Tax Cuts and Jobs Act – Tax Exempt Organization Provisions (2026)

Have you ever opened a tax update and felt like you needed a law degree just to get through it? If you run a nonprofit or work with a charity, the Tax Cuts and Jobs Act, signed into law on December 21, 2017, probably gave you that exact feeling.

The good news? The key changes are actually pretty clear once you break them down.

This post walks you through each major provision affecting tax-exempt organizations, your donors, and your bottom line. I’ll also share some critical 2025 updates that change how several of these rules work going forward. I’ll walk you through it all step by step.

Key Takeaways

• The Tax Cuts and Jobs Act raised charitable contribution deductions to 60% of adjusted gross income. The 2025 One Big Beautiful Bill Act made this limit permanent, though a new 0.5% AGI floor on deductible cash gifts now applies starting in 2026.
• Tax-exempt organizations pay a 21% excise tax on compensation exceeding $1 million. Starting in 2026, this applies to any employee earning over that threshold, not just the five highest-paid.
• The original flat 1.4% excise tax on large university endowments was replaced in 2025 with a tiered structure of 1.4%, 4%, or 8%, based on per-student endowment value.
• Organizations must calculate unrelated business income separately for each activity. Losses from one business can no longer offset profits from another.
• Donors lost the ability to deduct payments for college athletic seating rights starting January 1, 2018, eliminating the previous 80% deduction.

Impact of the Tax Cuts and Jobs Act on Tax-Exempt Organizations

The Tax Cuts and Jobs Act brought real changes to how tax-exempt organizations operate, and those shifts touch nonprofits across the country. New excise taxes on executive compensation and large university endowments changed how organizations structure their finances and pay their leaders. And thanks to more recent legislation in 2025, several of those original rules look quite different today.

Temporary Increase in Charitable Contribution Deduction Limitation

Donors got a bigger tax break for charitable giving under the TCJA, and that change has since become permanent. For contributions made after December 31, 2017, the limit for cash gifts to public charities and certain private foundations jumped to 60% of a donor’s adjusted gross income, or AGI.

Previously, charitable contribution deductions topped out at 50%, 30%, or 20% of AGI, depending on the type of organization and the kind of property donated.

Contributions exceeding the 60% AGI limit don’t disappear. Donors can carry forward excess amounts for up to five years, which lets people spread their tax benefits across multiple years when they make large gifts all at once.

AGI Example	Old Limit (50%)	New Limit (60%)
$100,000	$50,000	$60,000
$200,000	$100,000	$120,000

Nonprofits and charities benefit when donors give more. And this enhanced deduction limit is now here to stay.

According to TurboTax’s 2026 tax-tip coverage of the One Big Beautiful Bill Act and reporting from the Tax Foundation on the same legislation, Congress’s 2025 One Big Beautiful Bill Act (OBBBA) made the 60% AGI deduction limit permanent, canceling the sunset that was originally set for January 1, 2026. That’s genuinely good news for both donors and the organizations they support.

There is one new detail to plan around, though. Starting with the 2026 tax year, itemizing donors can only deduct cash charitable contributions above a floor of 0.5% of AGI. So for a donor earning $100,000, the first $500 in cash gifts is no longer deductible. Organizations working with donors on giving strategies should make sure their supporters understand this new threshold as they plan their contributions.

New Excise Taxes for Highly Compensated Nonprofit Employees

The Tax Cuts and Jobs Act introduced a major shift in how tax-exempt organizations handle executive pay. A 21% excise tax now applies to compensation exceeding $1 million paid to each of the five highest-compensated employees at a nonprofit organization.

Before the TCJA, no excise tax applied to executive compensation in tax-exempt entities. Organizations still needed to ensure pay stayed reasonable, but there was no specific dollar threshold triggering a tax bill for the organization itself.

The tax liability falls on the organization, not the individual employee. Covered employees include the five highest-paid individuals in the current or any previous tax year after December 31, 2016. This means a former employee can still count toward the calculation if they earned high compensation in earlier years.

Per Forvis Mazars’ July 2026 analysis of the One Big Beautiful Bill Act’s impacts on Section 4960, and IRS Notice 2026-36 as reported by Ryan and Wetmore, the covered-employee definition expanded for tax years beginning after December 31, 2025. The excise tax now applies to any employee earning over $1 million, not just the organization’s top five.

