By Mark Piszko, CPA , CGMA, Partner in Charge, Not-for-Profit Services
“The One Big, Beautiful Bill Act (OBBBA),” recently enacted, introduces a wide range of tax and policy changes – some of which may have a direct and lasting impact on not-for-profit organizations. Below is a summary of key provisions specifically relevant to the NFP sector. As not-for-profits navigate this evolving landscape, it’s important to assess both immediate compliance requirements and potential opportunities to strengthen mission-aligned financial planning.
Additional Taxes on College and University Endowments
The OBBBA imposes a 1.4% tax on net investment earnings for private colleges and universities with an endowment between $500,000 and $750,000, based on a “student-adjusted endowment” calculation. A student-adjusted endowment is the endowment of a college or university and related entities determined as of the end of the preceding taxable year divided by the number of “eligible students.” Eligible students are those who meet certain requirements under the Higher Education Act of 1965. The endowment net investment earnings tax increases from 1.4% to 4% on student-adjusted endowments between $750,000 and $2 million and from 4% to 8% on student-adjusted endowments of more than $2 million. The OBBBA applies to private colleges and universities with at least 3,000 students.
This additional tax on endowment earnings can potentially reduce the amount of funds available to spend on educational programs. Schools subject to it may have to consider ways of limiting the effects of the tax, including restructuring their investment portfolios, receiving endowment donations through donor-advised funds or even borrowing against their endowments rather than third parties. Be advised, the rules within this provision are complex and require careful consideration before making any endowment fund changes.
Excise Tax on Executive Compensation
The OBBBA expands the 21% excise tax on not-for-profits that pay more than $1 million in compensation to any employee, including former employees employed after the 2016 tax year. Under previous guidance, the 21% excise tax applied to “covered employees” which included the five highest compensated employees in a current tax year.
While expanding the excise tax to include all employees with more than $1 million in compensation can potentially reduce the net revenue of organizations affected by this provision, the effects of this tax can be mitigated through careful budgeting and compensation considerations, including the structuring of deferred compensation payout agreements.
Changes to Deductibility of Charitable Contributions
The three OBBBA provisions listed below do not directly apply to not-for-profit organizations; however, they may affect corporate and individual taxpayer charitable giving:
- Imposes a 1% floor for the deduction for charitable contributions made by corporations in which only contributions above 1% of taxable income are deductible, up to a limit of 10% and allows corporations to carry forward the tax benefit for five years.
- Establishes a cap on the value of the charitable deduction for high income taxpayers in the 37% tax bracket. The charitable deduction amount may be further reduced by any state and local tax (SALT) deduction a taxpayer claims.
- Makes permanent a partial tax deduction of $1,000 for single filers and $2,000 for joint filers for charitable contributions for non-itemizers.
Although evidence suggests that charitable giving is driven more by donor’s affinity to an NFP’s mission rather than tax deductibility, the first two provisions listed above can potentially affect the amount of charitable giving by corporations and individual taxpayers, given the limitations established by the new thresholds.
The third provision above seems like a positive change that may provide incentives for additional donations from a larger population of potential donors who do not itemize on their tax filings.
Contact Us
The OBBBA will take time to fully take effect. The PKF O’Connor Davies NFP Team will keep you apprised of current developments on this and other executive actions that may impact your revenue streams and operations.
To learn more about the provisions of the OBBBA and how we may be of assistance to your not-for-profit organization, please contact:
Mark Piszko, CPA, CGMA
Partner
mpiszko@pkfod.com | 646.449.6316
Garrett Higgins, CPA
Partner
ghiggins@pkfod.com | 914.421.5655
Joseph Russell, CPA
Partner
jrussell@pkfod.com | 551.249.1155
Joseph Izzo, CPA
Partner
jizzo@pkfod.com | 646.449.6325