
OBBBA introduces new tax rules for nonprofits, affecting charitable deductions, UBIT, and excise taxes on endowments and high compensation.
The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, aims to reform various aspects of the tax code in the United States. Additionally, the act has many provisions that also impact funding for various federal agencies, which may impact many nonprofits as well.
This analysis is focused specifically on the tax implications and can help you understand the potential implications for your operations and financial health. We’ll continue to share insights as further information is available on funding changes as a result of OBBBA.
For a comprehensive overview of the tax provisions in OBBBA, see our full summary of the tax bill and what it could mean for your tax strategy.
Key items in the new tax bill affecting nonprofits
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For further insights, check out our webinar on tax planning strategies related to the new law.
Changes to charitable contribution deductions
Above-the-line tax deduction
OBBBA creates an above-the-line tax deduction for charitable contributions, with annual limits set at $1,000 for individuals and $2,000 for married couples, effective for tax years after December 31, 2025. This could positively impact revenue streams for nonprofits that receive donations from individuals as more individuals have a tax incentive to give.
Limitation for itemized deductions
OBBBA establishes a 0.5% minimum threshold for charitable deductions for taxpayers who itemize, effective for tax years after December 31, 2025. Further, the 60% of AGI contribution limitation for cash gifts to qualified charities is made permanent.
Limit on corporate charitable deductions
Charitable contributions would be deductible by a corporation only to the extent they exceed 1% of taxable income floor and are less than 10% of taxable income ceiling. Excess contributions can carry over for five years, but contributions below the 1% floor carry over only if the corporation’s contributions exceed the 10% ceiling. This provision is effective for tax years after December 31, 2025. For nonprofits with many corporate donors, this could impact when or how they make contributions in the future.
Scholarship awarding charities credit
OBBBA establishes a new nonrefundable tax credit for contributions to a 501(c)(3) public charity designated as a “Scholarship Granting Organization” (SGO). The credit is capped at $1,700 per tax year.
There is a reduction to the credit to the extent that a similar state tax credit is taken. Unused credits can be carried forward for five years. The SGO designation requires specific criteria for the organization and the scholarship program. This provision is effective for tax years ending after December 31, 2026. This could impact private or independent schools by providing increased funding for students meeting the required criteria.
Excise tax modifications
Increased tax rate on endowments
OBBBA revised this provision, which imposes an excise tax on nonprofit colleges and universities with large endowments.
Under the 2017 Tax Cuts and Jobs Act, a 1.4% excise tax is imposed on the investment income of nonprofit colleges and universities with at least 500 tuition paying students and with endowments with assets of at least $500,000 per enrolled student.
OBBBA will now be applicable to nonprofit colleges and universities with at least 3,000 tuition-paying students, among other factors. Further, the provision introduces a tiered excise tax rate range of 1.4%, 4%, and 8%, dependent on the size of the student-adjusted endowment. The exclusion for state colleges and universities remains unchanged.
This provision is applicable for tax years beginning after December 31, 2025. This change will create additional financial burdens for the affected colleges and universities, warranting proactive tax planning to help mitigate adverse tax impact.
Expansion of excise tax on highly compensated employees
This provision expands an existing 21% excise tax to all current and former employees of tax-exempt nonprofits who receive more than $1 million in compensation to employees in any year — as well as certain severance agreements.
Under current law, this excise tax is only applicable to payments made to the five highest compensated employees of the organization.
Implications for nonprofits
The final excise tax provisions in OBBBA may prove to be less onerous than the excise tax provisions initially proposed.
How CLA can help
While some OBBBA provisions offer opportunities for increased funding and financial stability, others present new challenges and administrative burdens. The ultimate success of nonprofits in navigating these changes will depend on their ability to remain flexible, innovative, and proactive in addressing the new tax rules.
CLA’s nonprofit professionals can help you assess the implications of these changes and develop strategies to adapt to the evolving tax landscape.