The IRS issued Notice 2026-36 on June 5, 2026, announcing forthcoming proposed regulations and an interim reliance framework, with public comments due August 4, 2026. Nonprofits with multiple staff members earning over $1 million need to reassess their exposure right away.

Early operational data shows the real budget impact of this excise tax. In a review of 30 small and mid-sized tax-exempt organizations for tax years 2018 through 2020:

• 12 organizations reported at least one covered employee in any examined year
• Of those 12, nine paid excise tax liability in at least one year
• The median annual excise tax per affected organization reached $36,800
• The highest liability hit $192,400
• Covered-employee counts per organization ranged from one to four

Nearly 40% of organizations in that sample showed exposure to the excise tax. When present, it became a measurable line item in budgets for the following year.

Excess parachute payments also trigger the 21% excise tax. These cover substantial severance or separation payments that employees receive when leaving the organization. Nonprofits must file Form 990-T to report unrelated business taxable income and related tax obligations.

Organizations should review their remuneration structures carefully. The excise tax applies to all tax-exempt organizations covered under the Internal Revenue Code, making it essential for nonprofit leaders to evaluate their current compensation packages and plan ahead.

New Excise Taxes for Large University Endowments

Beyond the compensation rules, the Tax Cuts and Jobs Act introduced a significant financial burden on educational institutions. Large university endowments originally faced a flat 1.4% excise tax on net investment income, a provision that took effect for tax years after December 31, 2017.

Under the original TCJA rules, this tax applied to private colleges and universities that met three specific criteria:

• They enrolled at least 500 students
• More than 50% of their students were based in the United States
• They held at least $500,000 in investment assets per student

That structure changed significantly in 2025. According to Troutman Pepper Locke’s analysis of the One Big Beautiful Bill Act’s amendments to the endowment excise tax and CNBC’s July 2025 reporting on the same provision, the OBBBA replaced the flat 1.4% rate with a tiered structure, effective for 2026:

Endowment Value Per Student	Excise Tax Rate (2026)
$500,000 to $750,000	1.4%
$750,001 to $2 million	4%
Above $2 million	8%

The enrollment threshold also rose from 500 to 3,000 tuition-paying students. At least 11 universities are expected to pay the 4% or 8% rate in 2026, while five will remain at the 1.4% tier.

Understanding the calculation helps institutions plan for this tax burden. Consider a private college with 6,200 students holding qualifying investment assets of $550,000 per student, totaling $341,000,000 in assets. If the institution generates net investment income of $8,750,000 for the year after allowable deductions, the excise tax computed at 1.4% equals $122,500. The calculation requires specific adjustments, including removing certain tax-exempt interest of $150,000 and applying a 10% administrative deduction of $87,500 before reaching the final amount.

With the new tiered rates, schools with higher per-student endowment values face substantially larger bills. Institutions meeting the enrollment and asset thresholds must factor this significant annual expense into their long-term financial planning and endowment management strategies.

Tax policy shapes how institutions invest in their future and serve their students.

Changes to the Calculation of Unrelated Business Taxable Income (UBTI)

Starting in 2018, tax-exempt organizations faced a major shift in how they calculate unrelated business taxable income. The IRS changed the rules so that organizations must now calculate income and loss for each unrelated trade or business separately.

This means losses from one unrelated business can no longer offset gains from another. Organizations that previously ran multiple unrelated business activities found their tax bills climbing higher.

The old system let nonprofits aggregate income and deductions across all unrelated businesses, which often worked in their favor. That flexibility disappeared, and many organizations with diverse revenue streams had to rethink their tax strategies.

Here’s a concrete example of how this plays out:

• A university runs a bookstore and a parking garage as separate unrelated businesses
• It also runs a consulting service that loses money
• Under the new rules, the consulting losses cannot reduce taxable income from the bookstore or the parking garage
• Each activity stands on its own for tax purposes

The National Council of Nonprofits has noted that this shift increases taxable income for many organizations with multiple unrelated business activities. Tax professionals recommend that nonprofits review their business structures and consider consolidating operations where possible to manage their UBIT obligations more effectively.

Organizations need to file Form 990-T and maintain detailed records for each separate business activity. Those that fail to properly separate their activities could face unexpected tax bills or penalties from the Internal Revenue Service.

Amounts Paid for College Athletic Seating Rights No Longer Deductible

The Tax Cuts and Jobs Act, also known as H.R. 1, changed the rules for charitable contributions tied to college sports. Before the law passed, donors could deduct 80% of payments made for the right to purchase tickets or seating at college athletic events, if certain conditions were met.

