Summary: The OBBBA introduced sweeping tax changes that will directly affect how nonprofits raise funds, compensate leaders, and manage endowments. From new charitable deduction floors to tiered excise taxes on executive pay and investment income, your nonprofit organization needs a clear picture of what changed and a plan for what comes next.
What Nonprofits Need to Know About the One Big Beautiful Bill Act’s Tax Impact
Nonprofit leaders need to understand the full impact of the One Big Beautiful Bill Act (OBBBA), which was passed in July 2025. The legislation touched nearly every corner of the nonprofit world, including charitable giving incentives, executive compensation rules, and endowment taxes. Some provisions opened new doors for fundraising, while others added cost and complexity. Understanding both sides can help your nonprofit organization plan more effectively and efficiently.
In this article, we explore what the OBBBA means for nonprofits.
How Did the OBBBA Change Charitable Giving?
The OBBBA reshaped charitable giving in two ways: first, the bill created new incentives for smaller and mid-level donors; second, it reduced the tax benefits that had encouraged major donations from high-income individuals and corporations. As a result, nonprofits that depend mostly on a few large donors may face greater fundraising pressure, while groups that rely on several small donors may benefit.
New Deduction for Non-itemizers Expands the Donor Pool
Prior to the OBBBA changes, taxpayers who did not itemize their deductions did not receive any federal tax benefit for charitable contributions. However, for tax years after 2025, the OBBBA introduced a deduction for non-itemizers, capped at $1,000 for individuals and $2,000 for joint filers. For example, a single taxpayer with taxable income of $90,000 who donates $1,500 and does not itemize, can now claim a $1,000 deduction. At a marginal tax rate of 22%, this results in a federal tax savings of $220. Note that this deduction is only for cash contributions to qualified charitable organizations and does not include contributions to private foundations or donor advised funds.
This new OBBBA provision creates a significant incentive for millions of middle-income Americans who previously could not claim a federal income tax deduction without itemizing. At the same time, this is an opportunity for nonprofits. We recommend creating a campaign focused on the new deduction and making the math simple for potential donors. This messaging can help attract contributors who previously could not claim a federal tax deduction without itemizing.
New Floors and Caps Reduce Incentives for Major Donations
High-income donors face real disincentives because of the OBBBA. The bill introduced a 0.5% adjusted gross income (AGI) floor for itemized charitable deductions starting with tax year 2026; this means that only the portion of a donation exceeding that threshold qualifies. It also capped the deduction value for donors in the 37% tax bracket at 35%, rather than their full marginal rate.
For instance, a single taxpayer with an AGI of $650,000 for 2026 who donates $5,000 can deduct only $1,750, with the remaining $3,250 being excluded by the 0.5% AGI floor. That deduction is then capped at 35% of the $1,750 deductible amount, yielding just $613 in tax savings. Before the OBBBA, the same donor would have received $1,850 in savings from an identical contribution. This scenario illustrates the need for nonprofit organizations that depend on large individual donations to model how this change may affect their top donors.
Meanwhile, corporate giving faces similar headwinds. A new 1% of taxable income floor for corporate charitable deductions means smaller corporate donations may no longer yield a tax benefit. A study from the Indiana University Lilly Family School of Philanthropy estimates that these changes could reduce charitable giving by $5.69 billion per year overall and $1.55 billion per year specifically from corporations.
What is the Education Freedom Tax Credit, and How Can Nonprofits Benefit From It?
Starting January 2027, the OBBBA will introduce the Education Freedom Tax Credit (or Federal Scholarship Tax Credit per the IRS website), a dollar-for-dollar federal tax credit for individuals who donate to Scholarship Granting Organizations (SGOs). Taxpayers will receive a credit up to $1,700, with unused credits carried forward up to five years.
SGOs are 501(c)(3) organizations whose primary mission is to provide scholarships for K–12 students from households earning no more than 300% of their geographical area’s median gross income. They must direct at least 90% of their income toward scholarships and operate within a state that has opted into the federal program. Participating states have until the end of 2026 to submit lists of SGOs operating within their state to the federal government.
Qualifying educational expenses under this credit are quite broad. They may include tuition, fees, special needs services, transportation, uniforms, and other classroom-related costs, such as band instruments. That breadth makes the credit more tangible for donors who want to see their dollars make a concrete difference in students’ lives. Nonprofits that qualify as SGOs or are considering applying to become one should work with a tax advisor on eligibility and compliance.
How Can Nonprofits Turn the Education Freedom Tax Credit Into a Fundraising Opportunity?
We see a real opportunity here for SGOs and education-focused nonprofits. Remember, a dollar-for-dollar tax credit is a far stronger incentive than a deduction. Donors aren’t just reducing taxable income; they’re offsetting their tax bill directly, and that message should be front and center in your outreach. Practical steps include:
- Highlighting the credit on social media and in donor communications: Make the dollar-for-dollar value clear with simple relatable examples for donors.
- Hosting webinars and Q&A sessions with tax and investment professionals: Help donors understand the credit and what it means for their overall tax picture.
- Publishing annual impact reports with scholarship metrics: Show donors exactly how their contributions are helping students access education.
How Do New Excise Taxes Affect Nonprofit Compensation and Endowments?
Two provisions in the OBBBA significantly expanded excise tax exposure for tax-exempt organizations. Each of the following deserves close attention from nonprofit finance and governance teams:
The broader “covered employee” definition increases compensation tax exposure.
Section 4960 previously imposed a 21% excise tax on compensation above $1,000,000 paid to certain “covered employees” of tax-exempt organizations. The OBBBA expanded who qualifies as a covered employee to include any current or former employee, with a lookback period to January 1, 2017. This means deferred compensation arrangements, retirement packages, and executive transition payments could trigger the tax for individuals who left the organization years ago. Note that compensation paid for the performance of medical services is excluded from this excise tax calculation by Section 4960.
Nonprofit organizations should review their compensation records, strengthen governance processes around executive pay, and work with legal and tax advisors to identify any former employees who might now fall under this expanded definition.
Tiered endowment tax hits private colleges harder as per-student assets grow.
Private colleges and universities previously paid a flat 1.4% excise tax on net investment income. The OBBBA replaced this with a three-tier structure for institutions with at least 3,000 students based on “student adjusted endowment” (SAE), essentially total assets (excluding assets used directly in carrying out the institution’s exempt purpose) divided by the number of eligible students. Now, the rates range from 1.4% for institutions with an SAE between $500,000 and $750,000, 4% for institutions with an SAE between $750,000 and $2,000,000, and 8% for institutions with an SAE above $2,000,000.
Carefully tracking the endowment, student enrollment, and related-organization assets is now a must for affected institutions. We can see a possible shift in payout policies, fundraising strategies, and endowment-management decisions. It is also important to note that related organizations can be included in the SAE calculation under specific aggregation rules, adding another layer of complexity to the analysis.
Final Thoughts: How the OBBBA Impacts Nonprofits
The OBBBA created several issues for nonprofits: charitable giving incentives shifted, new scholarship tax credit opportunities emerged for qualifying organizations, executive compensation rules expanded, and endowment and investment income taxes went up for many organizations.
If you are a private college, have your investment advisor walk through what the new excise tax tiers mean for your portfolio. Additionally, if your organization is considering becoming a SGO, we encourage you to get qualified early. The 2027 start date is closer than it looks.
