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Episode 10: OB3’s Impact on Nonprofits
Welcome back to “Tackling Tax,” where we’ll bring you the latest on tax policy and strategies—in an easy-to-understand format. Whether you’re looking to learn more about tax bills, global tax implications, or planning insights for your business, you’re in the right place.
Listen every other week for more from our guests, which include everyone from university scholars to industry professionals to the firm’s experienced leaders.
On this episode, we’ll look into ways the One Big Beautiful Bill Act (OB3) affects the tax-exempt space, specifically looking at ways OB3 directly impacted nonprofits, like the revised endowment tax on higher education and excise tax on excess executive compensation. In addition, we’ll dive into its indirect impacts like those on philanthropy, tax credits, and more. We welcome Krystal Creach, a partner in our firm who focuses on tax-exempt in healthcare. She’s joined by Graham Godfrey, a manager on her team.
If you have any questions or need any assistance, please reach out to a professional at Forvis Mazars.
Transcript
IRIS LAWS
On this episode, we'll look into ways OB3 affects the tax exempt space, specifically looking at ways OB3 directly impacted nonprofits like the revised endowment tax on higher ed and excise tax on excess executive compensation.
Additionally, we'll dive into its indirect impacts, including those on philanthropy, tax credits, and more. We welcome Krystal Creach, a partner in our firm that focuses on tax exempts in healthcare. She's joined by a manager on her team, Graham Godfrey. From your one stop for tax updates and analysis, I'm Iris.
DEVIN TENNEY
And I'm Devin.
IRIS LAWS
It's Tuesday, September 16th and this is Tackling Tax.
DEVIN TENNEY
Before we get started with our much-anticipated guest, we always start our show with four stories that we think might be most impactful to you. So, let's jump right into these Fast Four stories of the week.
IRIS LAWS
With a 35-28 party-line vote, the House Appropriations Committee has approved the fiscal year 2026 Financial Services and General Government Appropriations Act, serving as one of the initial steps towards advancing the appropriations bill in the Senate. Included in this is a proposal that would cut the IRS annual budget by $2.8 billion. The 23% reduction would result in the IRS having its lowest annual budget since 2001.
The bill also contains measures that would eliminate the Direct File program that was launched by the IRS last year. We're still in the earlier stages of the process. So much of this may be subject to change. Congress has until 9/30, that's the end of the fiscal year, to pass the bill and have it signed into law. So, that does leave many skeptical that the deadline will be met and might result in a shutdown of the federal government.
DEVIN TENNEY
Another episode, another Fast Four on the leadership changes at the IRS. On September 8th, the Senate is scheduled to hold a nomination hearing for Donald Korb, Trump's nominee to serve as IRS chief counsel. Now having served as George W Bush’s IRS chief counsel from 2004 to 2008, he should have an easier time transitioning into the role if confirmed; however, with the Office of Chief Counsel having lost 353, or 13%, of its staff since the beginning of Trump's second term, Korb may find his work cut out for him.
As for other positions at the IRS, the search continues for the replacement nominee for the IRS commissioner. Additionally, Jennifer Best, the acting commissioner of the Large Business and International Vision, has left the agency. Best inherited the role after Holly Paz was put on administrative leave in July. As it stands, around half of the 30 leadership positions at the IRS remain unfilled.
IRIS LAWS
As of the recording of this episode on September 8th, the Supreme Court is set to decide whether they'll hear a lawsuit involving the legality of President Trump's “Liberation Day” tariffs, a decision that could impact other tariffs and results in U.S. consumers receiving refunds on tariffs they've already paid. This comes after the Federal Circuit and Court of International Trade have both held that the Liberation Day tariffs are illegal. If SCOTUS decides to hear the case, oral arguments could be scheduled as early as November.
DEVIN TENNEY
Now, Iris, what would happen should SCOTUS decides not to hear the case?
IRIS LAWS
Yeah, so if SCOTUS decides not to hear the case, the Federal Circuit's ruling banning the tariffs would go into effect. As indicated by Treasury Secretary Scott Bessent, this could result in American consumers receiving refunds for about half of the tariffs already paid.