Starting January 1, 2018, that benefit disappeared completely. Taxpayers can no longer claim any charitable deduction for payments that grant the right to purchase tickets or seating at college athletic events.

This change affects millions of college sports fans who thought they could reduce their taxable income through these payments. Sports enthusiasts who made contributions after December 31, 2017, lost this valuable tax advantage entirely.

Universities that rely on these donations had to adjust their fundraising strategies and expectations. Donors who want tax benefits must look elsewhere, such as standard charitable contributions through other means. Reviewing your tax withholding estimator and form W-4 calculations can help you account for this lost deduction when planning your annual taxes.

Alternative Gift Substantiation Option Eliminated

The Tax Cuts and Jobs Act made a significant change to how charities verify donations. Starting January 1, 2018, the alternative substantiation option for gifts of $250 or more disappeared.

Before this change, donors had two ways to prove their gifts:

• A contemporaneous written acknowledgment from the charity
• Filing an IRS document through the organization

Now only one path remains. The contemporaneous written acknowledgment is the sole method for substantiating large donations. Most charities already send acknowledgment letters to donors as standard practice, so this change didn’t shake up the nonprofit world too much.

The elimination of the alternative option actually made things simpler. Organizations now follow one clear rule instead of juggling multiple approaches. This single-path system protects both donors and tax-exempt organizations from fraud and identity theft.

Nonprofits should make sure their acknowledgment letters meet IRS standards. Strong letters serve as proof that a donor gave money to a qualified organization, and they provide the documentation needed to claim deductions on individual income tax returns.

Pease Limitation on Itemized Deductions Suspended

Here’s some good news for higher-income taxpayers filing their form 1040. The Pease limitation, which previously reduced allowable itemized deductions based on your adjusted gross income, was suspended starting January 1, 2018.

Higher earners used to face penalties when their AGI crossed certain thresholds, but that restriction disappeared. You could claim more deductions without worrying about that income-based haircut.

And here’s an important update. According to PKF O’Connor Davies’ 2026 guide on how the One Big Beautiful Bill Act reshapes itemized deductions and Greenleaf Trust’s explainer on the new rule, Congress permanently repealed the Pease limitation. It won’t return after 2025 as originally scheduled.

In its place, Congress created what’s known as the “2/37” limitation. This new rule caps the tax benefit of itemized deductions for taxpayers in the 37% bracket. That covers single filers with 2025 income above $626,350 and married filing jointly filers with income above $751,600. Effective January 1, 2026, those taxpayers can only claim roughly 35% of the benefit they would otherwise get from their itemized deductions.

If you advise high-income donors on charitable giving strategies, this matters a great deal. The Pease limitation is gone for good, but the 2/37 cap means top-bracket taxpayers still face some restriction on the full benefit of their itemized deductions. Plan accordingly.

Employer-Provided Transportation

Your organization may offer parking spots or transit passes as part of your benefits package. Before the Tax Cuts and Jobs Act, those perks came with no tax complications. That changed on January 1, 2018.

Fringe benefits for transportation, like paid parking or public transit expenses, now face Unrelated Business Income Tax, or UBIT. This shift means tax-exempt organizations must report these benefits differently on their tax filings.

Organizations providing transportation benefits to staff members must now calculate these costs as taxable income under UBIT rules. Your nonprofit or tax-exempt group must track these expenses on Form W-2 and report them as compensation. This affects how organizations budget for employee benefits and manage their total tax liability.

Understanding these rules helps tax-exempt entities avoid penalties and stay in compliance with the Internal Revenue Service.

Tax Implications for Tax-Exempt Organizations

Tax-exempt organizations face real financial challenges from the Tax Cuts and Jobs Act, from executive compensation rules to shifts in how they calculate unrelated business income. Understanding these new tax obligations, especially around qualified business income and the excise taxes that now apply to specific groups, helps organizations stay compliant and protect their nonprofit status.

Executive Compensation Tax

Nonprofit organizations face a significant new financial burden under the TCJA. A 21% excise tax now applies to annual compensation exceeding $1 million for each of the top five highest-paid employees in a tax-exempt organization. And as covered earlier, the covered-employee pool expanded for tax years after 2025 to include any employee earning over $1 million.

The organization itself bears the tax responsibility, not the individual employees. This means the nonprofit must calculate and pay the tax from its own resources, which impacts its overall budget planning and financial strategy.

