The recently enacted One Big Beautiful Bill Act introduces significant tax changes affecting tax-exempt organizations and charitable giving, with most provisions effective after Dec. 31, 2025. Understanding these shifts is critical for attorneys and CPAs advising private foundations and other exempt entities to guide clients through a complex landscape. Here’s an outline of the bill’s practical implications for the charitable sector:
Expanded Excise Tax on High Compensation
The OBBBA amends Internal Revenue Code Section 4960, expanding the 21% excise tax on compensation exceeding $1 million. Previously, under the 2017 Tax Cuts and Jobs Act, this tax applied only to the five highest-compensated employees of a tax-exempt organization, current or former, with liability allocated proportionally among the exempt entity and related organizations via Form 4720. Under OBBBA Section 70416, starting in 2026, the tax will cover all employees—current or former—of the tax-exempt organization earning over $1 million who were employees during any taxable year beginning after Dec. 31, 2016. This means that tax-exempt organizations must now review compensation records from 2017 and onward to identify any current or former employees paid over $1 million, even if they weren’t among the top five earners in such past years.
For example, a retired executive receiving a $1.2 million deferred payout from a related for-profit subsidiary would trigger the tax, with the subsidiary liable for its share of the $200,000 excess. This broader scope could increase compliance costs and push nonprofits to restructure compensation to avoid tax liability. Advisors should review compensation agreements and related-entity structures to mitigate exposure.
Charitable Deduction Changes
Section 70424 reshapes charitable deductions for individuals and corporations. For individuals, it establishes a permanent above-the-line deduction, beginning in 2026, for non-itemizers, capped at $1,000 ($2,000 for joint filers), encouraging modest giving among the roughly 90% of filers who don’t itemize.
Section 70425 adds a new 0.5% floor, beginning in 2026, on adjusted gross income (AGI) for itemizers, meaning only contributions exceeding this threshold are deductible. Carryforwards are also allowed only if this 0.5% floor is met.
Section 70425 makes the 60% AGI limit for cash contributions to public charities permanent, preserving incentives for larger donations. However, under Section 70111, beginning in 2026 the tax benefit for itemized deductions is capped at 35 cents per dollar, down from 37 cents for top-bracket taxpayers, slightly reducing high-earner incentives.
Section 70426 imposes a 1% floor on taxable income for corporations, so only contributions exceeding this threshold are deductible, up to the existing 10% limit. Independent Sector estimates this could reduce corporate charitable giving by approximately $4.5 billion annually, straining nonprofit budgets, particularly for smaller organizations.
Under Section 70411, a new nonrefundable tax credit of up to $1,700, starting in 2027, applies to donations to certain organizations whose primary purpose is granting scholarships to private or religious K-12 schools, potentially diverting funds from broader charitable causes.
SALT Cap and Itemization Trends
Section 27502 raises the SALT deduction cap from $10,000 to $40,000 for filers with modified AGI under $500,000, with a 1% annual increase through 2029 (subject to a phaseout for taxpayers with incomes in excess of $500,000), before reverting to $10,000 in 2030. This could make itemizing more attractive for some, boosting charitable deductions for those who itemize. However, the standard deduction, permanently increased under Section 27504 to $15,750 for single filers, $23,625 for heads of household and $31,500 for joint filers, increased for inflation in future years, likely means that fewer taxpayers will itemize. This trend could reduce the pool of donors claiming charitable deductions, further challenging nonprofit funding.
Endowment Tax Increase
Section 70415 amends IRC Section 4968, increasing the excise tax on net investment income in a new tiered structure for certain private colleges and universities with endowments exceeding specific per-student thresholds, from 1.4% to as much as 8%, effective after Dec. 31, 2025. This targets wealthier institutions, aiming to curb excess accumulation. The higher tax may pressure affected universities to adjust investment strategies or increase spending on mission-driven programs, though it could strain financial aid budgets.
Implications for the Charitable Sector
These changes create a mixed outlook. The above-the-line deduction and higher SALT cap may encourage some giving, but the 0.5% and 1% floors, coupled with fewer itemizers, could reduce contributions, with total charitable giving ($557 billion in 2023) at risk of decline. The expanded IRC Section 4960 tax and endowment tax add financial and administrative burdens, particularly for smaller nonprofits and select universities. To navigate these rules, advisors should counsel clients on restructuring compensation, optimizing deduction strategies and monitoring related-entity payments. The OBBBA’s complexity underscores the need for proactive planning to sustain the charitable sector’s vitality.
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