have made over several years and then make distributions from the DAF on an annual basis. By doing this, the contributions would only be subject to the 0.5% limitation once, providing more overall tax benefit for the same charitable contributions. Not-for-profit organizations should ask contributors if they have a DAF or be ready to refer them to an organization that can assist them in establishing one.
Excise tax modification
Under previous law, certain private colleges and universities had to pay a 1.4% excise tax on their net investment income if they had at least 500 tuition-paying students and a student-adjusted endowment of $500,000 or more. The OBBBA enacted two major changes effective for tax years beginning after Dec. 31, 2025. The student threshold increased from 500 to 3,000 tuition-paying students, likely resulting in fewer institutions subject to the excise tax. Additionally, a tiered tax system will replace the flat 1.4% with different rates based on the institution's student adjusted endowment as follows:
This tiered excise tax model intentionally targets private colleges and universities with large endowments. This provision was originally enacted to encourage private colleges and universities with larger endowments to use the funds to reduce the cost of education or provide more scholarships to students. It demonstrates that Congress continues to examine the amounts held by not-for-profit organizations in their endowment funds and has identified it as a potential revenue raiser for future legislation. Not-for-profit organizations should continue to work with peer advocacy groups to coordinate responses to any future expansion of this excise tax.
Tax credit for individual scholarship contributions
Effective for tax years beginning after Dec. 31, 2026, a new tax credit of up to $1,700 has been created specifically for individuals who make charitable contributions to public charities that provide scholarships to qualifying elementary and secondary school students. To qualify for the scholarships, students must come from homes with incomes below 300% of the area's median gross income and be eligible to enroll in a public elementary or secondary school.
The credit provides more benefit than a charitable contribution deduction as it is a direct offset to the individual's tax liability and is also not subject to the deduction limitations on either itemizers or non-itemizers. Individuals who are looking to maximize the tax benefit of their charitable contributions and existing qualifying organizations will benefit the most from this change.
1% floor on corporate charitable contribution deductions
This provision establishes a floor equal to 1% of taxable income for the deductibility of corporate charitable contributions. Exceeding 1% is deductible up to 10% and if a corporation's contributions exceed the 10% limit, the provision allows taxpayers to add the amount disallowed under the 1% floor to the amount carried over to the following year.
While this change is unlikely to significantly impact charitable giving by large corporations, it may cause small or midsized corporations to consider reducing contributions to charities and instead look to sponsoring community events. These business expenses would not be subject to the 1% floor and still enable the corporations to support their local community.
Nonprofit organizations that rely heavily on direct charitable contributions from corporate donors should anticipate a change in how small and midsized companies approach charitable support. The not-for-profit's fundraising development team should continue to focus on the social impact of the contribution when addressing corporate donors and look for ways to increase direct sponsorship of community activities to help corporate donors maximize the after-tax benefit of the contribution.
No tax on overtime
The OBBBA introduced a maximum deduction for qualified overtime income of $12,500 for single filers ($25,000 for joint returns). Not-for-profit organizations are now required to separately state the amount of qualified overtime on their employees' Form W-2.
This additional filing requirement may cause increased administrative time or changes to the payroll reporting process. On the other hand, we may see employees express increased interest in working overtime hours.
Excess compensation
Before the OBBBA, only the top five highest-paid employees at a tax-exempt organization were subject to the excise tax on compensation in excess of $1 million. With the new provision, this rule has expanded to include any employee or former employee that has earned over $1 million during any tax year after Dec. 31, 2016. This results in more highly paid employees being subject to the excise tax.
This change is likely to impact many large not-for-profit organizations that have more than five employees with excess compensation. These organizations should further refine their internal processes to ensure they identify individuals meeting this requirement, especially those individuals compensated by related parties.
It is important to note that the exception to this rule for remuneration for medical services remains in effect.
What now?
These OBBBA provisions will require some learning and flexibility from not-for-profit organizations. While there are challenges that come with these changes, there are also new opportunities and incentives for those looking to make charitable contributions.
