New tax law introduces big changes for exempt organizations and donors

ARTICLE | July 14, 2025

Authored by RSM US LLP

Executive summary: How the OBBBA affects tax-exempt organizations

The One Big Beautiful Bill Act (OBBBA, P.L. 119-21), which became law on July 4, 2025, is expected to broadly impact most US taxpayers, including tax-exempt organizations.

Overall, the new law contains fewer provisions directly aimed at exempt organizations than initially proposed: Expansion of the definition of covered employees, increases in excise taxes for some private colleges and universities, and changes to charitable contribution deductions.

However, private foundations can breathe easier knowing that the proposed increase to net investment income excise taxes failed to advance, and similarly, the sector can rejoice that the parking tax (i.e., increasing unrelated business income (UBI) for qualified transportation fringe expenses) remains a nightmare of the past. Other proposals that failed to advance include proposed amendments to the excess business holding provisions and the fundamental research exclusion to UBI.

Details of OBBBA provisions that affect tax-exempt organizations

The tax package will primarily affect private colleges and universities with large endowments and exempt organizations with highly compensated employees. Changes to the charitable contribution deduction rules may also affect charitable organizations and their donors.

College and university endowment excise tax (section 4968)

The legislation increases the college and university endowment excise tax on private colleges and universities that have income producing non-charitable use assets of over $750,000 per student from 1.4% up to 8% as follows:

While the final rate structure is not as severe as originally proposed (up to 21%), additional changes will affect a school’s determination as to whether it is subject to the tax and how much income is taxable, in addition to imposing additional Form 990 reporting:

• Requiring at least 3,000 tuition-paying students (up from 500 under current law) may exempt certain schools from the excise tax.
• Including student loan interest income and “federally subsidized” royalty income will increase the amount of tax paid.
• Form 990 reporting will expand to include the number of students (both tuition-paying and those in the per student endowment size).

Other proposed changes, including exceptions for schools that did not participate in federal loan programs or certain religiously affiliated schools, did not find their way into the final law. Also missing from the final provision was the proposal to exclude foreign students from the calculation. State colleges and universities continue to be excluded from the excise tax.

Excess compensation excise tax (section 4960)

The legislation expands the definition of a “covered employee” under section 4960 to include any current or former (tax years beginning after 2016) employee of an applicable tax-exempt organization (ATEO). Beginning with the 2026 calendar year, exempt organizations with employees over $1 million in remuneration may see an increase in their excise tax liability. However, the definition of remuneration, including the medical services exclusion and volunteer exceptions, remain unchanged.

On the one hand, organizations will no longer need to identify and track the top five employees with the highest compensation.

On the other hand, rather than limiting the tax to the highest five compensated employees from 2017 through 2025, an exempt organization will pay the tax with respect to all employees with over $1 million in section 4960 remuneration. In addition, the excise tax may apply to more separation agreements due to the expanded definition of covered employee.

Charitable contributions (section 170)

While encouraging charitable giving by reinstating a charitable contribution deduction for non-itemizers, the new law may also discourage charitable giving by introducing a floor on charitable contributions made by individual itemizers and corporations.

Charitable contribution deduction for non-itemizers

Individuals who make cash contributions to public charities (not including to donor advised funds or supporting organizations) but that do not itemize will be eligible for a deduction of up to $1,000 (or $2,000 for married couples filing jointly).

0.5% floor on itemized individual charitable deductions

Individuals that itemize will now deduct only the charitable contributions in excess of 0.5% of adjusted gross income (AGI) (e.g., $3,000 for $600,000 AGI; $250,000 for $5 million AGI). Generally, individuals will permanently lose the disallowed amounts unless they have carryforwards, in which case, the disallowed deduction will also carryforward for up to five years.

60% AGI limit

No longer due to expire, individuals that itemize will be able to continue deducting charitable contributions up to 60% of AGI, provided they make cash contributions to public charities. Amendments attempt to effect Congressional intent to permit calculation of the 60% limit after all other charitable contribution limitations.

1% floor on corporate charitable deductions

Corporations will now deduct only the charitable contributions in excess of 1% of taxable income (e.g., $100,000 for $10 million of taxable income; $1 million for $100 million of taxable income). Generally, corporations will permanently lose the disallowed amounts unless they have carryforwards (contributions in excess of 10% of taxable income), in which case, the disallowed deduction will also carryforward for up to five years.

RSM US takeaways

The law also introduces a number of other changes that will affect exempt organizations, including information reporting, compensation and benefits, and clean energy credits, among others.

Ultimately, proactive planning is essential for effectively navigating risks and uncovering potential benefits presented by this legislation. Consult with your tax advisor to tailor a strategy that best suits your situation and goals.