Background
On July 4, 2025, what has been referred to as the One Big Beautiful Bill Act (the Act or OBBBA) was signed into law, signaling many upcoming revisions to the current tax landscape. While many provisions within the Act are not directly related to tax-exempt entities, they could still have a significant impact on the nonprofit, education, and public (NEP) sector. Outlined below are how select provisions from the Act can affect nonprofits. Note, unless otherwise indicated, most of provisions are effective for taxable years beginning after December 31, 2025.
Excise Taxes
Expanding Application of Tax on Excess Compensation Within Tax-Exempt Organizations
Section 4960 levies a 21% excise tax on tax-exempt employers who pay more than $1,000,000 in compensation or parachute payments to covered employees. In this context, covered employees are any employee or former employee that rank among the five most compensated employees during the taxable year.
The Act modifies the definition of covered employee by expanding it to include all employees rather than the top five compensated employees. The provision also includes employees of related persons or government entities in this definition.
Forvis Mazars Insight: The existing carve-out removing renumeration in exchange for medical and veterinary services from the amount subject to the excise tax remains in effect. As such, the impact of medical institutions will likely be minimal. However, due to the expansion of the covered employee definition, universities and other large 501(c)(3) organizations with large numbers of highly compensated individuals may fall more heavily under this tax regime.
Excise Tax on Higher Education Endowments
The Act broadens the impact of the §4968 endowment tax on higher education institutions already subject to the endowment tax through implementing a tiered tax structure and expanding the income subject to tax. This tax applies to private colleges and universities with at least 3,000 students, 50% of the student base located in the U.S., and a student-adjusted endowment of at least $500,000 per student. The Act replaces the previous flat tax of 1.4% with a tiered tax based on endowment size as follows:
| Per-Student Endowment Size | Tax Rate |
|---|---|
| $500,000 - $750,000 | 1.4% |
| $750,001 - $2,000,000 | 4.0% |
| > $2,000,000 | 8.0% |
In addition to implementation of the tiered rate structure, the Act includes other changes to the calculation, including:
- The amount of student-adjusted endowment is now calculated by dividing the total value of endowment assets, which excludes assets used directly for educational purposes, by the number of eligible students.
- Eligible students include both U.S. and international students.
- The definition of net investment income is expanded to include interest from student loans made by an institution as well as any royalty income derived from federally funded intellectual property developed by faculty or students.
- Also of note: institutions must comply with greater reporting requirements including disclosure of student headcount calculation and endowment valuation methodology in their Form 990.
Forvis Mazars Insight: As the legislation navigated its way through Congress, it was considered likely that this provision would make it into the Act. While we saw a few modifications throughout the legislative process, the outcome was anticipated. Higher education institutions affected under the initial endowment tax will need to assess more regularly the potential impact of this new provision as we anticipate the tax will have a more significant impact on the institutions that are subject to it. For small institutions, the 3,000-student threshold offers exemption from the tax.
Clean Energy
With the passing of the Inflation Reduction Act (IRA), many nonprofits were able to take advantage of a number of clean energy credits. The Act ends many of these benefits earlier than established in the IRA, therefore nonprofits will want to take a look at current and future projects to ensure viability of the various credits and other benefits.
Forvis Mazars Insight: Many nonprofits have been able to take advantage of wind, solar, and other clean energy tax credits. Nonprofits that have wind or solar projects queued for the future will need to consider their beginning of construction date and place in service date to determine whether expediting projects may be needed to take advantage of clean energy credits. To learn more about the effect of the Act on clean energy tax credits, please see our FORsight article, Impact of OBBBA on IRA Clean Energy Credits.
Charitable Contributions
The Act significantly alters the philanthropic pathway by placing barriers to entry in the form of minimum contribution thresholds—for both individuals and corporations, while also introducing a new individual charitable deduction.
Individuals: 0.5% Floor on Charitable Contributions
Individual taxpayers who itemize their deductions will be subject to a contribution floor of 0.5% of their contribution base (defined as adjusted gross income (AGI) without regard to net operating loss carrybacks). This limitation could serve to eliminate the charitable deduction for many.
Corporations: 1% Floor on Charitable Contributions
Corporations are also subject to a contribution floor starting in 2026, equaling 1% of their taxable income. Corporate charitable deductions continue to be subject to a 10% ceiling, meaning annual deductions are limited to 9% of taxable income. There is a five-year carryforward period for contributions exceeding the 10% ceiling. In addition, the nondeductible 1% of contributions may also be carried forward if total contributions for the year exceeded 10%.
Forvis Mazars Insight: Taxpayers may consider a contribution strategy termed “bunching,” where multiple years’ worth of charitable contributions are combined and made in a single year as opposed to spreading them out, e.g., $30,000 every three years as opposed to $10,000 every year. This could be particularly pronounced in 2025 by those looking to avoid the limitation.
Individual Charitable Deduction
The Act revives and expands upon a provision previously available under the Coronavirus Aid, Relief, and Economic SecurityAct (CARES Act) for 2020 and 2021, allowing nonitemizing individuals to deduct up to $1,000 ($2,000 for joint filers) for tax years starting in 2026.
