One Big Beautiful Bill Tax Updates: NFPs and Tax-Exempt Entities
The One Big Beautiful Bill Act (OBBBA) was signed into law on July 4th. Several versions of the bill have been talked about for weeks leading to some confusion about what ultimately made it into the final bill. Fortunately, some of the less popular provisions did not become law. However, the final version of the OBBBA includes provisions that affect charitable giving, executive compensation, endowment taxation, and more. Understanding these changes now can help you avoid surprises later and seize new planning opportunities.
Excise Tax on University Endowments
Private universities pay excise taxes on the earnings of their endowment funds. The way these taxes are calculated underwent three major changes. The definition of taxable income was expanded to include student loan interest and federally subsidized royalty income. The tax rate went from a flat rate of 1.4% to a tiered structure topping out at 8%. Additionally, the threshold for applicability increased from 500 to 3,000 tuition-paying students. This means that while some universities will have steep tax increases, others may fall below the 3000 student threshold and no longer be subject to the tax. It is estimated that only around 30 institutions will be impacted.
Excess Compensation Excise Tax
Previously tax-exempt organizations had to pay an excise tax of 21% on the amount of compensation in excess of $1 million for their top five paid employees only. Under the new rules, this tax applies to all covered employees who earn over $1 million, not just the top five, expanding the scope of the provision significantly.
Charitable Deductions for Non-Itemizers
The 2017 Tax Cuts and Jobs Act (TCJA) increased the standard deduction, which reduced the number of taxpayers itemizing their deductions (and increased the number of taxpayers taking the standard deduction). This provision was set to expire in 2025. The new tax law permanently increases the standard deduction. There are some concerns that the increased standard deduction disincentives charitable giving. However, the new law also added a provision that allows people to take an additional charitable deduction of up to $1,000 for single filers and $2,000 for joint filers, even if they take the standard deduction.
Charitable Deductions for Itemizers
The new law permanently retains the 60% limit on charitable contributions (prior to the TCJA the limit was 50%). This means that Individuals can contribute up to 60% of their adjusted gross income (AGI) to a charitable organization and receive a deduction. Anything in excess of that carries forward for five years. However, a new charitable deduction floor was introduced, requiring individuals to donate more than 0.5% of their AGI before any of it becomes deductible. For example, if your AGI is $200,000, only amounts over $1000 will be deductible. If you donate $3000, only $2000 is deductible. The first $1000 is lost and cannot be deducted.
Charitable Deductions for Corporations
A similar floor applies to corporate charitable giving. Corporations can only deduct contributions that exceed 1% of their taxable income. For example, if a corporation’s taxable income is $1 million, it would only be able to deduct contributions in excess of $10,000. If a corporation donates $30,000, only $20,000 is deductible. The first $10,000 is lost and cannot be deducted.
Tax Credit for Donations to Scholarship-Granting Organizations
The law creates a new non-refundable credit, up to $1700, for donations to scholarship-granting organizations. In order for the organization to qualify as an eligible scholarship-granting organization, 90% of their income must be spent on scholarships for K-12 students from low-income households. Because credits reduce tax liability dollar-for-dollar (rather than merely reducing taxable income), this provision may provide a strong incentive for this specific type of charitable giving.
Money Account for Growth and Advancement (Trump Accounts)
Children born between 2025 and 2028 will receive a one-time $1,000 government contribution into a special account, informally referred to as a Trump Account. Others can also contribute up to $5000 per year until the child reaches age 18. Charities can also contribute to these accounts, and their gifts are not subject to the $5000 annual limit. Funds in these accounts can be used beginning at age 18 for certain qualified expenses, including purchasing a home or paying for education.
What Didn’t Make the Final Bill
The unpopular “parking tax,” originally introduced under the TCJA and repealed in 2019, was not reinstated.
There were no changes to unrelated business income tax (UBIT), so the definition was not expanded to cover revenue from names or logos.
A proposed increase in the net investment tax for private foundations was scrapped; the rate remains at 1.39%.
A House proposal that would have allowed revocation of tax-exempt status for not-for-profits suspected of supporting terrorism, without due process, was excluded due to concerns over fairness.
Two notable proposed changes to university endowment taxation were also left out: a 21% top-tier tax rate and a religious exemption for affiliated schools.
What Does This Mean for Your Organization?
Tax law changes like those in the One, Big, Beautiful Bill Act can have lasting implications on higher education institutions and other tax-exempt organizations. Whether you're assessing the effect of increased excise taxes, navigating charitable deduction strategies, or exploring opportunities related to scholarship credits, we can help you interpret these changes and plan with confidence.
At CSH, our team has deep experience supporting tax-exempt organizations by helping them stay compliant and financially strong.
