We take a look at the new law's impact on nonprofits, colleges, and universities
On July 4, 2025, "The One Big Beautiful Bill" (the "Bill") was signed into law, introducing changes to the tax law that will impact nonprofits. The final version of the Bill includes some modifications to the Senate Finance Committee's (the "Finance Committee") version released on June 16, 2025, which we discussed in our earlier alert. Below, we detail the key provisions of the final law that impact nonprofits and examine how it diverges from the Senate Finance Committee's version.
Included in the Final Law
- New Tiered Rates for the Excise Tax on Investment Income of Certain Private Colleges and Universities (Endowment Tax). Section 70415 adopts the Finance Committee's new tiers and tax rates on private colleges and universities:
Changes from the Finance Committee's version include adjustments to the applicable institutions. The tax will now apply only to private institutions with a minimum of 3,000 tuition-paying students (increased from the previous threshold of 500), thereby reducing the number of affected institutions. Additionally, proposed exemptions for religious institutions and those not receiving federal funds have been removed.
- Higher Deduction for Non-Itemizers' Charitable Contributions. Section 70424 adopts the Finance Committee's proposed increases to the deduction for charitable contributions for non-itemizing individuals, raising it to $1,000 for single filers and $2,000 for joint filers, effective in 2026.
- 0.5% Floor on Itemizers' Charitable Contributions. Section 70425 adopts the Finance Committee's proposed 0.5% floor on charitable contributions for itemizing taxpayers for tax years beginning after December 31, 2025. The amount of an individual's charitable contributions for a taxable year is reduced by 0.5% of the taxpayer's contribution base for the taxable year. The provision will also permanently extend the 60% contribution limitation for cash contributions made to certain qualified charities.
- Expanded Scope of Excess Compensation Tax for Nonprofits. Section 70416 broadens the scope of IRC § 4960, which imposes an excise tax on "excess compensation" paid to "covered employees." The definition of "covered employees" now includes former employees and current and former employees of predecessor organizations. The addition of predecessor organizations is the sole modification from the Finance Committee version of the Bill.
- 1% Floor for Corporate Charitable Deduction. Section 70426 provides that corporations can deduct only contributions exceeding 1% of taxable income for the year, up to a maximum of 10% of taxable income for the year, a provision that remains unchanged from prior versions of the Bill.
- New Individual Tax Credit for Education Scholarship Contributions. Section 70411 creates a new individual tax credit for donations to organizations providing scholarships to K-12 students from households earning 300% or less of area median gross income and who are eligible to attend public schools. The final law differs from the Senate Finance Committee's version of the Bill in that it limits the annual tax credit to $1,700 and removes the $4 billion volume cap on the total amount of credits.
Not Included in the Final Law
Several significant proposals that could have affected the nonprofit sector were ultimately omitted from the final law, as detailed in prior client alerts:
- No increase to the excise tax on private foundation investment income;
- No unrelated business income tax on employer-provided parking;
- No reclassification of nonprofit research income as unrelated business taxable income;
- No reclassification of royalty income as unrelated business taxable income; and
- No provision specific to revoking the tax-exempt status of a "terrorist-supporting organization."
Conclusion
The Bill introduces changes to federal tax law that will affect nonprofit organizations in meaningful ways.
[View source.]
