When the tax and spending law known as the One Big Beautiful Bill Act (OBBBA) was enacted last summer, nonprofits quickly took note of the potential implications for charitable giving. However, the law includes several provisions that could affect nonprofits’ bottom lines in ways not directly related to donations. Here are three non-donation challenges that your organization should begin to prepare for now.
1. Expanded excise taxes on compensation
The OBBBA makes essential changes to the excise tax on excessive compensation paid by tax-exempt organizations. Under current law, Section 4960 of the Internal Revenue Code imposes a 21% excise tax on annual compensation over $1 million paid to a “covered employee,” as well as on certain “parachute payments” made when an employee leaves the organization. A parachute payment arises when termination benefits equal or exceed three times the employee’s average annual compensation for the prior five years. The tax applies to the excess over that average.
Starting in 2026, the OBBBA will expand the definition of covered employees dramatically. Any individual the nonprofit employed at any time after 2016 will now be considered a covered employee — even if they’re no longer employed or among the organization’s top earners. This broader definition will expose more executives and former employees to the 21% excise tax, increasing costs for many nonprofits. You should review your compensation and severance arrangements now to prepare for compliance.
2. Safety net cuts
The OBBBA features several provisions that will effectively pull back traditional safety net protections for the disadvantaged. For example, the law dramatically reduces the Medicaid funding that provides health care insurance for low-income Americans, including mental health and substance abuse treatment.
Among other things, the law imposes tighter eligibility requirements on recipients and caps funding paid to health care facilities. Nonprofits that are federally qualified health centers are among the first that will feel the repercussions. Cuts to rural hospitals and community health funding are also expected.
These cuts are likely to have ripple effects beyond the health care sector. For example, individuals may have less money for food, shelter and other necessities because their out-of-pocket health care costs are rising. In addition, the OBBBA slashes the Supplemental Nutrition Assistance Program over the next decade. This, too, could lead to a significant uptick in financial insecurity.
Such safety net tightening is likely to lead to rising demand for social services. Social service nonprofits, meanwhile, will probably face their own hefty federal funding cuts. If your organization operates in this arena, you must develop strategies to fill the funding gaps. Consider revising your fundraising materials to educate potential donors about the OBBBA’s consequences for those in need and the vital role your organization plays in helping them.
3. Accelerated expiration of clean energy tax incentives
Nonprofits in the climate change and sustainability space, or those that have planned to take advantage of direct-pay clean energy tax credits under the Inflation Reduction Act, should note the OBBBA’s rollback of many clean energy tax incentives. The law’s targets include credits related to wind and solar projects, and deductions for energy-efficient commercial buildings.
The OBBBA primarily accomplishes its rollback by modifying eligibility criteria and moving up deadlines. Affected nonprofits need to promptly investigate changes made to the specific provisions under which they hope to benefit. You may need to expedite plans to leverage clean energy credits before they expire or your organization becomes ineligible to use them.
Act now
The OBBBA is sweeping legislation, and many nonprofits will need to make significant adjustments to stay afloat and continue serving their constituencies. Contact Hood & Strong's nonprofit experts to help you navigate the new waters.
