New Federal Tax Law: What Tax-Exempt Organizations Need to Know Now

President Donald Trump signed the “One Big Beautiful Bill Act” (OBBBA) into law on July 4, following a 51–50 Senate vote on July 1 and a 218–214 House vote on July 3. The push to meet the Independence Day deadline involved late-stage negotiations and notable last-minute changes. With enactment complete, tax-exempt organizations should evaluate the law’s impact and identify planning opportunities and pressure points. The OBBBA blends tax cuts and revenue raisers that touch nearly all businesses and investors. The Joint Committee on Taxation (JCT) scored the package as a $4.5 trillion net tax cut over 10 years under traditional scoring; using the Senate’s current-policy baseline (which assumes extensions of expiring provisions), the cost is about $715 billion.

Section 4960 Excise Tax on “Excess” Compensation

OBBBA broadens who can be treated as covered by the 21% excise tax on compensation over $1 million paid by certain tax-exempt organizations. The rule now applies to all current and former employees (not only the five highest-paid employees for current or prior years), provided the individual was an employee in a tax year beginning after December 31, 2016. The change is effective for tax years beginning after December 31, 2025. Statutory exceptions remain for licensed medical professionals providing medical services and for employees who are not highly compensated under Section 414.

Section 4968 “Endowment Tax” on Applicable Educational Institutions

The prior flat 1.4% excise tax on net investment income is replaced with a tiered rate based on “student adjusted endowment” (aggregate FMV of non-program assets divided by number of students, measured at the prior year-end):

• Over $500,000 and up to $750,000 per student: 1.4%
• Over $750,000 and up to $2,000,000 per student: 4%
• Over $2,000,000 per student: 8%

The definition of applicable educational institution now exempts institutions with fewer than 3,000 tuition-paying students in the prior year (up from 500). Institutions must also include student-loan interest on loans they (or related organizations) make and federally subsidized royalty income in gross investment income, overriding existing regulations. Effective for tax years beginning after December 31, 2025.

Direct Pay and Energy Credits

Tax-exempt and governmental entities may continue to elect direct pay under Section 6417 for eligible clean-energy credits, but several incentives are curtailed or eliminated:

• Section 30C (EV charging/alt. refueling): not available for property placed in service after June 30, 2026.
• Section 45W (qualified commercial clean vehicles): no credit for vehicles acquired after September 30, 2025.
• Section 48E (technology-neutral ITC for certain wind/solar): terminated for property that doesn’t begin construction within one year of enactment (by July 4, 2026) or isn’t placed in service by December 31, 2027. For other facilities and for energy storage, current phaseouts beginning in 2032 generally remain.
• Section 48E revisions: tighter domestic-content phase-ins and material-assistance restrictions for projects involving specified foreign entities (for projects beginning construction after 2025). The House-proposed acceleration of geothermal ITC phaseout did not make the final law.
• Section 179D (deduction for certain energy-efficient property in government/tax-exempt buildings): not available for property beginning construction after June 30, 2026.

Employee Retention Credit (ERC)

The law: (1) disallows refunds after enactment for claims filed after January 31, 2024; (2) extends the statute of limitations to six years; and (3) increases penalties on preparers/promoters.

Charitable Contributions — Corporations

Corporations may deduct charitable contributions only to the extent amounts exceed 1% of taxable income, still subject to the overall 10% cap under Section 170(b)(2)(A). Excess contributions—and amounts disallowed by the 1% floor—carry forward up to five years. If total contributions do not exceed 10% of taxable income, no carryforward is allowed for amounts disallowed solely by the floor. Effective for tax years beginning after December 31, 2025.

Charitable Contributions — Individuals

0.5% AGI floor and value cap

Individuals may claim a charitable deduction only for amounts exceeding 0.5% of AGI. Existing percentage limitations by contribution type/recipient remain. A new cap on the value of itemized deductions effectively limits the benefit so that the maximum offset is equivalent to income taxed at 35% (not 37%), creating a de-facto 2% difference for top-bracket taxpayers. Excess contributions—and amounts disallowed by the 0.5% floor—carry forward five years; where no carryover exists, amounts disallowed solely by the floor do not carry over. Effective for tax years beginning after December 31, 2025.

60% AGI limit for cash gifts made permanent

The 60% of AGI limit for cash contributions to public charities (and certain private foundations under Section 170(b)(1)(F))—originally enacted by the TCJA—is now permanent. The act also adjusts how the 60% limit applies; as summarized, it may allow up to a 60% deduction even where total cash gifts are below 60% of AGI and additional non-cash contributions are made to eligible but non-public-charity donees.

Non-itemizer deduction reinstated and increased. A permanent partial deduction for taxpayers who do not itemize is restored: up to $2,000 (MFJ) or $1,000 (all others) for cash gifts to eligible charities. Non-cash gifts, donor-advised funds, supporting organizations, and most private foundations do not qualify. Effective for tax years beginning after December 31, 2025.