DEVIN TENNEY
Treasury and IRS have recently released updated guidance on the No Tax on Tips and Overtime provisions. To start, we have received a copy of the 2026 form W-2. Now, the new form has revisions that include new codes for box 12 for both tips and overtime, with those codes being TP and TT, respectively. Additionally, box 14 was split into boxes 14 A and 14 B, with 14 B being titled Treasury Tip Occupation Code.
Now, while we don't have an official list of occupation codes yet, Treasury did release a preliminary list of occupations that could be eligible for this qualified tip deduction. The list is fairly extensive and includes industries such as beverage and food service, entertainment and events, hospitality and guest services, home services, and personal services.
IRIS LAWS
Devin, you know you play in this space a lot. Were there any occupations in the list that took you by surprise?
DEVIN TENNEY
Great question, Iris. You know, the list was certainly more expansive than I initially expected, but most of the positions certainly make sense. And it really hammers home how widely applicable tipping is for many industries. As for surprising, believe it or not, social media influencers were included.
IRIS LAWS
Well, with that, let's move on to the main attraction of today: our segment called Planning Insights.
DEVIN TENNEY
On today's segment of Planning Insights, we're joined by Krystal Creach and Graham Godfrey, who are here to talk about the primary ways that the OB3 has directly and indirectly impacted the tax-exempt sector. Krystal is a partner on our Tax-Exempt team, and Graham is a manager on the same team, and I'm told that he is a rising star. So, welcome to Tackling Tax, Krystal and Graham.
00;05;28;20 - 00;05;31;13
KRYSTAL CREACH
Thanks for having us. Happy to be here.
DEVIN TENNEY
Well, Krystal, I would like to start with you. Now, I've had a lot of opportunities lately working with your team, particularly on the OB3. And while there have been a lot of direct and indirect impacts of the OB3, on tax exempt, I'd like to start off first with what didn't make the cut.
KRYSTAL CREACH
Yeah. There hasn't been a ton of media attention on the tax exempt pieces, but there were some of those key provisions. We were really monitoring a lot of the different versions that were coming through. And one of the really big things that was coming out was the return of the parking tax. That was UBI that came from parking to employees that many of our organizations remember from several years ago. Thankfully, that did not make it into the final bill, and I think that was some welcome relief.
GRAHAM GODFREY
And one thing to add, Krystal, and another welcome release is that private foundations generally pay 1.39% excise tax on their net investment income. That was on the House version of the bill that would set the tiered rate up to 10% for large endowments and that was left out of the final bill as well.
IRIS LAWS
Well, that certainly sounds like, in general, some of those things that didn't make it into the act that might be welcome news. But I do know that there were some things that did end up in the bill. Things like the changes to the endowment tax on higher ed. So, Krystal, what changed here? And how might it impact those that are subject to it?
KRYSTAL CREACH
Yeah. It's no surprise that educational institutions were targeted. We've seen a lot in the political arena. Especially, you know, President Trump really going after universities like Harvard with those large endowments. So, we weren't surprised to see a little bit of a change to this. This is an endowment tax that began under the prior Tax Act, which was the Tax Cuts and Jobs Act in 2017, and it is an endowment tax for private colleges and universities that have at least 3,000 students and a $500,000 per student endowment.
So, it doesn't affect a ton of universities once you get into that math. It was previously a flat tax of 1.4%, and now it's a tiered system that goes up to 8%. So, previously it was about 50 to 60 universities in the whole country that were affected by it. And something like Harvard is certainly affected. And this will expand to some additional universities but still won't impact the majority.
So, a little bit of a change that will help kind of get some of that revenue increase to offset some of the tax deductions that came through the bill but still won't affect a majority of our educational institutions.
DEVIN TENNEY
So you said; what was the original rate?
KRYSTAL CREACH
It was originally 1.4%. And, so the 1.4% is still there, but now it's a tiered system, up to 8% depending on the size of the endowment.
DEVIN TENNEY
How did they structure the tiering?
KRYSTAL CREACH
It's based on the size of the endowment. And so, they also changed some of the calculations to show the student adjusted endowment now calculated by the total value, divided by the number of students. And then they also changed some of that definition of net investment income. But really looking at that size of endowment, similar to kind of how a tax bracket would be or it's based on taxable income similarly, and they've got new brackets for that tiered structure.
DEVIN TENNEY
Well, Graham, I want to talk to you about this next direct change. And that was on the section 4960 21% excise tax. Now, because this is a comp and ben item I did touch on it last month briefly. But can you again walk us through, you know, what is 4960? When did it go into place? What is this change and how is it going to, or at least how do we expect that it’s going to impact our tax-exempt entities?
