Impact Of The One Big Beautiful Bill Act On Tax-Exempt Organizations

Highlights

• The One Big Beautiful Bill Act (OBBB), signed into law on July 4, 2025, includes sweeping changes to the U.S. Internal Revenue Code (Code).
• Changes involve the expansion of excise taxes imposed on applicable tax-exempt organizations, a progressive excise tax on the investment income of private colleges and universities and a new tax credit that will further school choice initiatives by incentivizing donors to give to certain scholarship-granting organizations.
• This Holland & Knight alert provides an overview of amendments to the Code under OBBB that will impact tax-exempt organizations and their donors, as well as other noteworthy provisions that were considered but not passed into law.

President Donald Trump signed into law the One Big Beautiful Bill Act (OBBB) on July 4, 2025, marking a victory for his administration's ability to advance major policy priorities in his second term domestic agenda, including sweeping changes to the U.S. Internal Revenue Code (Code). (For a comprehensive analysis of the bill, see Holland & Knight's previous alert, "Trump Signs the One Big Beautiful Bill Act," July 3, 2025.)

This Holland & Knight alert provides an overview of amendments to the Code under OBBB that will impact tax-exempt organizations and their donors, as well as other noteworthy provisions that were considered but not passed into law. Tax-exempt organizations should consider how their organizations may be directly impacted by OBBB and how the new law may impact fundraising and donors' incentives to give. In addition, tax-exempt organizations should take note of those provisions that the U.S. Congress considered but did not make it into law, as these topics may appear again in future legislation.

Tax-Exempt Organizations

Excise Tax on Excess Compensation

Section 70416 of OBBB expands the 21 percent excise tax imposed on applicable tax-exempt organizations for executive compensation of more than $1 million. Under OBBB, the excise tax is triggered by compensation paid to any employee or former employee of an applicable tax-exempt organization (or its predecessor) who was an employee during any taxable year beginning after Dec. 31, 2016. Previously, covered employees were limited in scope to only those who were one of the five highest compensated employees of the organization during the taxable year or a covered employee of the organization (or any predecessor) for any preceding taxable year beginning after Dec. 31, 2016.

"Applicable tax-exempt organizations" include organizations exempt under Section 501(a) of the Code (e.g., public charities, private foundations, social welfare organizations, trade associations), farmers' cooperative organizations described in Section 521(b)(1) of the Code, political organizations described in Section 527(e)(1) of the Code and certain governmental entities.

This amendment is effective for taxable years beginning after Dec. 31, 2025.

Excise Tax on Investment Income of Private Colleges and Universities

Section 70415 of OBBB modifies the excise tax on the net investment income of certain private colleges and universities. Previously, a flat tax of 1.4 percent of the net investment income was generally imposed on private colleges and universities with at least 500 tuition-paying students (more than 50 percent of whom are located in the U.S.) and an aggregate fair market value (FMV) of assets of at least $500,000 per student. Under OBBB, a progressive tax is generally imposed on those colleges and universities with at least 3,000 tuition-paying students (more than 50 percent of whom are located in the U.S.) and a student adjusted endowment of at least $500,000. A "student adjusted endowment" means the aggregate FMV of a private college or university's assets as of the end of the preceding taxable year (other than those assets used directly in carrying out the institution's exempt purpose) divided by the number of students of such institution.

The progressive tax has three tiers:

The OBBB provides that regulations and other guidance shall be prescribed to prevent the avoidance of tax under this section and, notably, the avoidance of tax through the restructuring of endowment funds.

This amendment is effective for taxable years beginning after Dec. 31, 2025.

Donors

Corporations

Section 70426 creates a new 1 percent floor for corporations to qualify to deduct their charitable contributions under Section 170 of the Code, meaning corporations must contribute at least 1 percent of their taxable income in order to take any charitable deduction. The 10 percent ceiling on corporate charitable contribution deductions remains. Although it's not clear how the floor will be applied, it appears that only the middle section of the value in excess of 1 percent, but less than 10 percent of a corporation's taxable income, is deductible as a charitable contribution. If the corporation contributes more than 10 percent of its taxable income, it can carry forward the excess, and the carryforward rule is adjusted to add back the 1 percent floor amount but only to the extent the total charitable contributions exceed the 10 percent ceiling. Therefore, the 1 percent floor will reduce that contribution only once, rather than in both the year contributed and the year when the excess amount is used.

The 1 percent floor on corporations' deductions of charitable contributions is effective for taxable years beginning after Dec. 31, 2025.

Individuals

Changes to Charitable Deductions for Itemizers and Nonitemizers

• Standard Deduction. Under Section 70424 of OBBB, individuals who take the standard deduction will now be able to claim a deduction for charitable contributions of up to $1,000 for single filers and $2,000 for joint filers.
• Itemized Deductions. The Tax Cuts and Jobs Act of 2017 (TCJA) temporarily increased the individual deduction limit for cash contributions made to public charities from 50 percent to 60 percent of a taxpayer's adjusted gross income (AGI) and was scheduled to sunset after 2025. Section 70425 of OBBB permanently extends this expansion to 60 percent of a taxpayer's AGI.

In addition, for individuals who itemize their deductions, Section 70425 of OBBB creates a new floor of 0.5 percent to be eligible to deduct charitable contributions, meaning that individuals will have to contribute more than 0.5 percent of their AGI to qualify. It appears that this means that such individuals would only be able to deduct the middle section between 0.5 percent and the applicable percentage of their AGI (e.g., 60 percent for cash contributions to public charities). The OBBB includes a carryforward rule that is adjusted to add back the 0.5 percent so that the deductible amount would only be reduced by 0.5 percent once, rather than in both the year contributed and the year when the excess amount is used.

