Nonprofit Resources

What Nonprofits Need to Know About the One Big Beautiful Bill Act

On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (the “OBBBA”) into law — a far-reaching piece of legislation with major implications for the nonprofit sector. Touted as a comprehensive tax reform, the landmark bill introduces significant changes for tax-exempt organizations, from churches and educational institutions to charitable foundations and advocacy groups. The law also brings new requirements for employers, including nonprofits.

For nonprofit leaders, understanding what the OBBBA changes — and when — is essential for strategic planning, compliance, and mission success. This article highlights the key provisions affecting tax-exempt organizations and outlines what they need to know to navigate this new legal terrain. You can learn more about changes affecting higher education institutions here.

Changes Uniquely Impacting Nonprofit Organizations

• Expansion of nonprofit executive compensation excise tax – The OBBBA expands the definition of a “covered employee” under the rules for the excise tax on nonprofit executive compensation under IRC § 4960. Effective January 1, 2026, “covered employee” will include any employee with compensation exceeding $1 million, including former employees (e.g., those receiving a severance and who had been employed during any tax year beginning after December 31, 2016). Previously, the statute only applied to the five highest-compensated employees.
• Increase in the tax rate applicable to net investment income earned on certain higher education institution endowments – The OBBBA increases the amount of tax that will be levied on institutions with endowments that exceed a certain size. Beginning in 2026, the endowment tax will apply to institutions with 3,000 or more students, half or more of whom must be located in the United States. Note that the “religious institutions” exemption in the House version of the OBBBA was removed from the final version signed into law.

• Additional uses for 529 funds – Effective July 4, 2025, 529 funds may be used for:
  • In the case of primary and secondary school students: curriculum and curricular materials; books or other instructional materials; online educational materials; tuition for tutoring or educational classes outside the home if taught by an unrelated, licensed, and experienced teacher; fees for nationally standardized achievement tests, advanced placement examinations, or college entrance examinations; fees for dual enrollment in a higher education institution; and fees for educational therapy provided by a licensed or accredited practitioner or provider, including occupational, behavioral, physical, and speech-language therapies
  • Qualified postsecondary credentialing expenses, if the beneficiary is enrolled in a recognized postsecondary credential program
  • Fees for testing, if the testing is required to obtain or maintain a recognized postsecondary credential
  • Fees for continuing education, if the education is required to maintain a recognized postsecondary credential
• Increase in the amount of 529 funds that can be spent on primary and secondary school expenses – Effective January 1, 2026, the amount of 529 funds that may be spent on primary and secondary school expenses will increase from $10,000 to $20,000.
• Tax credit for contributions to scholarship granting organizations – Donors who make contributions to a “scholarship granting organization” to provide elementary and secondary school scholarships will now be able to claim an income tax credit of up to $1,700. The credit is nonrefundable, and the amount is reduced by the amount of any state tax credit the donor may receive for the same contribution.

Clean Energy Credit Changes

The OBBBA significantly alters the timeline and eligibility criteria for several clean energy credits, many of which were introduced or modified under the Inflation Reduction Act of 2022. One significant change was to the end date for certain credits, as outlined in the following table:

The OBBBA also expands eligibility for the Clean Energy Investment Credit (Section 48E) to include fuel cell property for projects beginning construction on or after January 1, 2026, even if they do not meet emissions-neutral standards. Previously, fuel cell property was only eligible for this credit if construction began before 2025, or began after 2025 and met the emissions-neutral requirements of section 48E. Note that under the OBBBA, fuel cell property projects where construction began in 2025 are not eligible for the credit, even if they are emissions-neutral.

If your nonprofit is considering pursuing clean energy credits, we recommend that you reassess project timelines and eligibility under these new deadlines and requirements.

Employee Retention Credit Enforcement Provisions

The OBBBA creates enhanced employee retention credit (ERC) enforcement provisions and limits the outstanding ERC claims that will be processed and potentially paid by the IRS. This includes:

• Penalties for promoters – Failure to comply with due diligence requirements on the part of so-called “COVID-ERTC promoters” will result in a $1,000 penalty for each failure. Essentially, promoters will need to demonstrate that they engaged in some type of eligibility assessment and provide documentation to avoid this penalty. The provision excludes certified professional employer organizations (such as payroll service providers) from the definition of a COVID-ERTC promoter.
• Limits on claim refunds – Refunds for ERC claims for the third and fourth quarter of 2021 are now limited to those filed on or before January 31, 2024.
• Extended penalty assessment window – The IRS now has six years (up from five) from the date the taxpayer claims the ERC credit to assess penalties on ERC claims for the third and fourth quarters of 2021.

Changes Impacting Charitable Contributions

• Charitable deduction for non-itemizers reinstated – The charitable contribution deduction for non-itemizers created by the CARES Act of 2020 expired at the end of 2021. It is now back, starting with contributions made in 2026. It is important to note that:
  • The amount of the potential deduction has increased to $1,000 for single filers and $2,000 for married couples filing jointly.
  • The deduction is only available to non-itemizers.
  • The contribution must be cash, and it must be made to a public charity. Donor-advised funds are not eligible recipients for these deductible contributions.
  • The deduction is not “above-the-line,” meaning that it does not lower the taxpayer’s adjusted gross income (AGI). Rather, it reduces taxable income.
• 60% AGI limit for charitable deductions made permanent – The existing cap allowing itemizers to deduct up to 60% of their AGI for cash charitable contributions to a public charity, including a donor-advised fund, that was set to sunset on December 31, 2025, is now permanent.
• New 0.5% of AGI floor for itemized charitable deductions – Beginning in 2026, there will be a 0.5% floor for charitable contribution deductions for individuals and married couples filing jointly. This means that only those charitable contribution amounts that are above 0.5% of a taxpayer’s AGI will be eligible for deductibility. Amounts considered nondeductible due to the floor may be carried forward only if the taxpayer has a carry-forward amount arising from the application of the AGI limits on the allowable charitable contribution deductions.
• Corporate charitable deduction floor introduced – Beginning in 2026, corporations will only be allowed to deduct charitable contributions to the extent such contributions exceed 1% of the corporation’s taxable income, with the maximum allowable deduction remaining at 10% of net income before taking into account the deduction for charitable contributions. Amounts considered nondeductible due to the floor may be carried forward where total contributions in the taxable year exceed the 10% cap.

