While much of the spotlight has been on individual tax cuts and family deductions, this legislation also makes significant changes for tax-exempt organizations and charitable giving.
Let’s break down three areas already drawing attention: executive compensation, university endowment taxes, and charitable deductions for individuals and corporations.
Executive Compensation at Nonprofits
Under prior tax law, nonprofits were subject to an excise tax if they paid more than $1 million in salary to one of their five highest-paid employees.
The new law removes that limitation. Now, any employee at a tax-exempt organization who earns over $1 million may trigger the excise tax, regardless of where they fall in the pay scale. This change broadens the scope of the tax and will affect how nonprofits structure executive compensation packages.
University Endowment Taxes
The bill also restructures the tax on private university endowments.
Previously, there was a flat 1.4% tax on investment income at institutions with at least 500 tuition-paying students and more than $500,000 in assets per student.
Now, that flat rate has been replaced with a tiered system:
- $500,000–$750,000 per student → 1.4% tax
- $750,000–$2 million per student → 4% tax
- Over $2 million per student → 8% tax
These rules only apply to private institutions with at least 3,000 tuition-paying students, and the asset calculation now includes related organizations such as foundations and affiliated nonprofits.
Charitable Giving Rules
For Individuals:
The bill restores a deduction for taxpayers who take the standard deduction, up to $1,000 in charitable donations ($2,000 for joint filers). This applies only to cash contributions made to qualifying charities.
For those who itemize, there’s a new hurdle: charitable contributions are deductible only once they exceed 0.5% of adjusted gross income (AGI). Contributions that don’t clear this threshold can only be carried forward if the excess surpasses the floor.
For Corporations:
Corporations now face a 1% floor and a 10% cap on charitable deductions, with excess contributions above the cap eligible to be carried forward for up to five years. However, contributions below the 1% floor cannot be carried forward unless the business later exceeds the 10% cap.
This structure may encourage corporations to rethink their giving strategies, potentially classifying donations as business expenses rather than charitable contributions.
What Didn’t Make It Into the Bill
Several proposals that appeared in earlier drafts were excluded from the final legislation. Notably:
- No increase to the tax on net investment income for private foundations.
- No changes to unrelated business income rules.
- No new restrictions on employee-owned stock in foundation portfolios.
- No authority for the IRS to revoke nonprofit status without external review.
Looking Ahead
While the One Big Beautiful Bill leaves much of the nonprofit tax framework intact, it introduces key changes around compensation, charitable giving, and university endowments. These updates will influence how nonprofits operate, how donors give, and how institutions plan for the future.
Stay informed, these provisions are likely to spark ongoing debate as they roll out. And as always, if you have questions, contact Paragon today.
