Breaking Down the OBBBA: Impacts on Not-for-Profits

The One Big Beautiful Bill Act (OBBBA) didn’t just create sweeping tax code changes for corporations and individuals – it also significantly impacted many not-for-profits, schools and other tax-exempt organizations. The act introduces new incentives and stricter thresholds for charitable giving, shifts education funding dynamics through Scholarship Granding Organizations (SGOs) and 529 plans, and expands oversight and reporting requirements for some organizations.

Here’s what not-for-profits should keep on their radar:

1. Charitable Contributions Changes for Individuals and Corporations
2. New SGO Tax Credit
3. Expanded Use of Section 529 Plans
4. Excise Tax on Private College and University Endowments
5. Expanded Excess Compensation Tax and Reporting
6. 1099-MISC Reporting Changes

CHARITABLE CONTRIBUTION CHANGES FOR INDIVIDUALS AND CORPORATIONS

Individuals should focus most on these four core changes to charitable contribution deductions, starting in 2026:

• Individuals who itemize their tax deductions will face a 0.5% adjusted gross income (AGI) floor for charitable contributions. This means deductions only apply to charitable giving exceeding this threshold.
• Taxpayers in the highest bracket for individuals (37%) can only receive a 35% tax deduction for charitable deductions and other allowed itemized deductions.
• A new above-the-line deduction will allow non-itemizing individuals to deduct up to $1,000 ($2,000 for joint filers) in qualified cash contributions. Contributions to donor-advised funds (DAFs) are excluded from this deduction. 
• The current 60% AGI limit for cash gifts to charities was extended and made permanent.

Tax Planning Tip for Individuals: Individuals (especially high-income) that itemize should consider accelerating charitable deductions this year, before these new laws take effect in 2026.

Tax Planning Tip for Corporations: Corporate charitable deductions will become subject to a 1% floor – representing 1% of its taxable income – and the existing 10% ceiling still applies. Excess contributions are still permitted to carry forward for five years.

Tax Planning Tip for Charities: Charities should keep in mind that while the OBBBA adds complexity to how donors assess tax deductibility, many give without fully evaluating the tax impact. It’s even more important for charities to clearly tell their story.

NEW SGO TAX CREDIT

SGOs are Section 501(c)(3) not-for-profits that provide scholarships for K-12 education. Starting in 2027, the OBBBA establishes a new federal tax credit for individual contributions to SGOs – equal to 100% of qualified contributions, up to $1,700 per taxpayer annually, with a five-year carryforward for unused credit. IRS guidance will clarify whether this is a credit per individual or per couple for those filing jointly. This credit is only available in states that opt in and formally certify SGOs.

To maintain eligibility, SGOs must keep separate accounts, award scholarships to at least 10 students from different schools and allocate at least 90% of their income directly to scholarships. Recipients must come from households earning no more than 300% of the area’s median gross income and be eligible for public elementary or secondary school. Scholarship funds are not counted as part of the recipient’s taxable income.

Tax Planning Tip for Educational Institutions: Schools eligible to receive SGO-funded tuition should consider donor outreach highlighting this new opportunity: a dollar-for-dollar federal tax credit for contributions to SGOs benefiting their organization.

EXPANDED USE OF SECTION 529 PLANS

Section 529 plans can now cover a broader range of educational expenses. For K–12 students, this includes tuition, textbooks, digital learning materials, tutoring services, standardized testing fees and specialized education support. For postsecondary students, qualifying expenses cover tuition, fees for credentialing programs, licensing exams and continuing education. Eligible programs must be recognized by agencies like the U.S. Department of Labor, the Department of Veterans Affairs or state workforce agencies.

The expansion of allowed Section 529 plan expenses also includes certifications for upskilling or reskilling and purchasing therapies for specific needs.

Tax Planning Tip for Individuals: Most states offer a tax credit or other incentive for contributions to these plans. Evaluate the potential opportunity available in your state of residence.

EXCISE TAX ON PRIVATE COLLEGE AND UNIVERSITY ENDOWMENTS

This provision applies to educational institutions that enroll at least 3,000 tuition-paying students, with over half located in the U.S., and that maintain a student-adjusted endowment of at least $500,000. Starting in 2026, tiered excise tax will be applied to the institution’s investment income based on its per-student endowment level:

• Tier 1: 1.4% excise tax for endowments between $500,000 and $750,000 per student
• Tier 2: 4% excise tax for endowments between $750,000 and $2 million per student
• Tier 3: 8% excise tax for endowments over $2 million per student 

Note: The definition of “investment income” subject to excise tax has expanded to include interest earned on student loans. 

EXPANDED EXCESS COMPENSATION TAX AND REPORTING

Starting in 2026, the definition of a “covered employee” will include any individual who earned over $1 million from the institution at any point after 2016 – whether currently or formerly employed. Once designated, covered employee-status becomes permanent regardless of future earnings. Compensation above the threshold is subject to a 21% excise tax.

1099-MISC REPORTING CHANGES

Starting in 2026, the Form 1099-MISC and 1099-NEC reporting threshold will increase from $600 to $2,000, with inflation indexing beginning in 2027. This adjustment aims to ease administrative burdens by reducing reporting on lower-dollar payments.

Note: The final version of the OBBBA removed several controversial provisions from earlier drafts, including an increase in the net investment income tax on private foundations, the parking tax and expanded unrelated business income (UBTI) provisions.

This article is part of our continued analysis of the OBBBA. Find all of our coverage here. Our Sikich team will continue to monitor IRS guidance on OBBBA provisions impacting tax-exempt organizations. For questions or assistance, please reach out.