The Opportunity, Balance, and Better Budget Act (OBBBA), formerly known as the One Big Beautiful Bill Act, enacted on July 4, 2025, introduces the most significant changes to the tax landscape for tax-exempt organizations since the 2017 Tax Cuts and Jobs Act. These changes affect tax-exempt private colleges and universities, nonprofit employers, and charitable organizations and their donors alike. This alert summarizes the key rules for tax-exempt organizations.
1. Section 70416: Expanding the Executive Compensation Tax (Code § 4960)
The OBBBA expands the scope of the Code section 4960 excise tax on "excess" compensation paid to "covered employees" by applicable tax-exempt organizations (ATEOs) and their related entities. Under current law, the 21% tax applies to an ATEO's five highest-paid employees earning over $1 million (aggregated across the ATEO and its related entities).
The new law significantly broadens the definition of "covered employee" to include any individual who was employed by the ATEO after December 31, 2016 — regardless of their position or current employment status and regardless of whether they are still receiving compensation from the ATEO or are one of the five highest-paid employees. As a result, the number of individuals whose compensation could trigger the excise tax increases substantially. Understanding how the Internal Revenue Service (IRS) defines "related" entities is now essential. Compensation paid by a related entity can trigger the excise tax if the individual was employed by the ATEO — even if the ATEO is no longer paying them. These changes apply to taxable years beginning after December 31, 2025.
Given the scope of these changes, thousands of organizations could be affected. The IRS is expected to issue guidance on how to apply the expanded "covered employee" definition — particularly in light of a lookback to individuals employed after 2016 — and clarify how exceptions will work under the new rules.
a. Next Steps and Opportunities for ATEOs
- Conduct a historical review. Tax-exempt employers should review compensation records dating back to 2017 to identify individuals who may now fall under the expanded "covered employee" definition.
- Coordinate across related entities. Corporate affiliates, foundations, and supporting organizations should work together to assess shared exposure and ensure consistent tracking.
- Reevaluate compensation structures. Organizations should examine current employment and compensation arrangements — especially for employees who have moved between related entities.
- Build internal compliance protocols. Develop or enhance internal systems to track and document compensation across related entities. This will be critical for compliance and audit readiness.
2. Section 70415: New Tax Rules for University Endowments (Code § 4968)
The OBBBA significantly revises the excise tax on net investment income for tax-exempt private colleges and universities under Code section 4968 for tax years beginning after December 31, 2025. Previously, this tax applied at a flat 1.4% rate to institutions with at least 500 tuition-paying students and $500,000 in assets per student.
The new law introduces a tiered rate structure based on the organization's student-adjusted endowment:
- 1.4% for endowments between $500,000 and $750,000 per student
- 4% for endowments between $750,000 and $2 million per student
- 8% for endowments exceeding $2 million per student
It also revises the applicability threshold, providing that the tax only applies to private institutions with at least 3,000 tuition-paying students, significantly narrowing the number of affected schools. Based on current public data, fewer than 30 institutions are expected to meet both the asset and student thresholds, depending on how "tuition-paying" is defined and how endowment assets are calculated.
Notably, the House bill proposed even higher tax rates (up to 21%) and excluded foreign students from the student count; both provisions were dropped from the final law. Proposed exemptions for religious institutions and those not receiving federal funds were also excluded.
In drafting regulations, we anticipate the IRS and the U.S. Department of the Treasury (Treasury) will focus on:
- Anti-avoidance rules targeting asset transfers to supporting organizations
- Clarification of what qualifies as "used directly" in exempt activities
- Rules for calculating student counts and endowment values
Note that the Supreme Court's Loper Bright decision may mean that any regulations under revised section 4968 (and any other revised Code section) may be subject to heightened judicial scrutiny, especially if the IRS and Treasury stretch statutory language.
a. Code § 4968 Next Steps and Planning Considerations
- Project student-adjusted endowment exposure. Begin modeling projected student-adjusted endowment values under the new thresholds and rate tiers.
