OBBBA’s impact on nonprofits

The passage of the One Big Beautiful Bill Act (OBBBA) includes several important changes to federal law important to nonprofits across the country.

Expanded excise tax on nonprofit employee compensation

Prior to the OBBBA, tax-exempt entities paid a 21% excise tax on compensation over $1 million (when paid to one of the five highest-paid employees). The OBBBA expands this excise tax to include compensation over $1 million paid to any current employee of the tax-exempt organization or past employee who was an employee of the organization after January 31, 2016. This expansion of the tax will apply to taxable years beginning January 1, 2026.

Modified charitable deduction rules

The OBBBA also modified the tax deduction rules under 26 U.S.C. § 170 for both individual taxpayers and corporations making charitable contributions.

      Individual standard deduction. First, the OBBBA expands the deduction for charitable contributions available to taxpayers who claim the standard deduction. Under Section 70424 of the OBBBA, individuals taking the standard deduction may make annual charitable contribution deductions up to $1,000 and joint filers may deduct up to $2,000, replacing the previous limits of $300 and $600, respectively. These rules will go into effect January 1, 2026.

      Individual itemizers. The OBBBA also enacts minimum and maximum thresholds for charitable deductions for taxpayers who itemize. Under Section 70425, charitable deductions are only permitted if the aggregate of all charitable contributions for a given year exceeds 0.5% of the taxpayer’s contribution base (often the adjusted gross income) and do not exceed 60% of the taxpayer’s contribution base. The 60% portion of the rule was set to expire January 1, 2026, but the OBBBA made this maximum threshold permanent (effective January 1, 2026).

      Corporations. Section 70426 of the OBBBA provides that corporations may only make a deduction for charitable contributions that are, in the aggregate, more than 1% of the corporation’s taxable income for that year and equal to or less than 10% of the corporation’s taxable income for that year.  Only charitable contributions over the 10% may be carried forward into future years.  These rules will take effect January 1, 2026.

Tax credit for scholarship organizations

The OBBBA also established a tax credit for charitable contributions to tax-exempt organizations which qualify as “scholarship granting organizations.” The credit available to donors is capped at $1,700 annually. To qualify as a “scholarship granting organization”, the entity must satisfy the requirements listed at Section 70411(c) and (d) of the OBBBA. For instance, the entity must be a 501(c)(3) tax-exempt organization, provide scholarships to 10 or more students who do not all attend the same school, and spend at least 90% of the entity’s income on scholarships. Under this new program, individual states will submit to the federal government a list of scholarship-granting organizations within the state that qualify for participation under the OBBBA’s requirements.

Endowment taxes on private universities

Section 70415 OBBBA also modifies the endowment tax enforced against private colleges and universities under 26 U.S.C. § 4968. Previously, a private college paid a tax of 1.4% of its net investment income from its endowments. The OBBBA first changed the applicability of the endowment tax, limiting the tax to only schools that had at least 3,000 tuition-paying students during the previous taxable year. Second, the OBBBA changed the tax rate to depend upon the school’s “student adjusted endowment”. This is calculated by dividing the total value of the school’s assets (but only those assets which are not used for the school’s exempt purposes – i.e. the school’s investment assets) by the number of students at the school. The below chart shows the student adjusted endowment ranges and the matching endowment tax rate:

    Student Adjusted Endowment                        Applicable endowment tax rate

                $500,000 – $750,000                                              1.4%

                $750,000 – $2,000,000                                           4%

                Exceeding $2,000,000                                             8%

The OBBBA continues the exclusion from endowment tax for public colleges and universities. The OBBBA also modified the Form 990 reporting requirements (see 26 U.S.C. § 6033) for schools subject to the new endowment tax, requiring such schools to report on the Form 990 both the number of tuition-paying students and the total number of students at the school. The OBBBA’s new tax rates will be effective January 1, 2026.

Exempt activities by western Alaska villages

The OBBBA also declared that certain activities by tax-exempt entities in Alaska will be considered substantially related to the entities’ federal tax-exempt purpose under 26 U.S.C. § 501(a) if the below criteria are met.

Federal law (see 16 U.S.C. § 1855(i)(1)(A)) established the “western Alaska community development quota program”. The OBBBA provides at Section 70428 that certain activities of villages participating in the quota program (i.e. “harvesting, processing, transportation, sales, and marketing of fish and fish products of the Bering Sea and Aleutian Islands . . .”) will be considered substantially related to the tax-exempt purpose of the village. To qualify as substantially related to an exempt purpose, such activity must further one of the stated purposes under 16 U.S.C. § 1855(i)(1)(A), which includes supporting the economic development of western Alaska as well as alleviating poverty and providing economic and social benefits to residents in western Alaska. This section of the OBBBA became effective once the OBBBA was enacted and will remain effective for as long as the western Alaska community development quota program remains effective.

Contact us to discuss OBBBA’s impact on our nonprofit!