GRAHAM GODFREY
Yeah, Devin, section 4960 was really introduced back with the TCJA in 2017. It's essentially a 21% excise tax for tax-exempt organizations that pay compensation over $1 million to employees or certain parachute payments, as well. So really, 4960 isn't new. It's not going away. But the definition of covered employees is just really broadened under OB3. So, as opposed to being the top five compensated employees over the $1 million threshold, it's covering all employees.
One item to point out here that's important for our, you know, health systems and other healthcare organizations is there is a carve out that has existed since 2017 and it didn't go away in OB3, and that's for medical services. So, if you have physicians with compensation over $1 million, this will not apply to them. We'll really see it impact some large nonprofits and universities. But with the medical services carve out it'll apply less to our hospitals.
DEVIN TENNEY
Yeah. Certainly, initially thought that the biggest recipient of this excise tax would have been hospitals. But because of that carveout, it really does help alleviate that strain on a lot of healthcare organizations. So, yeah, I'm thinking what universities, what are some examples of some of the larger tax-exempt entities that you can think of that aren't universities that might be subject to this?
KRYSTAL CREACH
So, I would say, yes, it was great to see that physician carveout was still there for the medical. We were certainly monitoring that because it wasn't clear in some of the earlier versions of the bill. And that was definitely talking about, being talked about a lot by organizations who are really monitoring that, because that could have had a really big impact on being able to provide healthcare by some of our large hospitals.
GRAHAM GODFREY
Krystal, do you, are there other organizations outside of universities, to answer Devin's question, that you really see this impacting?
KRYSTAL CREACH
I mean, universities are definitely where it's going to have the biggest impact. I would also say some of our really large, well-known types of tax-exempt organizations probably have several high-paid officers that would be subject to this, that now they may have a little bit of an expansion with this, additional having more than just five employees being subject to it. But, for the most part, it's probably going to be more like universities. That is what we're seeing is probably going to have more of the impact.
IRIS LAWS
Well, Krystal, I'll stay with you here for a minute. Let's talk about charitable contributions. So, I do know there were some changes on this front, both right to businesses and individuals. What were they? What were the changes? And maybe what are some strategies that both businesses and individuals might consider, in light of those changes?
KRYSTAL CREACH
Yeah. This is kind of one of the areas that we watch for the indirect changes to nonprofits. And so, a lot of times they're just looking for those things that are directly affecting them. You know, what new tax filings and things like that, but when we look at anything that's changing charitable giving, that really can impact a lot of our tax-exempt organizations.
And so, for individuals, there's a couple new things. There's a 0.5% floor, and then there's also for your top tax bracket, high earners, they have a limit on the itemized deductions. Which, of course, part of itemized deductions is charitable contributions. And so, those are both going to impact the amount of giving that individuals are going to do. Now this starts in 2026, so we're seeing some people who are really talking right now about what maybe needs to happen in 2025 to where they can get the best bang for their buck.
So, we're seeing a lot of those high earners, people in the highest tax brackets and people that have a lot of giving that they want to do, really trying to accelerate their contributions into 2025, maybe by bunching, by doing large donor advised fund contributions.
Lots of different things can happen to where they can try to avoid losing out on some of their deductions in the coming years. So, it's really important, I think, for tax-exempt organizations to get in front of some of those donors so that they can be the recipients of those funds or they can just help their donors navigate how they can give. The other piece of it, too, is that they would want to be watching, how is this going to impact their next few years from a budgetary standpoint?
You know, a lot of times when nonprofits are making their budgets, they're kind of rolling over from last year expecting the same levels. They may get a big bump in 2025, or they may be the same in 2025, and then it's going to go down for the next couple of years. So, really looking at what your donor base looks like, working with them right now before the end of 2025, and kind of trying to figure out what it's going to look like for the next few years with these changes is important.
IRIS LAWS
All good points, Krystal. And I think certainly something that our tax-exempt entities should be thinking about. Graham, to turn to you, what about the individual above-the-line deduction?
