Nonprofit organizations are at the heart of community transformation, but recent legislative changes are stirring uncertainty across the sector. With the passage of the One Big Beautiful Bill (OBBB), nonprofits find themselves navigating a maze of funding cuts, tax law amendments, and enhanced compliance requirements. The question now: How should nonprofits adapt to ensure their missions remain sustainable and impactful?
This article will unpack the key changes introduced by the OBBB, analyze their implications for nonprofits, and provide actionable strategies to mitigate challenges while maximizing opportunities.
The Challenges Posed by OBBB
The OBBB introduces significant hurdles for nonprofits, including:
Medicaid Funding Cuts
The bill reduces Medicaid funding by a staggering $900 billion over the next decade. These cuts will impact programs supported by nonprofit healthcare providers, particularly those in underserved communities. Specific provisions like Section 71106 (reducing erroneous Medicaid payments) and Section 71119 (mandatory Medicaid community engagement requirements) aim to reduce costs but may inadvertently limit access to essential services.
Changes to Tax Laws and Charitable Giving Incentives
The OBBB revises tax deductions for charitable contributions. For example:
- A 0.5% floor on deductions for individual contributions is introduced, which might reduce small donor engagement.
- Corporations face a 1% baseline donation requirement to qualify for deductions, potentially cutting back on corporate philanthropy.
Additionally, stricter reporting requirements for donor-advised funds (DAFs) could slow disbursements to beneficiary nonprofits, limiting cash flow.
Grant Availability Reductions
The OBBB reallocates federal funding toward sectors like border security and public infrastructure, resulting in reduced grant allocations for education and prevention programs. For instance, the funding for National Education and Obesity Prevention Programs (Section 10107) will now expire by 2025, leaving many nonprofits scrambling for alternative revenue sources.
Stricter Compliance Requirements
The IRS ramps up its scrutiny with expanded reporting mandates under the OBBB, especially targeting private foundations and donor-advised funds. Nonprofits risk penalties if they fail to meet these compliance criteria or properly document their financial and operational activities.
Silver Linings in the Legislation
Despite these disruptions, the OBBB also introduces measures that nonprofits can leverage to their advantage:
Universal Charitable Deduction
The OBBB introduces a $1,000 deduction for non-itemizers ($2,000 for joint filers). While this targets small donors, it may still encourage new giving from individuals who were previously untapped resources.
Expanded Opportunities for Prevention Programs
Federal agencies like the CDC, SAMHSA, and HRSA continue to offer competitive grants in public health, mental health, and substance-use prevention. Savvy nonprofits could pivot focus to align with these grant opportunities.
Renewed Focus on Efficiency
The financial pressures of the OBBB may force nonprofits to operate in a leaner fashion, spurring innovation in cost management and operational efficiency.
Adapting to the New Reality
To remain resilient under OBBB’s provisions, nonprofits must adopt proactive strategies:
Navigate Medicaid Cuts
- Reassess Program Funding: Identify at-risk services and evaluate alternative funding models to sustain essential programs.
- Leverage Public-Private Partnerships: Collaborate with private entities to share the financial burden and ensure continuity in care.
- Maximize Grant Flexibility: States can optimize existing block grants under the Public Health and Human Services framework for preventive care.
Revise Fundraising Strategies
- Bespoke Donor Engagement: Focus efforts on high-impact relationships with donors who can offset the decline in corporate and institutional giving.
- Highlight Tax Incentives: Educate donors about the newly introduced universal deduction to encourage small-dollar contributions.
- Diversify Revenue Streams: Explore crowdfunding platforms and earned income strategies to reduce dependency on traditional grants.
Enhance Compliance Readiness
- Invest in Internal Auditing: Regular audits ensure your organization meets IRS standards for reporting and regulatory compliance.
- Update Policies and Training: Train staff on the OBBB’s new compliance requirements, focusing on donor-advised fund rules and endowment management.
Operate Smarter and Leaner
- Audit Operational Efficiency: Lean operational reviews can uncover cost-saving opportunities, allowing your team to do more with less.
- Automate Administrative Tasks: Use technology to streamline donor tracking, volunteer management, and reporting.
Take Action Today
The One Big Beautiful Bill presents a crossroads for nonprofits. While the challenges are significant, so are the opportunities for those prepared to adapt.
At Rehmann, we understand the unique challenges nonprofits face in an evolving legislative landscape like the one shaped by the OBBB. With over 80 years of professional services experience, our team is well-equipped to help nonprofits anticipate and adapt to these changes.
Don’t wait to take action. Contact Rehmann today for expert guidance tailored to your organization.
