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Read MoreThe One Big Beautiful Bill Act:
Update for Tax-Exempt Organizations
One area of The One Big Beautiful Bill Act (OBBBA) that is flying under the radar is how the bill will impact tax-exempt organizations and their donors. While the bill covers a wide range of tax policy, this post will focus on the provisions most relevant to the nonprofit sector.
Charitable Giving Incentives: A Mixed Bag
The OBBBA introduces new rules for charitable deductions for both individual and corporate donors, with a mix of potential benefits and drawbacks for nonprofits. These changes provide reasons for both optimism and concern for nonprofits, as they determine whether the bill is beautiful, ugly, or kind of pretty when it takes its glasses off.
Here are the details:
- For Non-Itemizers: A potential win for smaller-scale giving, the act permanently reinstates a charitable contribution deduction for taxpayers who do not itemize. This deduction is capped at $1,000 for individuals and $2,000 for joint filers for cash contributions made to qualifying public charities.
- For Itemizers: The bill creates a new 0.5% floor on Adjusted Gross Income (AGI) for itemizing taxpayers. This means that individuals can only deduct the portion of their charitable contributions that exceeds 0.5% of their AGI. For example, a taxpayer with a $200,000 AGI would only be able to deduct contributions over $1,000. The act also makes permanent the 60% AGI limit for cash contributions to public charities. This could lead to certain donors changing the timing of their donations to make larger donations less frequently to meet this floor. This floor does not apply to non-itemizers.
- For Corporations: Similar to individual taxpayers, a new 1% floor on taxable income is imposed for corporate charitable deductions. Corporations will only be able to deduct the portion of their contributions that exceeds 1% of their taxable income, up to the existing 10% limit. This could potentially reduce corporate giving, as some corporations may not meet the new floor or choose alternate deductions instead, such as business expenses for sponsorships.
- New Tax Credit: The act also establishes a new, nonrefundable tax credit of up to $1,700 for individual donors who contribute to “scholarship granting organizations.” These are qualified state-designated organizations that provide elementary and secondary school scholarships to eligible students. The potential credit is reduced by any amounts that are allowed as a credit at the state level and cannot be double counted as a charitable contribution deduction.
New Taxes and Expanded Burdens
The OBBBA also introduces new or expanded taxes that could increase the financial and administrative burdens on certain tax-exempt organizations.
- Executive Compensation Excise Tax: The act expands the 21% excise tax on compensation exceeding $1 million. Previously, this tax applied only to the top five highest-compensated employees. The new law extends the definition of “covered employees” to include all current and former employees who received over $1 million in compensation in any taxable year beginning after December 31, 2016. This broader scope may significantly impact hospitals and other large nonprofits, increasing their compliance costs.
- College and University Endowment Tax: The existing flat 1.4% excise tax on the net investment income of certain private colleges and universities is replaced with a three-tiered structure. The new tiered rates, which apply to institutions with at least 3,000 tuition-paying students and a student-adjusted endowment of at least $500,000 per student, are as follows:
– 1.4% for endowments between $500,000 and $750,000 per student.
– 4% for endowments between $750,000 and $2,000,000 per student.
– 8% for endowments above.
– $2,000,000 per student. This change is intended to curb endowment growth at the wealthiest institutions and may pressure them to adjust their investment strategies or increase spending on mission-related programs.
– The bill also introduces new reporting requirements for IRS Form 990 related to this excise tax, such as number of tuition-paying students.
What Is NOT in the Bill
It is also important to note what was not in the final version of the bill. Earlier drafts included provisions that would have:
• Reinstated the “parking tax,” which treated the cost of providing employee parking as unrelated business taxable income (UBTI).
• Taxed royalties from the licensing of a nonprofit’s name or logo as UBTI.
• Provided the Treasury with broad authority to revoke the tax-exempt status of organizations deemed to support terrorism.
The exclusion of these measures will be a relief to many in the nonprofit community.