Select Changes Impacting Employers and Employees, Including Nonprofit Organizations

• Inclusion of student loan repayment assistance as part of an Educational Assistance Program made permanent – The CARES Act temporarily modified the definition of educational assistance to include student loan payments, with the change slated to end on December 31, 2025. The OBBBA makes this change permanent, allowing employers to continue to offer employees up to $5,250 per year in tax-free educational assistance that may be applied toward tuition and student loan repayment. This amount will be indexed for inflation starting in 2026.
• Dependent Care Assistance Program FSA limits increased – For plan years beginning after January 1, 2026, the annual limit for Dependent Care Assistance Program funds that may be placed into a flexible spending account (FSA) will increase from $2,500 to $3,750 for individuals and from $5,000 to $7,500 for married couples filing jointly.
• Overtime pay and tip deduction introduced – The OBBBA added a limited deduction for overtime pay and tips for tax years 2025 through 2028. During that time, individuals may deduct:
  • Up to $12,500 (single individual) or $25,000 (married couples filing jointly) in overtime pay. It is important to note that this deduction only applies to overtime pay required by the Fair Labor Standards Act (FLSA). If there is a separate agreement for enhanced overtime pay or alternative state requirements that are different from the FLSA requirements, the deduction will not apply to those amounts.
  • Up to $25,000 in qualified cash tips from employment where tips are customarily received (excluding automatic gratuities and mandatory service charges).

Select Changes Impacting Individuals, Including Donors

• Standard deduction permanently increased – Starting in 2025, the standard deduction will increase to $15,750 for single individuals and $31,500 for married couples filing jointly. This amount will be indexed annually for inflation.
• Child tax credit permanently increased – The increase to the child tax credit implemented in the Tax Cuts and Jobs Act of 2017 (the TCJA) has been made permanent. It will be $2,200 per qualifying dependent for 2025 (up from $2,000), and the potentially refundable portion has been increased to $1,700 (up from $1,400). Both amounts will be indexed for inflation starting in 2026.
• The “Pease limitation” on itemized deductions permanently eliminated and replaced – The so-called “Pease limitation” on the amount of itemized deductions that individuals could claim on their individual income tax returns was temporarily eliminated until December 31, 2025, by the TCJA and has now been permanently repealed.

• Estate and gift tax exemption amount increased and made permanent – The enhanced estate and gift tax exemption amounts that were created by the TCJA in 2017 were due to expire after the 2025 tax year. These have now been made permanent and, effective January 1, 2026, increased to $15 million, creating an effective exemption for married couples of $30 million. This amount will be adjusted for inflation beginning in 2027.

Select Changes Impacting General Business Operations

• Increased Form 1099 reporting threshold – Starting in 2026, the threshold for the requirement to file a Form 1099-NEC, Nonemployee Compensation, or Form 1099-MISC, Miscellaneous Information, will rise from $600 to $2,000 for payments made to contractors, vendors, and service providers during the year. This threshold will be indexed for inflation beginning in 2027, with the IRS rounding the amount to the nearest multiple of $100.

Draft Provisions Not Included in the Final Bill

Several high-profile provisions in draft versions of the OBBBA were not included in the final version signed into law. The two most applicable items for nonprofits are below:

• Qualified transportation fringe benefit tax removed – A proposed provision that would have resurrected the so-called “parking lot tax” for nonprofits was ultimately excluded from the final version of the OBBBA.
• Private foundation tax structure unchanged – A proposed tiered tax structure on the net investment income of private foundations was removed from the final bill. The flat 1.39% tax on net investment income remains in place.

Preparing for What’s Next

As with many changes, the OBBBA introduces opportunities as well as challenges for nonprofits. The key is to understand and consider the implications of and timelines for these changes and assess and adjust your processes and strategies accordingly.

Please contact us with questions or if you’d like to discuss how our nonprofit tax specialists can help. With over 50 years of experience exclusively serving nonprofit organizations, we have in-depth knowledge of the unique tax considerations you face.

Additional Resources:

What Higher Education Institutions Need to Know About the One Big Beautiful Bill Act

Key Changes in the One Big Beautiful Bill Act – This helpful chart from Carr, Riggs & Ingram highlights the key changes for individuals, businesses, and estates

Chris Purnell

Chris serves as Partner and Tax Counsel at CapinCrouse. A licensed attorney, he advises exempt organizations of all sizes on a wide range of issues, including tax and employee benefit related matters, representation before state and federal tax authorities, and assistance with firm audit* or advisory engagements to formulate advice and counsel on important operating and tax issues. Chris also assists clients with general tax issues, unrelated business income, charitable solicitation, and missionary employment structures. Prior to joining CapinCrouse in 2019, Chris served as the Executive Director of the Neighborhood Christian Legal Clinic, the nation’s largest Christian legal aid organization. Note: Although licensed to practice law in Indiana, Chris’s services through CapinCrouse do not involve the practice of law and consequently do not result in the creation of an attorney-client relationship.