GRAHAM GODFREY
Yeah, Iris. So, starting in 2026, individuals can deduct up to $1,000, or $2,000 for married filing joint, of cash donations, even if they take the standard deduction. So, you don't have to itemize to take this deduction. If you think back a few years to some of the COVID years, they implemented a similar above-the-line deduction that really increased charitable giving. So, it's something to keep in mind and think of going forward.
DEVIN TENNEY
Will this deduction be subject to the, I'm assuming it won't be, but it will not be subject to the 0.5% floor, correct? Because it's not an itemized deduction?
GRAHAM GODFREY
That's correct.
DEVIN TENNEY
Okay. So, we could see individuals who are taking advantage of this deduction first and then any amounts that would, you know, exceed the $2,000 that they will then use as an itemized deduction?
GRAHAM GODFREY
Yes, that's correct. And we really see, you know, with the increase to the standard deduction, this will be a nice addition for individuals that don't itemize and just take the standard.
DEVIN TENNEY
Now, is there a ceiling? We have a new floor, but is there a ceiling that individuals are subject to on their charitable contributions that may have to be considered when they're, you know, looking at their bunching or however they're going to handle things?
KRYSTAL CREACH
Yeah. So, there are still the old ceilings in effect, in addition to the itemized deductions ceiling, for the top tax bracket that's going to start in ‘26, there's still the ceilings for 60% of their adjusted gross income for charitable contributions in general. And that's for 2025 and beyond. Nothing has changed there.
And so, they will still have that limit in place, but it does carry forward. And so, they can still take advantage of more than that in ‘25 and carry it forward. But then they have to have that interplay between the floor and standard and itemized. So, it'll just really make it a lot more complex in terms of giving and really important, again, to be in front of donors, to be able to help them give in the most tax efficient way.
DEVIN TENNEY
Yeah. So, a lot of strategy involved on the individual side. What about on the corporate side?
KRYSTAL CREACH
Yep. So, the corporations also have a new 1% floor. They had a 10% limit which remains. And so, essentially, they can give a 9% deduction. And that's 9% of their taxable income that they can give. So, there's a new structure there where they have to consider that floor, which may also impact where individuals give, whether they give to their corporations or whether they give through their individual dollars. So, that is a new limit as well that can further make some strategy a little bit difficult.
DEVIN TENNEY
And there's a carryover for both individuals and businesses, correct?
KRYSTAL CREACH
Yes. There are carryovers available. So even if they get over those limits, they are able to carry them forward. Generally, it's for five years. There are some options where they can convert to net operating losses and things like that as well. So, they'd have to consider the long-term strategy in terms of the amount that they're giving as well, and when they can use up those contribution carryovers.
DEVIN TENNEY
Yeah, a lot to think about. And I think that, you know, it's a good segue into the next topic I wanted to discuss, which is some tax credit changes. One of those being something that may help incentivize individuals to making additional charitable contributions with the new SGO credit, but can you speak a little bit to what that SGO credit is? What does SGO even mean?
KRYSTAL CREACH
Yeah. So, the SGO credit is an interesting new concept that's been added. And SGO stands for Scholarship Granting Organizations. And so, this is a new credit that has been added. A new, permanent federal tax credit, which of course you've probably talked about already. But the permanent in tax law just means there's no sunset. So, it could be changed in the future still.
But there's no sunset to this credit. It's a $1,700 per-person, per-year credit and is nonrefundable, but again, can be carried forward, similar to what we just talked about, but for five years. And this is for donations to those SGOs. The scholarship granting organizations and their specific requirements for what those scholarship granting organizations are. The interesting piece about this credit is that it's a federal credit, but the states have to opt in to join the program for donors to qualify.
We don't have really a full list of states at this point. As of last week, there were some states that they had stated they intend to opt in. We've seen North Carolina and Tennessee say they intend to opt in, but we've seen, like, Oregon and New Mexico have both stated they intend not to opt in. So, it will remain to be seen who will opt in. And so, it's just very interesting to have states sort of have control over it with it being a federal tax credit. But I think the important piece is, if you're an organization that provides scholarships to K through 12 students, it'll be worth watching to see if your state will opt in and then how you can use that to help with your funding.
DEVIN TENNEY
I think one of the primary requirements for this that may catch up a lot of organizations is that this can't be just like a scholarship granting org for a single institution. Is that correct? There's a number of institutions and students that these schools are required to give scholarships to.
