Insights

New Federal Tax Law: R&D Deduction Changes

Richard Levychin, CPA CGMA Featured on Podcast “Startups With Stu” Discussing Exiting Your Company

Potential Opportunities And Benefits To Taxpayers From Recent IRS Cutbacks

The GENIUS Act: A New Era for Stablecoin Regulation in the U.S. Introduction

How the Recent Version of The One Big
Beautiful Bill Will Impact Not For Profits

The One Big Beautiful Bill Act (OBBBA), signed into law by President Donald Trump on July 4, 2025, represents a sweeping piece of tax and spending legislation that extends provisions of the 2017 Tax Cuts and Jobs Act (TCJA) while introducing new measures with far-reaching implications. For nonprofit organizations, particularly those classified as 501(c)(3) and 501(c)(4) entities, higher education institutions, and policy-focused groups, the bill introduces a mix of opportunities and challenges.

Below, we explore the key provisions of the OBBBA that directly affect nonprofits, drawing on recent analyses and expert insights to outline their potential impacts.

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.

Reintroduction of the Parking Tax

The OBBBA reinstates the controversial “parking tax” from the 2017 TCJA, which classifies certain parking and transit-related benefits provided by tax-exempt organizations as unrelated business income (UBI). This means nonprofits will face a 21% tax on the value of parking or transit benefits offered to employees, even if these benefits are incidental to their core mission. For organizations with tight budgets, this additional tax burden could strain financial resources, particularly for those in urban areas where parking or transit benefits are common.

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:

  1. 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.
  2. 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.
  3. Makes permanent a partial tax deduction of $1,000 for single filers and $2,000 for joint filers for charitable contributions for non-itemizers.

Strategic Considerations

Nonprofits must proactively assess the OBBBA’s impact on their operations and fundraising. Key steps include:

  • Reviewing Compensation Structures: Organizations with highly paid employees should evaluate whether current compensation packages will trigger the expanded excise tax and explore cost-saving alternatives.
  • Adjusting Fundraising Strategies: Nonprofits should diversify their donor base to capitalize on the non-itemizer deduction and scholarship tax credit while mitigating the impact of reduced high-income giving.
  • Monitoring Legislative Developments: As some provisions (e.g., royalty taxation) were removed but could reappear, nonprofits should stay engaged with policy updates through networks like the Council on Foundations’ Public Policy Action Network.
  • Preparing for Increased Demand: Nonprofits serving vulnerable populations should anticipate higher service demands due to Medicaid and SNAP cuts and seek additional funding sources to bridge the gap.

Conclusion

The One Big Beautiful Bill Act introduces a complex mix of tax changes that will significantly impact nonprofits. While provisions like the non-itemizer deduction and scholarship tax credit offer opportunities to boost fundraising, the reintroduced parking tax, expanded excise taxes, and limits on itemized deductions pose financial and operational challenges. Additionally, cuts to social safety net programs like Medicaid and SNAP may increase demand for nonprofit services, particularly in rural areas. Nonprofits must carefully review their financial and fundraising strategies to navigate these changes effectively. Staying informed and adaptable will be critical as the sector responds to this landmark legislation.

To see past publications please visit our Knowledge Center.

The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.

To see past publications please visit our Knowledge Center.

The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.