The One Big Beautiful Bill Act (OBBBA) marks the most significant overhaul of nonprofit tax policy since the Tax Cuts and Jobs Act (TCJA) of 2017. This comprehensive tax legislation brings both opportunities and significant challenges for nonprofit organizations across America.
The new law presents a mixed landscape for nonprofits. For some organizations, new tax credits and giving incentives could transform fundraising strategies. For others, increased regulatory oversight and modified donor incentives will require significant operational changes. But one thing is the same: all nonprofits must now adapt to a philanthropic environment that looks fundamentally different from the past.
WHAT DID NOT MAKE IT: NONPROFIT SECTOR VICTORIES
Several provisions from earlier drafts that would have hindered nonprofit organizations were eliminated from the final law. These being removed from the final law is a significant victory for the nonprofit sector:
- Fringe Benefits Taxation: Proposed taxes on nonprofit employee fringe benefits (such as parking) were removed
- Research Income Limitations: Restrictions on nonprofit research income were eliminated
- Expedited Status Revocation: Provisions allowing rapid revocation of nonprofit status with limited due process were struck from the final bill
- Foundation Excise Tax Increases: The tiered excise tax structure affecting private foundations was eliminated
WHAT MADE IT INTO THE FINAL LAW: KEY PROVISIONS
The 35% Charitable Deduction Cap
The final law caps charitable deductions at 35% for high-income taxpayers in the 37% tax bracket. This provision, which affects taxpayers with adjusted gross income (AGI) above $751,600 (married filing jointly) or $626,350 (single), was a compromise between the House's more aggressive approach and the Senate's intent to eliminate the deduction entirely.
Research from the Indiana University Lilly Family School of Philanthropy suggests this cap could reduce charitable giving by $4.1 billion to $8.2 billion annually, depending on donor responsiveness to tax incentives. The higher estimate reflects recent findings suggesting that wealthy donors may be more affected by changes in tax policy than previously recognized.
Corporate Charitable Deduction Floor: New Barriers
The law establishes a 1% income floor for corporate charitable deductions, meaning businesses must exceed 1% of their taxable income in charitable contributions before receiving any tax benefits. This provision changes corporate giving incentives by removing tax benefits for modest charitable contributions that many businesses have historically made.
The 1% floor particularly affects small and medium-sized businesses that may contribute 0.5% or less of their taxable income to charity. Under the new law, these businesses lose all tax benefits for their charitable giving, potentially reducing their incentive to give entirely. Unlike major corporations that can easily exceed the 1% threshold, smaller businesses may find it financially challenging to increase their giving to reach the floor, potentially leading to reduced overall corporate charitable support.
Enhanced Standard Deduction: Reduced Itemization
The TCJA's enhanced standard deduction has been made permanent and is set to increase further in 2026 to $15,750 for individuals and $31,500 for married couples filing jointly. This substantial increase will likely lead to fewer taxpayers choosing to itemize deductions. Consequently, this could reduce the number of donors that receive tax benefits directly from their charitable contributions.
However, this potential challenge is somewhat mitigated by a new, permanent non-itemizer deduction. This ensures that taxpayers who do not itemize can still receive tax benefits for charitable contributions, up to $1,000 for individuals and $2,000 for joint filers.
Floor on Charitable Contributions and a Permanent 60% AGI Contribution Limit
Similar to the 1% corporate floor for charitable deductions, a new threshold was introduced for individuals claiming charitable deductions on their personal income tax returns. To benefit from a charitable deduction, itemizing taxpayers must now contribute more than 0.5% of their AGI.
Additionally, the 60% AGI limit for cash contributions by itemizers — originally set to revert to 50% — has been made permanent. Together, the establishment of a minimum contribution floor and the retention of the higher contribution limit aim to encourage continued philanthropic support for nonprofit organizations.
Nonitemizer Deduction: Democratizing Giving
One of the most impactful positive changes in this law is the permanent above-the-line charitable deduction for non-itemizers. This provision, allowing deductions of $1,000 for individuals and $2,000 for married couples filing jointly, closely aligns with the original Senate proposal. It has the potential to democratize charitable giving by extending tax benefits to millions of Americans that do not itemize their deductions.