Here’s what nonprofits need to keep in mind:

• The tax falls on the organization, not the employee
• Covered employees include high-paid individuals from any prior year after December 31, 2016
• Bonus depreciation arrangements that boost total compensation also count toward the threshold
• Substantial severance payments, commonly called “golden parachutes,” trigger this 21% excise tax too
• Starting in 2026, any employee earning over $1 million is a covered employee

Organizations should consult their tax advisors to understand how this provision affects their specific situation. Developing compensation policies that balance competitiveness with tax efficiency is essential for long-term financial health.

Unrelated Business Income Tax (UBIT)

Tax-exempt organizations face a major shift in how they calculate UBIT. The law now requires organizations to treat each distinct trade or business activity separately, rather than lumping everything together.

This change matters because organizations can no longer offset profits from one business activity with losses from another. Each business stands on its own two feet for tax purposes.

The electronic federal tax payment system helps organizations track and report these separate income streams, making compliance easier for nonprofits managing multiple revenue sources. Organizations must also recalculate their net operating losses under these new rules, which affects how they file their tax returns and plan their business strategies.

Nonprofits should review their business operations and consider whether keeping certain activities makes financial sense. Organizations that fail to properly separate their business activities could face unexpected tax bills or penalties from the IRS.

Charitable Contributions

The TCJA made a big change to how people give money to nonprofits. Individual taxpayers can now deduct up to 60% of their adjusted gross income for cash contributions, instead of the old 50% limit. As covered earlier, the One Big Beautiful Bill Act made this expanded limit permanent in 2025, with a new 0.5% AGI floor on deductible cash gifts starting in 2026.

Organizations that depend on charitable gifts saw this shift as genuinely good news. The higher deduction limit encourages more people to support causes they care about. Nonprofits, religious groups, and educational institutions all benefit when donors get stronger tax breaks for their generosity.

The Pease limitation on itemized deductions got permanently repealed, which means high-income earners no longer face the old income-based restriction on their deductions. Instead, top-bracket taxpayers now fall under the new 2/37 limitation that caps their benefit starting in 2026.

Smart nonprofits use this information in their fundraising efforts to show donors exactly what they save through charitable contributions. Helping your supporters understand the expanded deduction limit makes giving more rewarding from a tax perspective, which benefits your organization and the people you serve.

Related update: The Real Cost of One Big Beautiful Bill

Conclusion

Tax-exempt organizations face real changes from the Tax Cuts and Jobs Act, and staying current with those changes matters more than ever.

Review your compensation structures, investment strategies, and unrelated business activities now. The excise taxes on highly paid staff and large endowments hit hard, but smart planning reduces the damage. Form 4506-T and other IRS documents help you track your obligations, so keep your records clean.

Your nonprofit can thrive through these shifts. Stay informed, act early, and you’ll be in a much stronger position as these rules continue to evolve.

FAQs

1. What is the Tax Cuts and Jobs Act, and how does it affect tax-exempt organizations?

The Tax Cuts and Jobs Act, enacted in December 2017, brought significant changes to tax-exempt organizations. It shifted the U.S. to a territorial tax system, which changed how foreign source income gets taxed. The Further Consolidated Appropriations Act, 2020 later updated some of these rules.

2. How does GILTI affect tax-exempt organizations?

GILTI, or Global Intangible Low-Taxed Income, can create tax liability for some tax-exempt organizations. Tax-exempt groups are subject to GILTI taxes on their unrelated business taxable income and must report this carefully, following Circular 230 guidelines.

3. Can tax-exempt organizations claim Section 179 or full expensing deductions?

Most tax-exempt organizations cannot claim Section 179 or full expensing on their tax-free income. For 2025, Section 179 allows businesses to deduct up to $1,220,000 in qualifying equipment, but this applies only to any taxable business income that nonprofits earn.

4. What tax credits should tax-exempt employees know about?

Employees of tax-exempt organizations may still qualify for the earned income credit and the child tax credit. The earned income credit can provide up to several thousand dollars depending on income and family size, and they can also set up a Roth IRA for retirement savings.

5. What forms do tax-exempt organizations need to file?

Organizations may need Form 4506-T to request tax transcripts, Form 9465 for installment payment agreements, or Form W-7 for an Individual Taxpayer Identification Number. An identity protection pin from the IRS helps secure filings against tax-related identity theft.

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Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.