KRYSTAL CREACH
That's correct. Yeah. They do have to have some specific rules, and they have to give 90% out through scholarships to organizations as well. So, there's a lot of requirements that go into this. It won't be a slam dunk, but anybody who is giving those scholarships really should be paying attention to this.
DEVIN TENNEY
Now, Graham, I want to shuffle over to you and talk about some of the changes to the new market tax credit. And I believe we're going to have someone on our show here in the next month or two to talk about new market tax credits, but can you just give us a quick overview of what changed here and how that particularly is going to impact tax exempts?
GRAHAM GODFREY
Yeah, of course. So, I won't go into too much of the details today, but essentially new markets tax credit has been available prior to OB3. And, really, it's just now permanent. So, you're going to hear a lot more conversation surrounding it with it being extended through the bill. This isn't truly a tax credit for the tax-exempt organizations, since there's generally no tax liability to offset with the credit.
But it's really a way for nonprofits to get funds from additional investors. So, if you have new construction projects in economically distressed areas, this is something to keep in mind and look into. And that economically distressed area is really determined by U.S. census tracts. So, if you think you might qualify, that's something to definitely bring up and talk with your tax advisor.
IRIS LAWS
I think that's, you know, new markets tax credit is always a wonderful opportunity. And again we are going to be talking about that in a future episode here in a few. But to wrap up, Krystal, I mean, we've worked a lot in the clean energy space and we have had Troy Taylor on our podcast to talk about OB3 specifically and how it does affect clean energy credits.
You know, I think a lot of people forget that tax-exempt entities are eligible to benefit from clean energy credits from that direct pay election. You know, and I also think people, or tax exempts, are probably surprised to hear that, you know, maybe there are still opportunities even after OB3. So, do you have any final comments on, you know, whether it be clean energy or other indirect impacts from OB3 that you want to talk about?
KRYSTAL CREACH
Yeah, definitely. With the clean energy credits, definitely time is of the essence. They’ve cut off some of those programs to end earlier. So, if nonprofits were involved with that direct pay and had some wind, solar projects, things like that in the pipeline, really check their timelines before they continue down that to make sure that they can still take advantage of that and maybe even accelerate some things to still be able to get those benefits.
Some of the previous podcasts have also discussed some other provisions, especially like the payroll tax provisions, like no tax on tips, no tax on overtime, these things can have impacts as well. Any time that there's anything with payroll tax, payroll tax is no different for tax exempt than it is for any other type of entity. So, keeping on top of any of those kinds of changes is very important because there may be changes to how you're filling out W-2s. There's some changes to the 1099 requirements, things like that that they should also stay on top of.
DEVIN TENNEY
Well, Krystal, Graham, thank you both so much for joining us today. We're very excited to have you and hopefully we can have you again in the future.
GRAHAM GODFREY
Yeah. Thanks for having us, Devin.
KRYSTAL CREACH
Thank you.
00;24;26;01 - 00;24;46;18
DEVIN TENNEY
Now, for those of you listening that would like to learn more about this topic, I invite you to join a webinar on October 8th where a panel including myself, Amy Bibby, the tax leader of our Tax Exempt practice, Lauren Den, a managing director on that practice, and Troy Taylor, a prior guest on our show. We'll be doing a deeper dive into these topics, so I promise it's going to be a great one. So, keep an eye out for that registration for that webinar.
IRIS LAWS
Each episode, we'll bring you what we call a Focused FORsight of the week, an article or recording that might be of interest to you. This week's Focused FORsight is an article titled “Tax Exempt Entities and OBBBA Tax Reforms That Matter.” It covers much of what we talked about today, as well as highlighting additional areas impacting tax exempts. You can always access our FORsights on the WNTO website or the Forvis Mazars US website more broadly.
DEVIN TENNEY
And that's our show. Thanks for joining and remember to subscribe and listen in for the next episode of the podcast. Until next time ...
ANNOUNCER
The information set forth in this podcast contains the analysis and conclusions of the panelists, based upon his, her, or their research and analysis of industry information and legal authorities. Such analysis and conclusions should not be deemed opinions or conclusions by Forvis Mazars or the panelists as to any individual situation as situations are fact-specific. The listener should perform their own analysis and form their own conclusions regarding any specific situation. Further, the panelists’ conclusions may be revised without notice, with or without changes in industry information and legal authorities.