- Assess related and supporting organization structures. Review the structure and function of related organizations, including supporting organizations, to assess whether their assets and income will be attributed under the new rules.
- Coordinate with sector peers and advocacy groups. Engage with sector coalitions or associations to coordinate responses to proposed regulations.
3. Sections 70111, 70424, 70425, and 70426: Charitable Giving Reimagined (Code §§ 68 and 170)
The OBBBA makes several significant changes to the rules governing charitable contribution deductions under the Code section 170 and itemized deductions under Code section 68. The changes enacted under sections 70111, 70424, 70425, and 70426 will likely require IRS and Treasury interpretive guidance, especially for cases in which the statute introduces new thresholds or modifies deduction mechanics. All provisions are effective for tax years beginning after December 31, 2025.
a. New Floors for Deductibility
Individuals who itemize deductions will only be able to deduct charitable contributions that exceed 0.5% of their adjusted gross income (AGI). Corporations will only be able to deduct contributions that exceed 1% of taxable income. The overall 10% cap on corporate charitable contributions remains unchanged.
b. Permanent 60% AGI Limit
The 60% AGI limit for cash gifts to public charities is now permanent (barring further legislative changes). The law clarifies that donors may combine cash and noncash gifts to reach the 60% limit, resolving prior ambiguity.
c. Reinstated Nonitemizer Deduction
Non-itemizers will now be able to deduct up to $2,000 (married filing jointly) or $1,000 (all others) for cash gifts to 501(c)(3) public charities. This deduction excludes contributions to supporting organizations, donor-advised funds, and private foundations.
d. Limitation on the Value of Itemized Deductions
Effective for tax years beginning after December 31, 2025, the OBBBA introduces a new limitation on itemized deductions for individuals with taxable income exceeding the 37% rate bracket threshold. Under revised Code section 68, allowable itemized deductions are reduced by 2/37ths of the lesser of (i) total itemized deductions or (ii) the excess of taxable income (inclusive of deductions) over the 37% threshold. The limitation applies after all other deduction caps and does not apply to the Code section 199A qualified business income deduction. This provision may reduce the after-tax value of charitable contributions for high-income donors, potentially dampening incentives for large-scale philanthropic giving.
e. Impacts on Charitable Organizations Receiving Contributions and Next Steps
- Anticipate changes in donor behavior. Organizations may experience a shift in donor behavior, particularly among small and mid-level donors who may no longer receive a tax benefit for modest contributions.
- Consider fundraising strategies. Development teams should reassess fundraising strategies, especially year-end campaigns and appeals to non-itemizers or corporate donors.
- Strengthen the case for corporate giving. Organizations that rely heavily on corporate giving may need to demonstrate greater impact or alignment with corporate social responsibility goals to justify gifts that may no longer be deductible.
- Updated donor communications and internal systems. Organizations should also update informational communications provided to donors to reflect the new thresholds and limitations, which take effect for tax years beginning after December 31, 2025.
4. Section 70411: New Tax Credit for Scholarship Donations
The OBBBA creates a new nonrefundable $1,700 federal income tax credit for individuals who contribute to qualifying scholarship-granting organizations (SGOs). To qualify, SGOs must spend at least 90% of their income on scholarships for K–12 students from low-income households. This credit replaces the charitable deduction for these contributions and is reduced by any state-level tax credit received for the same donation.
5. Proposed Provisions Not Included in Final Law
While the OBBBA made major changes for tax-exempt organizations, several key proposals affecting the sector were ultimately excluded from the final law. These include:
- Increased private foundation net investment income tax, Code § 4940
- Expansion of the ability to suspend tax-exempt status to terrorist-supporting organizations, Code § 501(p)
- Reinstatement of the "parking tax," Code § 512(a)(7)
- Taxing name and logo royalties as unrelated business taxable income, Code § 513
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