Also, for itemizers, Section 70111 of OBBB caps the benefit of the total itemized deductions at $0.35 per dollar for taxpayers who are in the 37 percent tax bracket.

These changes for individuals are effective for taxable years beginning after Dec. 31, 2025.

Tax Credits for Individuals Who Donate to Scholarship-Granting Organizations

Section 70411 of OBBB creates a new tax credit available to individual U.S. citizens and legal residents who make qualified contributions to public charities that primarily grant scholarships to students attending elementary and secondary schools.

The allowable credit is equal to the aggregate amount of the individual's qualified contributions during the taxable year, subject to a $1,700 cap and reduced by the amount (if applicable) allowed as a credit on any state tax return of the taxpayer during that taxable year. Any amount of the contribution used for a tax credit is not allowable for purposes of taking a charitable deduction under Section 170 of the Code. Unused credits may carry forward to the succeeding taxable year under certain circumstances.

A state must opt in to participate in this tax credit and annually identify the scholarship-granting organizations in the state that qualify based on the following criteria:

• provide scholarships to 10 or more students who do not all attend the same school
• spend at least 90 percent of the income of the organization on scholarships for eligible students
• do not provide scholarships for any expenses other than qualified elementary or secondary education expenses

Scholarship-granting organizations must prioritize students who were awarded a scholarship in the previous school year and eligible students who have a sibling awarded a scholarship (although earmarking funds is prohibited). In addition, scholarship-granting organizations must verify and limit scholarships to eligible students whose household income is no greater than 300 percent of the area's median gross income.

The tax credit will be available for taxable years ending after Dec. 31, 2026.

Provisions Not Found in OBBB

Although OBBB makes significant changes that tax-exempt organizations should be aware of, there are also notable provisions that appeared in the initial version of the bill passed by the House of Representatives Committee on Ways and Means (Draft OBBB) that did not make it into the final legislation. Although these provisions are not current law, their initial inclusion in the Draft OBBB suggests that Congress may have an appetite in the future to revisit these amendments.

Key provisions not included in OBBB include:

• Unrelated Business Taxable Income (UBTI) Provisions
  • Treatment of Royalties as UBTI. The Draft OBBB included a provision that would have treated royalties received by a tax-exempt organization from the sale or license of its name or logo as UBTI.
  • UBTI for Parking Facilities and Qualified Transportation Fringe Benefits. The Draft OBBB would have increased UBTI for certain tax-exempt organizations (other than churches and church-affiliated organizations) with a new provision that would impose a tax on payments made for certain parking facilities and transportation fringe benefits. This "parking tax" is similar to a provision imposed under the TCJA and retroactively repealed shortly thereafter in 2019.
  • Exclusion of Certain Research Income from UBTI Limited to Publicly Available Research. The Draft OBBB would have expanded the scope of UBTI to include income from non-public research for an organization operated for the primary purpose of carrying on fundamental research, the results of which are freely available to the general public.
• Termination of Tax-Exempt Status of Terrorist Supporting Organizations. The Draft OBBB would have expanded Section 501(p) of the Code to set forth a procedure for the secretary of the U.S. Department of the Treasury to designate an organization as a terrorist-supporting organization and revoke its tax-exempt status. Terrorist-supporting organizations were defined under Draft OBBB to generally include organizations that provided material support or resources to a terrorist organization in excess of a de minimis amount over a three-year period ending on the date of such designation.
• Increase to Excise Tax on Net Investment Income of Private Foundations. The Draft OBBB would have increased the tax on a private foundation's net investment income from 1.39 percent to an "applicable percentage" ranging from 1.39 percent to 10 percent, depending on a private foundation's assets.
• Excess Business Holdings of Private Foundations. The Draft OBBB would have amended Section 4943 of the Code to treat certain voting stock repurchased by a business enterprise as outstanding when calculating the share of that company owned by a private foundation (i.e., when determining a private foundation's allowable holdings).
• Escalated Excise Tax on Investment Income of Certain Private Colleges and Universities. Although OBBB expands the flat 1.4 percent excise tax imposed on the investment income of certain private colleges and universities to a three-tiered progressive tax, the Draft OBBB would have imposed higher rates in a four-tiered structure starting at 1.4 percent and raising to 7 percent, 14 percent or 21 percent, depending on the size of the student-adjusted endowment.

Holland & Knight Insights

Although OBBB contains new requirements that impact tax-exempt organizations, the language in the final bill signed into law is significantly watered down from the changes proposed to the tax-exempt community under Draft OBBB. Notably, Draft OBBB contained several provisions that would have imposed UBTI on certain tax-exempt organizations and their activities. Tax-exempt organizations should work with counsel to ensure compliance under the new law and monitor whether further changes are on the horizon.

Public charities that wish to qualify as scholarship-granting organizations should understand whether the new tax credit under OBBB may or may not be available to their donors. Because the new tax credit has been associated with school choice initiatives that the Democratic party has opposed, it remains unclear whether states with Democratic leadership will opt in to allow this tax credit.

Tax-exempt organizations should review the applicability of the excise tax imposed on all current and former employees dating back to 2017, with compensation in excess of $1 million to ensure compliance with the new law. In addition, tax-exempt organizations should review related organizations structures as they consider the impact of this new law and how to mitigate its impact into the future.

Public charities should review their donor base to consider the impact of OBBB on future donations and potential new fundraising strategies to employ. For instance, the 1 percent floor on corporate charitable deductions may lead certain corporate donors to engage in less charitable giving and other corporate donors to consolidate charitable giving to a particular year in order to reach the 1 percent threshold.

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.