As one of the most comprehensive federal tax reforms in recent years, the One Big Beautiful Bill Act (OBBBA) introduces sweeping changes to federal tax policy that are already being felt nationwide. While much of the legislation focuses on corporate taxation and personal income provisions, a handful of reforms have implications for how nonprofits handle executive compensation, engage donors, and plan for long-term sustainability.
Among the bill’s most significant nonprofit-relevant reforms are:
- An expansion of the excise tax on high compensation
- New thresholds and incentives that reshape how charitable giving is rewarded
- A tiered excise tax on large university endowments that may affect education-focused and affiliated organizations
Below, we outline key changes from the landmark legislation and the strategic planning steps nonprofits can take to adapt and thrive.
Expanded Excise Tax on High Compensation
Beginning in 2026, the 21% excise tax under IRC §4960 will apply to any employee of a tax-exempt organization earning more than $1 million annually, rather than the five highest-paid individuals. This includes current and former employees hired after 2016. Compensation for medical services remains exempt.
What This Means: For nonprofits with multiple highly compensated staff, this change could substantially increase employment costs. Boards and leadership teams should reevaluate executive pay structures and explore whether deferred compensation or split-dollar arrangements could help reduce exposure to the excise tax. Modeling long-term budgetary impacts will be critical as organizations plan for sustainable growth.
Provisions Impacting Charitable Giving
While most donors are driven by purpose, connection, and belief in the mission, tax incentives can influence donor behavior in terms of timing, scale, and method. Several of OBBBA’s reforms introduce new thresholds and incentives that could reshape how individuals and corporations participate in charitable giving.
Universal Charitable Deduction Made Permanent
Beginning in 2026, taxpayers who do not itemize can deduct up to $1,000 (single filers) or $2,000 (joint filers) in cash donations to qualified 501(c)(3) public charities. Donations to donor-advised funds, private foundations, and supporting organizations are excluded.
What This Means: This permanent above-the-line deduction could re-engage middle-income households previously lacking a tax incentive to give. Nonprofits could experience a potential increase in small-dollar contributions and consider launching targeted campaigns that emphasize impact, transparency, and ease of giving. Donor education efforts and investment in digital engagement tools may also help convert new supporters into recurring contributors.
0.5% Floor on Itemized Charitable Deductions
Starting in 2026, itemizing taxpayers may only deduct charitable contributions that exceed 0.5% of their adjusted gross income (AGI).
What This Means: Previously, charitable donations were fully deductible regardless of amount. This new threshold may prompt donors to bundle giving or delay contributions to meet the floor. Nonprofits should adjust their messaging to emphasize the long-term impact, mission alignment, and broader outcomes generated by donor support.
Limits on Itemized Deductions for High-Income Taxpayers
Taxpayers in the top 37% income bracket will experience a reduction in the value of itemized deductions, including those for charitable contributions. Specifically, deductions will be reduced by 2/37 of either total itemized deductions or taxable income exceeding the threshold.
What This Means: While this does not cap giving, it diminishes the tax benefit for high-net-worth donors, potentially influencing how and when they contribute. Outreach to top-bracket donors may require renewed emphasis on planned giving and legacy programs.
1% Floor on Corporate Charitable Deductions
Under OBBBA, corporations must now donate at least 1% of taxable income annually to qualify for a charitable deduction. Contributions below this threshold are not deductible and cannot be carried forward.
What This Means: The federal giving floor is intended to encourage more deliberate and sizable corporate philanthropy. Nonprofits may want to explore strategic partnerships and offer multi-year engagement opportunities that align with business goals. Smaller organizations may benefit from collaborating on pooled campaigns or reframing sponsorships to help corporate donors meet the new requirement.
Excise Tax on Large University Endowments
OBBBA introduces a tiered excise tax on the net investment income of private colleges and universities with significant endowments and student bodies. This provision may impact education-focused organizations and those with donor overlap.
Key Changes:
- Applies to private institutions with 3,000 or more tuition-paying students and average endowments over $500,000 per student.
- Tiered excise tax rates (1.4%, 4%, or 8%) based on endowment size per student.
- Tax base expanded to include student loan interest and federally subsidized intellectual property royalties.
What This Means:
- Institutions could see reduced investment income available for scholarships, research, and operations.
- Affiliated nonprofits or support foundations may be included in excise tax calculations if considered “related”.
- Donors may reconsider timing and size of contributions due to concerns over resource allocation.
Organizations operating adjacent to higher education may want to monitor donor sentiment and consider coordinated outreach or joint campaigns that reaffirm mission distinction and value.
Tax Credit for Scholarship-Granting Organizations
Donors who contribute to IRS-approved nonprofits that award K–12 scholarships are eligible for a nonrefundable tax credit of up to $5,000 or 10% of AGI, whichever is greater. The credit is available through 2029 and applies only to designated scholarship-granting organizations.
What This Means: Education-focused nonprofits may experience increased interest from donors in response to this new incentive. Organizations outside the education space should monitor donor behavior and consider adapting their messaging or pursuing partnerships or joint initiatives to remain competitive.
Strategies Moving Forward
To respond strategically to OBBBA, nonprofit organizations should adopt a proactive, coordinated approach across finance, fundraising, and governance — and for education-adjacent entities, investment and donor engagement strategies tied to institutional endowments.
Key strategies include:
- Financial modeling to understand how shifts in donor behavior could affect revenue streams, staffing, and reserves. For nonprofits with executives earning above the $1 million threshold, scenario planning can help determine the cost implications of the expanded excise tax and explore alternative structures.
- Targeted donor engagement strategies that evolve with donor behavior. Messaging should reaffirm that charitable giving is fundamentally driven by belief in the mission and commitment to the community.
- Leveraging data and analytics will give organizations the tools to personalize outreach, track behavioral shifts, and adapt quickly. Investing in technology that enables real-time insights will be key to maximizing fundraising effectiveness.
- Governance and compliance practices should be reviewed and reinforced. Regular policy audits, updated board oversight procedures, and timely staff training can demonstrate accountability, build donor trust, and ensure alignment with new regulatory standards.
For Tailored Guidance Under the OBBBA
Strategic adaptation is more important than ever. To explore how the evolving regulatory landscape may affect your organization’s fundraising, financial planning, and governance strategy, reach out to a Grassi advisor or contact David M. Rottkamp today.
