The Basics
- Excise Tax Expansion: The 21% excise tax on compensation over $1 million now applies to any employee, not just the top five, and university endowment taxes have shifted to a tiered structure.
- Charitable Giving Shifts: New floors apply to itemized and corporate deductions, while a new deduction for non-itemizers opens opportunities to engage a broader donor base.
- Operational Changes: The 1099 reporting threshold increases to $2,000, and deadlines for clean energy incentives are approaching rapidly in July 2026.
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Navigating Taxation and Operational Transitions in the Public Sector
The rules of nonprofit compliance are shifting. With the release of the IRS Priority Guidance Plan for 2025–2026 and the provisions within the One Big Beautiful Bill (OBBB), organizations face a complex mix of new burdens and distinct opportunities.
The IRS has outlined 105 specific guidance projects, signaling where it intends to focus its resources. For nonprofit leaders, understanding these changes is not merely about avoiding penalties; it is about strategically positioning your organization for sustainability and growth.
From expanded excise taxes to significant alterations in charitable giving rules, the following updates require immediate attention from executive directors and board members.
How do compensation and endowment taxes change in 2026?
The OB3 introduces rigorous changes to how compensation and endowments are taxed, particularly for larger institutions.
Expansion of Excise Tax on Compensation
Beginning with tax years after Dec. 31, 2025, the 21% excise tax on compensation in excess of $1 million will expand significantly. Previously, this applied only to an organization’s five highest-paid employees. Under the updated rules, the tax applies to any employee exceeding the threshold.
Organizations must note that the entity, not the individual, pays this tax. Compensation must be aggregated across related organizations, making coordination essential for groups with multiple entities. While this primarily affects large hospital systems and universities, all organizations should review their compensation structures as they evolve. Note that compensation paid to medical doctors and veterinarians is excluded unless it relates to administrative services.
University Endowment Excise Tax
Starting in 2026, private colleges and universities with at least 3,000 tuition-paying students and endowment assets exceeding $500,000 per student will face a tiered excise tax on investment income.
The definition of investment income has expanded to include student loan interest and federally subsidized royalty income. The tax rate is no longer a flat 1.4%; it is now tiered based on the endowment value per full-time student. This structure aims to align the tax burden more closely with the size of the institution’s endowment relative to its student body.
What are the new charitable giving rules?
The most pragmatic impact for the majority of nonprofits lies in the changes to charitable contribution rules. These provisions alter how donors should plan their giving, offering you a prime opportunity to educate your supporters.
Corporate and Itemizing Donors
Starting in 2026, corporate donors face a new 1% floor for charitable contributions. Only the portion of giving that exceeds 1% of taxable income is deductible. Similarly, individuals who itemize will find that only contributions above 0.5% of their adjusted gross income are deductible.
The Strategy: Educate your donors on “bunching.” Corporations and high-net-worth individuals may need to consolidate several years of giving into a single year to eclipse these new floors and maximize their tax benefits. Donor-Advised Funds (DAFs) remain a useful tool here, allowing for a large immediate deduction while distributing grants to charities over time.
The Non-Itemizer Opportunity
A significant win for nonprofits in OBBBB is the return and expansion of the deduction for non-itemizers. Single filers can claim an above-the-line deduction of up to $1,000, and joint filers up to $2,000, for cash gifts to public charities.
This opens the door to a historically untapped group of donors. Targeted campaigns should highlight that even those taking the standard deduction can now realize a tax benefit from their generosity.
State Scholarship Granting Organizations (SGOs)
For tax years starting in 2027, guidance is expected regarding a non-refundable federal income tax credit for cash contributions to Scholarship Granting Organizations (SGOs), i.e., nonprofits that provide scholarships for elementary and secondary education expenses. The maximum credit is $1,700 per individual ($3,400 for joint filers). Since credits are more valuable than deductions, this serves as a powerful fundraising lever for eligible organizations.
Which operational updates affect nonprofits in 2026?
Beyond fundraising and executive pay, OBBB impacts daily operations and compliance burdens.
- Overtime Compensation Deduction: A new deduction is available for FLSA-mandated overtime pay, but it applies strictly to the “premium” portion (the “half” in time and a half) for hours worked over 40. It does not apply to the base pay.
- Clean Energy Incentives: The window is closing. To qualify for the Clean Electricity Investment and Production Credits, projects must begin construction before July 5, 2026, and be in service by Dec. 31, 2027. If your nonprofit relies on these incentives for wind or solar projects, you must act now.
- Reduced 1099 Reporting: In a victory for administrative efficiency, the threshold for 1099 reporting (independent contractors, rent, prizes) increases from $600 to $2,000 starting with payments made in 2026. This will significantly reduce the volume of paperwork for finance teams.
- Parking Tax Repeal: The proposal to treat parking benefits as Unrelated Business Taxable Income (UBTI) was removed from the final bill. This is a major relief for the sector.
How can nonprofits use Form 990 strategically?
With increased IRS enforcement, the Form 990 serves as more than a compliance requirement; it is a barometer of governance and a primary source of information for watchdogs and grantors.
Program Service Accomplishments (Part III)
This section tells your organization’s story. Avoid broad statements about serving the community. Instead, provide concrete data: who you served, what you delivered, and measurable outcomes. Specificity builds credibility with donors and funders.
Governance (Part VI)
The IRS uses this section to assess risk. Ensure you have core policies in place, including conflict of interest, whistleblower protection, and document retention. Even simple templates signal good governance.
Public Support Test (Schedule A)
For 501(c)(3) organizations, Schedule A demonstrates broad public support. Reliance on a small number of major donors can threaten your public charity status, potentially reclassifying you as a private foundation. Review this schedule carefully for errors.
Take Action Today
These regulatory changes present a mix of challenges and strategic advantages. Whether it is updating your donor communication strategy to capture non-itemizer gifts or auditing your compensation structure to avoid new excise taxes, proactive planning is essential.
Your organization doesn’t have to navigate these complex shifts alone. Ensure your organization remains compliant and financially efficient by reviewing your specific situation with an experienced tax professional that specializes in working with nonprofits. Connect with a Rehmann advisor today.
Frequently Asked Questions
Q: Who pays the 21% excise tax on excess compensation?
A: The nonprofit organization pays the tax, not the individual employee. It applies to compensation over $1 million for any employee starting in tax years after Dec. 31, 2025.
Q: What is the new 1099 reporting threshold for 2026?
A: The reporting threshold for Form 1099 payments (including independent contractors and rent) increases from $600 to $2,000 for payments made starting in 2026.
Q: Can donors who take the standard deduction claim charitable gifts?
A: Yes. Under OB3, single filers can claim an above-the-line deduction of up to $1,000, and joint filers up to $2,000, for cash gifts to public charities.