The One Big Beautiful Bill (OBBB) has passed, and while much of the media attention focuses on individual and business tax changes, nonprofit organizations face their own set of challenges and opportunities. Understanding these impacts now will help your organization prepare strategically for the changes ahead.
This guide breaks down both the direct provisions affecting tax-exempt organizations and the indirect effects that could reshape your fundraising landscape. From new executive compensation taxes to shifts in charitable giving incentives, these changes require immediate attention from nonprofit leaders.
Let’s examine what these changes mean for your organization and how you can prepare.
Direct Impacts: What Changes Immediately Affect Your Nonprofit
New Executive Compensation Excise Tax
Under the OBBB, any executive of a nonprofit receiving a total annual compensation (salary, bonuses, benefits, and retirement contributions included) that exceeds $1 million triggers a 21% excise tax, regardless of the number of executives meeting this criterion within an organization. The excise tax applies to the organization, not the individual, and is effective for tax years beginning after Dec. 31, 2025.
Expected Impact
This provision affects recruitment and retention strategies for large nonprofits competing for top talent. Organizations may need to document compensation decisions, restructure compensation packages, and establish formal policies about how compensation is set, as well as implement performance-based incentives differently or factor this additional cost into their budgeting process.
Your Action Steps:
- Review your current executive compensation packages.
- Calculate potential excise tax liabilities for 2026.
- Consider restructuring compensation to include more performance-based incentives.
- Update your Form 4720 reporting processes.
Large nonprofits competing for top talent will need to factor this additional cost into their budgeting process. Some organizations may need to adjust their recruitment and retention strategies to account for this new financial burden.
Overtime Compensation Deduction Requirements
Your payroll systems will need updates to accommodate new reporting requirements for overtime compensation — defined as the “compensation paid to an individual that is required under Section 7 of the Fair Labor Standards Act (FLSA) and is in
excess of the regular rate at which such an individual is employed.”
Under OBBB, employees can now deduct qualified overtime compensation from their taxable income — up to $12,500 for single filers and $25,000 for joint filers annually.
The deduction applies to overtime as defined by the Fair Labor Standards Act (1.5x hourly rate for overtime hours) and phases out for higher-income earners. This benefit is temporary, running only from 2025 through 2028.
Note: The deduction is only on the additional 0.5x premium pay (i.e., the “half” in “time-and-a-half); not the full 1.5x overtime pay after 40 hours. For example, if an employee’s regular rate is $20/hour, only the extra $10/hour (0.5 x $20) for each overtime hour is eligible for the deduction.
Your Action Steps:
- Update payroll systems to separately track and report qualified overtime compensation on W-2 forms. The IRS is not making updates to Form W-2 for 2025. Per IRS guidance released Nov. 5, 2025, “Employers and payors can make the information available to their employees and payees through an online portal, additional written statements provided to the employees or payees, other secure methods, or in the case of qualified overtime compensation in Box 14 of the employee’s Form W-2.
- Train payroll staff on the new reporting requirements.
- Communicate this benefit to employees who regularly work overtime.
Trump Accounts: New Employee Benefit Opportunity
The OBBB creates Trump Accounts — tax-deferred savings vehicles for minors under 18. While parents can contribute up to $5,000 annually, employers can contribute up to $2,500 per account tax-free for the employee. (The employer contribution counts toward the annual $5,000 limit.)
If your nonprofit is looking to enhance its compensation packages without increasing direct salary costs, contributing to these accounts might be a useful strategy to attract and/or retain employees with young children.
Your Action Steps:
- Communicate with your staff to gauge interest in this benefit and understand how it aligns with their needs, particularly for employees with young children.
- Consult with a financial advisor or payroll professional to ensure proper implementation, compliance with tax regulations, and seamless integration with existing benefits systems.
Clean Energy Credits & Initiatives
Nonprofits planning renewable energy projects should act quickly — and with the guidance of energy-credit-savvy tax professionals. The OBBB has tightened the allowable timelines and rules for eligibility for several clean energy tax credits under the Inflation Reduction Act (IRA), such as the Clean Electricity Investment Credit and Clean Electricity Production Credit. To realize these credits under the OBBB, construction must begin before July 5, 2026, and facilities must be placed in service by Dec. 31, 2027.
Opportunity Zones
While Opportunity Zones (OZs) aren’t a direct funding source for nonprofits, they are a powerful tool for channeling private investment into underserved communities. The program offers capital gains tax incentives to investors who reinvest through Qualified Opportunity Funds (QOFs), which in turn support projects within designated OZs. Under the One Big Beautiful Bill Act (OBBBA), the OZ framework has been permanently extended and significantly restructured to better align with community development goals — creating new opportunities for nonprofits to lead, partner, and shape outcomes.
Here’s what’s new — and why it matters:
- Long-Term Stability: OZs are now re-designated every 10 years, starting in 2026, with no sunset on new investments. This gives nonprofits a longer runway to plan and execute multi-year initiatives.
