What your not-for-profit needs to know about OBBBA
The One Big Beautiful Bill Act (OBBBA or Act) was signed into law by President Trump on July 4, 2025. The Act has several provisions that affect tax-exempt organizations and higher education institutions, although many proposed elements from the House bill did not make it into the OBBBA. It includes changes in areas like excise taxes, charitable giving incentives, and potential impacts on federal funding streams. Navigating these changes is important for nonprofits to ensure continued compliance and success in their missions.
Here’s a closer look at the OBBBA’s impact on nonprofits:
Charitable Giving Incentives
Universal charitable deduction for non-itemizing taxpayers
Previously, only taxpayers who itemize deductions could deduct charitable contributions. The OBBBA creates a permanent cash contribution deduction for non-itemizers. The deduction is limited to $1,000 for single filers ($2,000 for joint filers). Notably, this deduction does not apply to contributions made to supporting organizations under section 509(a)(3) and to donor advised funds. This provision is effective for taxable years beginning after Dec. 31, 2025.
New Limits on charitable deductions for itemizing taxpayers
While primarily affecting individuals, nonprofits may feel the impact of a 0.5% reduction in the value of charitable deductions and new limits on itemized deductions. Itemizing individuals can only deduct amounts exceeding 0.5% of their charitable contribution base. This provision is effective for taxable years beginning after Dec. 31, 2025.
One percent (1%) floor on charitable contribution deductions made by corporations
Previously, corporate taxpayers could generally deduct charitable contributions up to 10 percent (10%) of their taxable income. The OBBBA provision establishes a floor equal to 1% of taxable income for the deductibility of corporate charitable contributions. Excess of 1% is deductible up to the current limit of 10%. If a corporation’s contributions exceed the 10% limit, the provision allows taxpayers to add the amount disallowed under the 1% floor to amount carried over to the following year. This provision is effective for taxable years beginning after Dec. 31, 2025.
Tax credit for individuals’ contributions to scholarship-granting organizations
OBBBA creates a new tax credit up to $1,700 for individuals making charitable contributions to public charities that provide scholarships to qualifying elementary and secondary school students. In participating states, these credits apply to donations made to Scholarship Granting Organizations (SGOs), which are generally 501(c)(3) nonprofits that collect contributions and award tuition assistance to eligible K–12 students. The goal is to expand private funding for scholarships and improve educational access for lower-income families. To qualify for the scholarships, students must come from households with incomes at or below 300% of the area’s median gross income and must be eligible to enroll in a public elementary or secondary school. This provision is effective for taxable years beginning after Dec. 31, 2026.
Extension of increased estate and gift tax exemption amounts and permanent enhancement
This provision extends the estate and lifetime gift tax exemption established under the Tax Cuts and Jobs Act. OBBBA increases the exemption amount to $15 million per individual in 2026 and indexes the exemption amount for inflation going forward. The OBBBA also makes this exemption permanent, effectively allowing a married couple to transfer up to $30 million tax-free.
Other OBBBA provisions affecting not-for-profits
Expanding application of tax on excess compensation for tax-exempt organizations
Under prior law, an excise tax on excess compensation paid to specific highly compensated employees by applicable tax-exempt organizations was limited to the five highest compensated employees. The excise tax rate is equal to the corporate tax rate multiplied by the sum of (1) any remuneration of more than $1 million paid to a covered employee for a taxable year and (2) any excess parachute payment paid to a covered employee.
The OBBBA expands the definition of “covered” employee to any employee (or former employee) of any applicable tax-exempt organization (or predecessor) who was employed during any taxable year after Dec. 31, 2016. With this change, any employee of an applicable tax-exempt organization that receives remuneration of more than $1 million is now considered a covered employee. The exception for remuneration for medical services remains in effect.
Endowment taxation
The OBBBA introduces a tiered excise tax system for the investment income of private colleges and universities with substantial endowments (at least 3,000 tuition-paying students and $500,000 in student-adjusted endowment). The excise tax rates are: 1.4% for endowments between $500,000 and $750,000; 4% for endowments between $750,000 and $2,000,000; and 8% for endowments exceeding $2,000,000.
Federal funding implications
The OBBBA shifts responsibility for some food and healthcare programs to individual states, potentially burdening state budgets and impacting nonprofit organizations in the healthcare sector, particularly Federally Qualified Health Centers (FQHCs) and nonprofit hospitals.
Employee Retention Tax Credit
Enhanced enforcement provisions for the Employee Retention Credit (ERC), a refundable tax credit for businesses that kept employees on payroll during the COVID-19 pandemic, are included, with penalties for promoters and limits on refund claims for certain periods. If you filed an Employee Retention Tax Credit claim after January 31, 2024, you may not see your expected refund. The OBBBA bars the IRS from issuing refunds for certain claims submitted after that date. It also gives the IRS at least six years from the date of filing to challenge these claims.
Medicaid changes
Significant changes are made to Medicaid, including spending cuts, work requirements, and a shift of some costs to states, potentially impacting nonprofits providing healthcare services.
Enhanced enforcement provisions for the ERC are included, with penalties for promoters and limits on refund claims for certain periods.
Employer Related OBBBA Provisions
Increased reporting thresholds for Form 1099-NEC and 1099-MISC
The information-reporting threshold on Forms 1099-NEC and 1099-MISC increases from $600 to $2,000 for certain payments to businesses and for services, applicable after 2026. This may ease compliance for small nonprofits.
No tax on overtime
Temporarily allows for a maximum deduction for qualified overtime income of $12,500 ($25,000 for joint returns). Phasing out deduction for joint filers with adjusted gross income over $300,000 ($150,000 for other filers). Employers are required to separately state the amount of qualified overtime on their employee’s Form W-2. This provision is effective for years beginning after Dec. 31, 2024 and ending before Jan. 1, 2029.
OBBBA related strategies for nonprofits
- Review financial and fundraising strategies: Assess the potential impact of changes to charitable deductions and endowment taxes on funding streams.
- Engage in donor education: Inform donors about the impact of their contributions and the benefits of the permanent universal charitable deduction.
- Explore strategic partnerships: Collaborate with corporations to help them meet the new charitable giving floor and align business goals with mission outcomes.
- Invest in digital engagement tools: Enhance donor education efforts and facilitate online giving.
- Prioritize compensation and benefits reviews: Evaluate how the expanded excise tax on high compensation might affect their employees.
- Advocate for their cause: Engage in policy discussions and monitor the implementation of new provisions to ensure your organization’s continued ability to deliver services, meet goals and achieve your mission.
What’s next?
In summary, the OBBBA presents a complex landscape for nonprofits, with opportunities to capitalize on new incentives and challenges related to increased regulatory oversight and potential funding shifts. By adapting fundraising strategies, enhancing transparency, and proactively engaging with stakeholders, nonprofits can continue to make a meaningful difference in the communities they serve.
Warady & Davis can help your organization navigate these updates with confidence. If you have questions about how the OBBBA may affect your not-for-profit, contact your W&D advisor at (847) 267-9600 or [email protected] for guidance and support.
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