From Proposal to Policy: What the One Big Beautiful Bill Act Now Means for Nonprofits

When the One Big Beautiful Bill Act (OBBBA) was first introduced, it stirred national conversation, especially among nonprofit leaders navigating an already complex funding and regulatory landscape. Now that the legislation was officially signed into law on July 4, 2025, it’s time to revisit those early predictions and break down what actually made it into the final version and what did not. From steep new excise tax tiers on university endowments to broader rules on executive compensation, here is what nonprofits across the country need to know and how they can adapt in this new policy era.

Key Takeaways

• Expands the university endowment tax by creating tiers based on student-adjusted endowment value and broadening the definition of “investment assets” and “net investment income” for institutions with 3,000+ tuition-paying students
• Expands the excess compensation excise tax to apply to all “covered employees” since 2016
• Extends the Employee Retention Credit (ERC) audit window and disallows claims made after January 31, 2024
• Creates new limits on both corporate and individual charitable contribution deductions

Notable Changes to Nonprofit Taxation

1. Excise Tax on University Endowments

• Old Rule:
• 1.4% excise tax on net investment income for certain private colleges/universities
• New Rule Under the OBBBA:
  • $500,000–$750,000 per student: 1.4%
  • $750,000–$2 million per student: 4%
  • Over $2 million per student: 8%
• A tiered rate based on “student-adjusted endowment:”
• Effective for tax years starting on or after January 1, 2026
• Additional Key Changes
• The number of tuition-paying students required for a school to be subject to the tax was increased from 500 to 3,000.
• Expanded definitions for terms such as “investment assets” and “net investment income” to broader the taxable base

2. Excess Compensation Tax

• Old Rule:
  • Was one of the five highest compensated employees of the organization for the tax year.
  • Was a covered employee of the organization, or any predecessor for any preceding tax year beginning after December 31, 2016.
• Applied to the top five highest-paid “covered” employees who received more than $1 million in remuneration, including remuneration from related entities if they met the definition of control, plus any excess parachute payments to a covered employee
• A “covered” employee was defined as any employee, or former employee, of an applicable tax-exempt organization if the employee:
• New Rule Under the OBBBA:
  • Covered employees definition expanded to include:
  • Any current or former employee of the organization who was employed after December 31, 2016.
  • The requirement to be among the top five highest paid was also removed.
• Applies to all covered employees of the nonprofit and related entities, significantly broadening its scope.
• Effective for taxable years beginning after December 31, 2025

3. Employee Retention Credit (ERC) Statute of Limitations for IRS Audit Expansion

• Old Rule:
  • Statute of limitations for potential IRS audit was five years for ERC claims for wages paid in Q3 and Q4 of 2021.
• New Rule Under the OBBBA:
  • Statute of limitations has been increased to six years from the latest of three events for ERC claims for wages paid Q3 and Q4 of 2021.
  • Late filed ERC claims for Q3 and Q4 of 2021 are disallowed if submitted after January 31, 2024. However, this disallowance only applies to claims processed after the enactment of the OBBBA. Claims that were filed late but paid before July 4, 2025, should not be affected.

4. Corporate Charitable Giving Floor

• Old Rule:
• No minimum floor
• May deduct up to 10% of taxable income
• New Rule Under the OBBBA:
  • Taxable Income: $1,000,000
  • Charitable Donation: $12,000
  • Corporate Floor: 1% of taxable income = $10,000
  • Maximum Deduction: 10% of taxable income = $100,000
  • Deductible Amount: $12,000–$10,000 = $2,000
  • Carryforward Amount: $10,000 (can be carried forward for 5 years; however, it is still subject to the 1% corporate floor in the carryforward year)
• 1% minimum floor for corporate charitable deductions, potentially reducing the incentive for corporate giving unless it exceeds that threshold.
• For example, if a corporation has:
• Effective for taxable years beginning after December 31, 2025.

5. Individual Charitable Donations

• Old Rule:
  • Donor-Advised Funds & Private Foundations are eligible for deductions.
• No charitable deduction unless itemizing
• Generally, high-income donors are allowed a full deduction at their marginal rate, within AGI limitations.

• New Rule Under the OBBBA:

• • Non-itemizers can deduct up to $1,000 (single) or $2,000 (married filing joint) on cash donations only.
  • High-income donors may have deduction capped at a 35% rate (even for those in a higher tax bracket).
  • Charitable contribution deductions are now limited to donations exceeding 0.5% of AGI.
  • Donor-Advised Funds & Private Foundations are excluded from above-the-line deduction.

What This Means for the Nonprofit Sector

• Universities with large endowments may need to reassess investment strategies and student aid policies.
• Nonprofits with high executive pay or complex organizational structures may need to review compensation and governance practices and budget for additional excise taxes.
• Corporate philanthropy may be impacted due to the new deduction floor, affecting nonprofit funding streams.
• Individual philanthropy may also be impacted due to the new above-the-line deduction for non-itemizers and .5% AGI floor for itemizers.

Provisions That Were Cut from the Final Act

1. Excise Tax on Private Foundation Investment Income

• Proposed Changes:
  • A tiered tax structure based on total assets, up to 10%
• Result of the OBBBA:
  • All versions proposed were cut from the OBBBA.
  • The existing flat excise tax of 1.39% remains unchanged.

2. Unrelated Business Income and Expanded Scope of Taxable Activities

• Proposed Changes:
  • Parking Benefits: Nonprofits would be taxed on parking benefits provided to employees.
  • Certain Research Income: Research income that is not publicly availablewould be considered unrelated business income and taxed accordingly.
• Result of the OBBBA:
  • No change to the existing law.
  • Generally, the same UBIT rules continue to apply.

The Bottom Line: Don’t Panic – Prepare!

The One Big Beautiful Bill Act has brought opportunities, responsibilities, and challenges for nonprofits across the country. Although some anticipated reforms were ultimately cut – including the private foundation excise tax increase – numerous provisions have long-term impacts on fundraising and reporting. Nonprofit organizations must stay informed and adapt to this ever-changing policy to remain successful.

Contact us below if you have any questions about how the OBBBA may impact your organization.