- Tighter Targeting: Governors must apply stricter eligibility criteria when selecting OZs, including lower income thresholds and disqualification of contiguous tracts — areas that previously qualified for OZ status simply because they bordered low-income communities. This change ensures that OZ benefits focus on genuinely distressed areas, where nonprofits often lead the charge.
- Rural Incentives: Rural OZs receive enhanced tax benefits, including a 30% basis step-up and relaxed improvement requirements. These changes make it easier to attract capital to underserved rural communities and align with nonprofit-led revitalization efforts.
- Transparency & Reporting: QOFs must report detailed impact data annually. Nonprofits can leverage this information to demonstrate value, attract mission-aligned investors, and hold partners accountable.
- Transition Protections: Existing projects retain their OZ benefits, reducing risk for long-term initiatives already underway.
Your Action Steps:
- Develop a plan to identify and guide QOFs toward high-impact projects while educating stakeholders to ensure investments reflect community needs.
- Consider co-investing with philanthropic capital.
- Engage with state and local governments during the re-designation process; it will be key to shaping OZ priorities.
The OBBBA transforms OZs from a speculative tax tool into a more mission-aligned vehicle for inclusive development — one where nonprofits are not just beneficiaries, but co-architects of lasting change.
Indirect Effects: How Charitable Giving Changes Will Impact Your Fundraising
Corporate Charitable Contribution Floor
Starting in 2026, corporations can only deduct charitable contributions exceeding 1% of their taxable income. This change could significantly impact corporate giving, especially from companies with lower profit margins. It is important to note that charitable contributions exceeding 10% of taxable income are still carried forward for up to five years.
Strategic Implications:
Corporate donors will likely implement “bunching” strategies — concentrating donations into fewer years to exceed the 1% threshold. Take, for example, a corporation with $100,000 in taxable income; under OBBB, it would have to contribute $1,000 before receiving any tax benefit. The examples below illustrate the tax advantage of bunching a donation into one year:
Scenario 1: Traditional Giving
- The company donates $5,000 each year for two years.
- Each year, only the amount above $1,000 is deductible.
- The company receives a $4,000 deduction per year, totaling $8,000 over two years.
Scenario 2: Bunching Donations into One Year
- The company donates $10,000 in year one and nothing in year two.
- In year one, it deducts $9,000 ($10,000 minus the $1,000 floor).
- In year two, it doesn’t donate, so there is no deduction — but the total deduction is $9,000, which is $1,000 more than spreading it out over two years.
Your Action Steps:
- Engage corporate donors now about multi-year commitment strategies.
- Develop campaign materials that explain the tax benefits of larger, less frequent gifts.
- Consider offering naming opportunities or recognition programs that span multiple years.
Individual Charitable Deduction Changes
Individual donors who itemize deductions will face a 0.5% floor on charitable contributions starting in 2026. As with the 1% floor for corporations mentioned above, individual donors may also benefit from bunching their donations into fewer years to ensure they eclipse the 0.5% floor.
Another opportunity: The OBBB reintroduces an above-the-line deduction for non-itemizing taxpayers — up to $1,000 for individual filers and $2,000 for married couples filing jointly, beginning in 2026 — which will likely encourage broader participation in charitable giving from middle-income donors who don’t typically itemize their deductions.
Your Action Steps:
- Target non-itemizing taxpayers in your campaigns with messaging about this new tax benefit.
- Develop donor education materials explaining how the deduction works.
- Make a point to proactively educate your donors about how larger, less frequent gifts can unlock greater tax benefits.
- Consider campaigns specifically designed for first-time donors who can now receive tax benefits.
Positive Developments: Administrative Relief Nightmare “Parking Tax” Excluded
More good news: The controversial tax on qualified transportation fringe benefits (QTFBs) — aka the “parking tax” — was not reinstated under the OBBB. Originally introduced under the Tax Cuts and Jobs Act, this provision caused significant confusion and compliance headaches for nonprofits, which were suddenly required to treat parking and transit benefits as unrelated business taxable income (UBTI). Fortunately, your nonprofit remains exempt from this requirement, sparing you the burden of reporting these benefits on Form 990-T.
Simplified 1099 Reporting
Another win in the fight against administrative burdens: Beginning with payments made in 2026, the threshold for 1099 reporting to independent contractors, freelancers, and miscellaneous income like rent or prizes increases from $600 to $2,000. For many nonprofits, this means decreasing the number of W-9s you need to collect, 1099s you need to prepare, and payment totals you need to verify.
The OBBB represents a significant shift in the nonprofit operating environment. By understanding these changes now and taking decisive action, your organization can navigate the transition successfully while continuing to advance its mission in the community.
Discover how Rehmann’s public sector team can help your nonprofit adapt to changing regulations, capitalize on opportunity, and maximize its impact. From compliance guidance to back-office, tax, and accounting support, our experts are here to empower your organization. Learn more or reach out here.