Credit for Contributions to Scholarship-Granting Organizations

Individuals may claim a federal credit (max $1,700, five-year carryover) for contributions to a scholarship-granting organization (a Section 501(c)(3) other than a private foundation) that: provides scholarships to 10+ students, spends ≥90% of income on scholarships for eligible students, and limits aid to qualified elementary or secondary education expenses. Eligible students are from households ≤300% of area median gross income and eligible to enroll in public K-12. The credit is reduced by any state credit received, and no charitable deduction is allowed for amounts claimed as a credit. Scholarships for qualified elementary/secondary expenses are excluded from the recipient’s income. States must opt in and provide an annual list of qualified organizations. Effective for tax years beginning after December 31, 2026.

SALT Cap (Individuals)

The SALT cap rises to $40,000 (MFJ) starting in 2025, with a 1% annual increase through 2029; the cap is halved for non-MFJ filers. In 2030, it reverts to $10,000. For 2025, the higher cap begins to phase out when modified AGI exceeds $500,000 (halved for other filers), with the phaseout threshold increasing 1% annually thereafter. The allowable deduction cannot fall below $10,000.

Additional Provisions Relevant to Exempt Organizations (Directly or Indirectly)

Bonus Depreciation & Section 179

• 100% bonus depreciation is restored for property placed in service after January 19, 2025 and before January 1, 2030 (no phasedown beyond those dates).
• New elective Section 168(n) allows 100% depreciation for qualifying production portions of nonresidential real property used in specified production activities; modified original-use rules for certain acquired property not used in such activities between January 1, 2021 and May 12, 2025; 10-year recapture if disposed. Applies where construction begins after January 19, 2025 and before January 1, 2029 and is placed in service by December 31, 2032.
• Section 179 limit increases to $2.5 million with a $4 million phaseout (inflation-indexed).

Section 174 — Domestic Research Expensing

• Temporary Section 174A restores current expensing for domestic research for tax years after December 31, 2024 and before January 1, 2030; option to capitalize over 10 years (or asset life, ≥60 months).
• Foreign research remains 15-year amortization.
• Transition via automatic method change on a cut-off basis.
• 174A deductions must be reduced by the amount of any research credit.

Section 163(j) — Interest Limitation

• For tax years after December 31, 2024 and before January 1, 2030, ATI again excludes depreciation, amortization, and depletion for the 30% limitation.

Section 199A — Pass-Through Deduction

• Permanent deduction with enhancements: rate rises from 20% to 23% for tax years beginning after December 31, 2025; modified phase-out for taxpayers who don’t meet wage/capital tests or are in a specified service business; BDCs’ dividends qualify.

SALT Cap Workarounds — Entity-Level Taxes

• New Section 275 limits deduction of specified state taxes by partnerships/S corps; such taxes must be separately stated and then are subject to the $40,000 individual cap as substitute payments, with exceptions for property taxes and certain entity-level income taxes where ≥75% of gross receipts are from a qualified trade or business under 199A. Clarifies that business sales taxes are not covered.

FDII, GILTI, BEAT

• Section 250 percentages adjusted to keep effective rates near current levels: FDII to 13.335%, GILTI to 10.668%; excludes certain Virgin Islands services income from GILTI tested income.
• BEAT set at 10.1% permanently (avoids rise to 12.5%) and removes a scheduled 2026 change that would have increased liability by total credits.

Reciprocal Tax for “Unfair Foreign Taxes” — New Section 899

• Imposes additional U.S. tax on residents of countries with “unfair foreign taxes,” covering multiple categories (FDAP, ECI, Section 881 income, branch equivalents, certain private-foundation income, and USRPI dispositions).
• Modifies BEAT for groups >50% owned by affected foreign taxpayers (minimum 12.5% BEAT, no credit offset, and adjustments to base-erosion payments).
• “Unfair tax” definition includes Pillar Two UTPR, digital services taxes, and other taxes designed to disproportionately fall on U.S. persons. These add to, rather than replace, treaty rates.

Energy Credits — Additional Details

• 45Y/48E production/investment credits generally repealed for projects starting construction more than 60 days after enactment or placed in service after 2028 (with nuclear exceptions).
• 45V hydrogen repealed for projects starting after December 31, 2025; 45X manufacturing credit ends for wind components after 2027 and all others after 2031.
• Section 6418 transferability is limited, but traditional tax-equity structures remain viable.

Section 162(m)

• From tax years after 2025, covered-employee identification and deduction limits aggregate on a Section 414 controlled-group basis, with allocation rules for the $1 million cap.