Individual “Above the Line” Deductions
No Tax on Tips and Overtime
Many nonprofits will be affected by the new tips and overtime provisions within the Act. As key campaign promises proffered by the Trump administration, the no tax on tips and no tax on overtime provisions proved to be a headliner in the Act. The provisions allow for an above-the-line deduction for “qualified tips” and “qualified overtime compensation.” Both provisions are effective for tax years 2025 through 2028.
The no tax on tips deduction is limited to $25,000 of qualified tips as reported on Form W-2, 1099-K, 1099-NEC, or Form 4317. Tips must be voluntary, i.e., service charges of a percentage of the total bill for gratuity are ineligible. The no tax on overtime deduction is limited to $12,500 of qualified overtime compensation as defined by the Fair Labor Standards Act of 1938.
Employers are still required to report the income. As this is an income tax deduction, FICA taxes will apply to both items. The Secretary of the Treasury will provide modified income tax withholding tables for tax years beginning in 2026. For 2025, the Act provides a transition rule permitting employers to use a reasonable method to approximate the amount of qualified tips and overtime.
The Act excludes highly compensated individuals from receiving the tips and/or overtime deduction via a phase out based on modified adjusted gross income (MAGI) over $150,000 ($300,000 for married filing joint (MFJ) returns) which reduces the deduction by $100 for every $1,000 over the limit.
Forvis Mazars Insight: There are a number of areas where additional guidance is needed. At the federal level, it’s unclear how Form W-2 will be revised to account for qualified tips, qualified overtime, and the occupation of the employee. In addition, for the 2025 transition, employers currently have no instruction on how to provide the information relating to their reasonable approximation qualified tips and overtime amounts or whether service providers can rely on their own supporting documentation to claim a higher deduction. On August 7, the IRS issued IR-2025-83, announcing that no changes will be made to individual information returns or withholding tables for tax year 2025 in relation to this provision. They did, however, state that they are working on new guidance and updated forms for 2026, including information on tips and overtime reporting. At the state level, it is yet to be determined which states will follow federal law and exempt qualified tips and/or overtime from state income taxes/withholding.
Employee Fringe Benefits
Permanent Expansion of Educational Assistance
Under the CARES Act, employees and employers may exclude up to $5,250 of educational assistance payments provided by an employer from gross income and payroll taxes, respectively. According to the law, educational assistance payments include payments on student loan principal and interest. The CARES Act set this provision to expire before January 1, 2026. The Act renders the expansion of qualified educational assistance to include student loan payments permanent and indexes for inflation.
Forvis Mazars Insight: For more information on Act provisions impacting compensation and benefits, please see our FORsight article, Compensation and Benefits Reconciliation Changes 101.
Credits
Credit for Contributions to Scholarship Granting Organizations
The Act enacts a new tax credit for contributions from individuals to scholarship granting organizations (SGOs). A federal tax credit of up to $1,700 per individual, per year is intended to incentivize donations to SGOs and is permanent with no sunset date or federal cap on the total amount that can be claimed. The credit is nonrefundable but amounts exceeding taxable income can be carried forward for up to five years. Additionally, the credit cannot be claimed to the extent a charitable contribution deduction or state tax credit is claimed for the same contribution, i.e., no double dipping. States must formally join the program for taxpayers to be eligible for the credit and SGO’s must elect to participate in the state program.
SGO eligibility criteria include:
- status as a 501(c)(3) public charity (private foundations are not eligible);
- distribution of at least 90% of the contributions to eligible students;
- disallowance of earmarking scholarships for specific students;
- a provision of scholarships to at least ten students attending separate schools; and
- certain substantiation and annual audit requirements.
For eligible nonprofits that award scholarships, this provision could open new funding opportunities. Certain restrictions apply, however, for students to be eligible to receive the credit, e.g., in-state residency, household earning thresholds, coverage limitations for eligible expenses, like tuition, supplies, room, and board, etc.
Forvis Mazars Insight: There will be more details to come via the federal regulatory process as currently there are more questions than answers on how such programs will operate and how states and donors will respond. This provision, unlike many others in the Act, goes into effect for contributions made on or after January 1, 2027, which should help states develop and implement their programs.
New Market Tax Credit
Nonprofits have historically had an avenue to participate in New Market Tax Credits (NMTC). This program is designed to stimulate investment and economic growth in low-income and distressed communities throughout the country. The Act makes the NMTC program permanent.
Payroll Reporting
Reporting Threshold for Forms 1099–NEC & 1099–MISC
Businesses paying vendors and independent contractors were required to report compensation over $600 on 1099-NEC and 1099-MISC. For tax years beginning after December 31, 2025, businesses will be required to report vendor and contractor compensation in excess of $2,000 on Forms 1099-NEC and 1099-MISC.
Missed the Cut
Many provisions in earlier House and Senate bills that would have impacted tax-exempt entities were not included in the Act. Most notably, the Act excludes the proposed change that would result in tax-exempt entities generating unrelated business income via application of the “parking lot rules,” which currently only applies to for-profit entities by disallowing a deduction for certain parking expenses not included in employee compensation.
How Forvis Mazars Can Help
The Act contains a number of changes impacting the nonprofit, education, and public sectors that may impact you or your business. Forvis Mazars developed a 2025 Tax Bill Guide that summarizes the Act’s provisions. We also offer a suite of services aimed to guide you through these changes. For questions related to any of these changes or strategies to help navigate them, contact us here.