SECTOR-BY-SECTOR IMPACT UNDER THE NEW LAW
Private Foundations: A Narrow Escape
Private foundations avoided the significant excise tax increases initially proposed in the House's original bill. The final law eliminates the proposed hike to the excise tax on private foundation investment income. It crucially maintains the current 1.39% rate on net investment income, thereby preserving foundations' capacity for grantmaking. This capacity would have been curtailed under the House's initial tiered structure, which had threatened rates as high as 10% for the largest foundations.
While this legislative achievement is a positive development, it remains essential for private foundations to stay actively engaged in ongoing policy discussions and diligently monitor the implementation of other new provisions that could affect their donors and grantees.
Charter Schools: An Exceptional Opportunity
The new law positions charter school networks as clear beneficiaries, ushering in a significant philanthropic opportunity: the permanent School Choice Tax Credit. This groundbreaking provision, with its substantial $4.5 billion annual cap, essentially allows donors to redirect their tax payments directly toward educational scholarships, holding the potential to fundamentally transform educational philanthropy.
More precisely, this law, permanent beginning in 2027, introduces a 100% School Choice Tax Credit with that same $4.5 billion cap. What makes this particularly powerful is that donors will receive complete tax credits, not just deductions, for contributions to scholarship-granting organizations, directly empowering them to allocate their tax dollars for education.
Given this change, prompt and strategic action is essential. K-12 schools should prioritize the development of comprehensive School Choice Tax Credit campaigns and proactively establish partnerships with scholarship-granting organizations to effectively leverage this significant opportunity.
OTHER PROVISIONS THAT IMPACT NONPROFITS
To alleviate annual compliance for organizations across the board, the information-reporting threshold on the Form 1099-NEC and 1099-MISC has increased from $600 to $2,000 for certain payments to persons engaged in a trade or business and payments for services. This is applicable for calendar years after 2026. The increase in reporting threshold will aid small nonprofit organizations whose operations may be ran by volunteers or have minimal staff.
Several refundable energy incentives will also be sunsetting, such as the clean electricity investment credit and the clean vehicle credit. The current bill eliminates the credit for wind and solar facilities placed in services after Dec. 31, 2027. The vehicle credit will no longer apply for vehicles purchased after Sept. 30, 2025. Organization in the process of adding solar or those that had plans to purchase a commercial electric vehicle should consider the termination dates.
IMPLEMENTATION TIMELINE AND IMMEDIATE ACTION STEPS
Effective Dates
- Jan. 1, 2026: 35% charitable deduction cap takes effect
- Jan. 1, 2026: Corporate charitable deduction floor begins
- Jan. 1, 2026: Individual charitable deduction floor begins
- Jan. 1, 2026: Nonitemizer deduction becomes available
- Jan. 1, 2027: School Choice Tax Credit becomes permanent
Immediate Actions for All Nonprofits
Before Dec. 31, 2025:
- Communicate urgency to major donors about the coming 35% cap
- Engage corporate partners about the 1% floor requirement
- Prepare fundraising systems for nonitemizer outreach
- Review and adjust executive compensation policies
- Model financial impacts of all relevant provisions
First Quarter 2026:
- Launch nonitemizer acquisition campaigns
- Implement new donor stewardship strategies
- Adjust budget projections based on new tax environment
- Begin planned giving conversations incorporating new estate tax exemptions
NONPROFIT TAX STRATEGIES AND NEXT STEPS
The OBBBA creates opportunities for organizations willing to adapt. The permanent nonitemizer deduction has the potential to democratize charitable giving in ways not seen since the charitable deduction was first introduced. School Choice Tax Credits offer opportunities for educational philanthropy.
While the law creates significant challenges, particularly for organizations dependent on corporate partnerships and major donors, these obstacles can be managed. The 35% charitable deduction cap, while significant, affects a relatively small number of donors. The corporate charitable deduction floor, while concerning, provides clear parameters for strategic planning.
GAIN SUPPORT FROM GHJ
Organizations should not wait to begin adapting to the new tax laws. The most successful nonprofits will use the next few months to prepare their systems, educate their stakeholders and position themselves for success.
Nonprofit organizations looking to best prepare for tax changes can lean on GHJ’s Nonprofit Tax Practice experts for tailored support and strategy.
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