Individual Deductions (2025–2028)

• Tip deduction equal to qualified tips reported on specified forms; income limit ($160,000 in 2025, Section 414 threshold); voluntary-tip and occupation rules apply; employer W-2 reporting required; FICA tip credit generally unaffected except for certain beauty services.
• Overtime deduction equal to FLSA-required overtime; similar $160,000 income limit; new employer reporting.
• Auto-loan interest deduction above the line up to $10,000 for interest on U.S.-assembled passenger vehicles; phase-out begins at $100,000 (single)/$200,000 (joint); exclusions for leases, fleets, commercial vehicles, salvage, etc.
• Seniors’ deduction of $4,000 for taxpayers 65+, phasing out above $150,000 (MFJ)/$75,000 (others).

Transfer Taxes

• Lifetime exemptions for estate, gift, and GST taxes permanently set at $15 million in 2026, indexed thereafter.

Active Business Losses — Section 461(l)

• Made permanent and revised: disallowed losses must be separately tracked and carried forward to apply in future 461(l) calculations (rather than simply becoming NOLs).

Individual TCJA Extensions (Selected)

• Permanently retains numerous TCJA items (e.g., repeal of personal exemptions, various deduction limits, repeal of miscellaneous itemized deductions, bicycle-commuting exclusion).
• AMT exemption/phaseout made permanent with inflation adjustment change beginning 2026.
• Pease remains repealed but the law caps the value of itemized deductions (max benefit equivalent to the 32% bracket).
• Standard deduction is increased an additional $1,000 (single)/$2,000 (MFJ) for 2025–2028; the child tax credit increases by $500 for 2025–2028, reverts to $2,000 in 2029 and is then indexed; SSNs required.
• Rate cuts and bracket adjustments are made permanent with slightly more favorable inflation indexing (except the 37% bracket).

Opportunity Zones

• Investment deadline extended to December 31, 2028; creates rural OZ category with favorable rules; mandatory gain recognition for 2027/2028 investments on December 31, 2033; 10% basis step-up for five-year holds; up to $10,000 of aggregate investments may offset ordinary income (no recapture); new reporting required.

Form 1099 Reporting

• 1099-K threshold restored to 200 transactions and $10,000 (retroactive), replacing ARPA’s $600 rule and superseding IRS transitional thresholds.
• 1099-MISC/NEC threshold increases from $600 to $2,000 in 2026, inflation-indexed.

Tax-Exempt Entities — Additional Items

• For universities and private foundations: endowment and private-foundation excise taxes adopt graduated brackets (top rates 21% and 10%, respectively); the executive-compensation excise tax reaches current and former employees; UBTI rules broaden to include qualified transportation fringe benefits and narrow the research income exception to research freely available to the public.
• Earlier House proposals (e.g., adding name/logo royalties to UBTI, discretionary revocation authority tied to support for terrorist organizations, and broader related-party reach for the compensation excise tax) were removed before final passage.

Next Steps for Tax-Exempt Organizations

Although many changes apply beginning in 2026, several provisions take effect sooner or require near-term project timing (e.g., energy-credit windows). Exempt organizations should model effects across compensation policies (Sections 4960/162(m)), charitable-giving dynamics (corporate and individual floors, non-itemizer deduction), endowment taxation (Section 4968), and clean-energy plans (direct pay and phaseouts).

For assistance evaluating how these provisions affect your organization and for planning aligned to your mission and financial goals, contact Wei, Wei & Co., LLP.

Frequently Asked Questions (FAQ)

What changes does the One Big Beautiful Bill Act (OBBBA) make to the Section 4960 excise tax?

The OBBBA expands the Section 4960 excise tax to apply to all current and former employees of certain tax-exempt organizations who were employed in any taxable year beginning after December 31, 2016. Previously, the rule applied only to the top five highly compensated employees.

Are direct pay options for clean energy tax credits still available to tax-exempt organizations?

Yes, but with limitations. Tax-exempt entities may still use direct pay under Section 6417 for qualifying projects; however, many clean energy credits are curtailed or phased out, including EV charging credits and clean vehicle incentives.

What new limitations are placed on charitable contribution deductions for corporations?

Corporations may now deduct charitable contributions only to the extent they exceed 1% of taxable income, up to the existing 10% cap. Excess amounts and disallowed contributions can be carried forward for five years, but only if the total does not exceed the 10% cap.

What is the new charitable deduction rule for individual taxpayers?

Individuals may deduct charitable contributions only if their total gifts exceed 0.5% of adjusted gross income (AGI). The deduction’s value is also capped so that it offsets income taxed at a top rate of 35%, not 37%.

Is there a charitable deduction available for individuals who do not itemize?

Yes. The OBBBA permanently reinstates a partial deduction for non-itemizers: up to $2,000 for joint filers and $1,000 for others, for cash contributions to qualifying charities.

When do the new tax provisions go into effect?

Most changes take effect for tax years beginning after December 31, 2025, although some provisions related to clean energy and the Employee Retention Credit take effect sooner.