5 challenges to nonprofits presented by OBBBA

By David J. Manbeck, CPA

Nonprofit organizations are bracing for a new era of complexity and scrutiny as the OBBBA ushers in a host of tax reforms. As nonprofits evaluate the far-reaching implications of OBBBA, several key challenges emerge that warrant careful consideration.

Here are five major challenges that nonprofits may face under OBBBA.

1. Expansion of the excise tax on executive compensation

Under the previous law, the 21% excise tax on executive compensation applied to the top five highest-paid employees of a nonprofit each year, plus any previously listed “covered employees.”

OBBBA expands this definition to include any employee ever classified as a covered employee since 2017 — regardless of current compensation or employment status.

Impact:

The list of covered employees is now cumulative and permanent, thereby increasing the number of employees subject to the excise tax. Nonprofits may face greater liabilities for executives whose compensation exceeds $1 million, including former executives, and must address the resulting administrative burden.

The change increases administrative burdens, requiring tighter payroll tracking, reviews of compensation policies, and careful planning for severance or retirement packages.

2. Graduated tax on private college endowments

Previously, a 1.4% excise tax applied to the net investment income of certain private colleges and universities. OBBBA replaces this with a graduated rate structure:

• 4% for endowments between $500,000 and $750,000 per student
• 4% for $750,000 to $2 million
• 8% for over $2 million
• Additionally, net investment income now includes student loan interest and some federally subsidized royalties.

Impact:

Many large institutions will face significantly higher tax bills. This may necessitate adjustments to endowment spending policies, potentially resulting in reduced scholarship funds, capital projects, or research budgets.

Smaller institutions nearing the thresholds will need to monitor endowment growth closely and may consider restructuring how they hold and distribute funds.

3. Private foundation tax rate unchanged — for now

The 1.39% excise tax on private foundation net investment income remains unchanged. OBBBA did not include a proposed progressive rate structure in the final law.

Impact:

Private foundations maintain the status quo, while donor-advised funds (DAFs) remain exempt from this tax, perpetuating a long-standing disparity in tax treatment. While OBBBA made no changes here, continued congressional scrutiny of foundations and DAFs suggests more reform may be on the horizon.

4. Charitable deduction modifications

• A universal charitable deduction of up to $1,000 ($2,000 for joint filers) is now permanent for non-itemizers.
• Itemizers may now only deduct contributions that exceed 0.5% of their AGI.
• Corporate donors face a 1% floor, with deductions allowed only beyond this threshold and still subject to the 10% overall cap. New carry-forward rules also apply.

Impact:

While the universal deduction offers a chance to engage a broader base of smaller donors, the floors for itemized and corporate deductions may reduce incentives for large one-time gifts.

Nonprofits may experience a shift in donor behavior, with more modest but consistent annual gifts replacing fewer large donations.

Development teams should refresh donor messaging to emphasize the direct impact of recurring or multi-year gifts, provide clear examples of outcomes supported by donor dollars, and guide donors on timing gifts to maximize both tax and philanthropic benefits.

5. Unrelated Business Income Rules (UBIT) remain

OBBBA did not make direct changes to unrelated business income tax (UBIT), but existing provisions — such as the requirement to silo different lines of unrelated business — remain in place.

Impact:

Nonprofits with unrelated business activities must still track each line item separately, which complicates financial reporting and increases compliance concerns. OBBBA didn’t change these rules, but vigilance remains essential.

Bottom line

OBBBA brings increased taxes, shifting deduction rules, and more complex compliance for nonprofits. Attention to these changes, along with smart planning, is essential.

But with smart messaging, donor education, and proactive financial planning, nonprofits can adapt — and thrive — in this new era of charitable giving. The Boyer & Ritter team is ready to help your nonprofit navigate the new tax landscape and help you fulfill your charitable mission.

About the Author

David J. Manbeck, CPA is a Principal at Boyer & Ritter LLC and chairs the firm’s Nonprofit practice group. With more than 22 years of experience, Dave specializes in providing audit, accounting, and tax services to a wide range of nonprofit and governmental entities, including charitable organizations and community foundations. Contact Dave at 717-761-7210 or dmanbeck@cpabr.com