A Look at Proposals in the Original Budget Reconciliation Bill That Target Nonprofits

Editor's Note: This article has been updated to reflect ongoing changes to the bill. 

A bill that targets nonprofits’ tax-exempt status and increases taxes against these organizations cleared a key House committee vote last night. It is expected to move to the House floor for a vote by the end of the week.

House Republicans hope to pass the tax reconciliation package by Memorial Day since Congress wants to pass the full package by July 4 to address the debt limit and avoid a default. House Republicans have noted they have been working with senators in hopes that the Senate doesn’t modify the bill to stay on track, according to recent reporting from ABC News.

“We've got to get this done and get it to the president's desk by that big celebration on Independence Day,” House Speaker Mike Johnson, a Republican representative from Louisiana, told the outlet. “And I'm convinced that we can.”

While some of the bill’s proposed changes — like reductions to Medicare and the Supplemental Nutrition Assistance Program; increases to taxes for private college and university endowments; and others — could affect nonprofits in select missions, here are select areas of the proposed budget that could directly impact nonprofits across missions. In most cases, these measures also directly target charitable organizations.

Incentivize Charitable Contributions

The budget reconciliation bill aims to make temporary tax cuts permanent while including the long-sought-after tax deduction for charitable gifts from taxpayers who do not itemize their deductions.

The Tax Cuts and Jobs Act of 2017 temporarily lowered taxes and almost doubled the standard deduction for taxpayers who don’t itemize, but expires at the end of 2025. The nonprofit sector has cited that law, which reduced the number of taxpayers who itemize their deductions, as a major contributor to the downward trend in charitable giving among donors. In fact, research found the Tax Cuts and Jobs Act of 2017 reduced giving by $20 billion.

The Ways and Means committee has proposed making tax cuts and the larger standard deduction permanent beginning for the 2026 tax year. Additionally, slightly larger standard deductions are proposed for tax years 2025 through 2028.

To allow taxpayers who take the standard deduction to also get a tax break for charitable gifts, the proposal includes a measure that has been called the “Charitable Act” in past bills. However, the version included here has smaller levels than previously proposed. Single filers could claim $150 in charitable donations while those filing jointly could double their claims in years 2025 through 2028. Donations made through donor-advised funds would not be eligible since the donor receives their tax break at the time they add the money to their fund.

Both measures will cost the federal government about $3.5 trillion combined over the next decade, according to the Joint Committee on Taxation.

Disincentivize Giving From Wealthy Individuals

When another Tax Cuts and Jobs Act of 2017 provision expires at the end of this tax year, the provision known as the “Pease limitation” will resume. The 1990s tax policy limits itemized deductions for those in the highest tax brackets. Though it sounds like bad news for charitable giving, the Center on Budget and Policy Priorities found it doesn’t reduce the incentive to donate to charity.

The proposed change would permanently replace the Pease limitation starting in 2026, capping each itemized dollar at $0.35.

The National Council of Nonprofits noted this policy would “disincentivize charitable giving” for high-income taxpayers. After all, major and supersize donors are responsible for nearly 78% of total dollars giving to charity, according to Fundraising Effectiveness Project.

This measure would save about $41 billion over the next decade, according to the Joint Committee on Taxation.

Creation of a Corporation Tax Floor

Corporations currently receive a tax break for charitable contributions up to 10% of their taxable income, but the proposal would also add a minimum contribution of 1% to receive that break. It would also allow corporations to carry over contributions over 10% for up to five years.

Corporations contributed more than $36 billion to charity in 2023; the latest year figures are available from Giving USA. It accounts for approximately 3% of total giving.

Like the proposed tax on wealthy individuals, the National Council of Nonprofits claims this policy change would disincentivize giving for corporations that do not currently meet that 1% floor.

This change is estimated to save the government nearly $17 billion over the next decade, according to the Joint Committee on Taxation.

Expansion of Private Foundation Net Investment Tax Rates

Private foundations that are exempt from taxation pay an excise tax of 1.39% of their net investment income, but this proposal would move to tax foundations up to 10%.

While those with less than $50 million in assets would maintain the current tax rate, foundations exceeding that figure would have a tax rate of at least 2.78%, with foundations possessing assets of $250 million or more being taxed at 5% and those having assets of $500 million or more having a 10% rate.

Foundations are often vessels for wealthy individuals and corporations to distribute charitable funds. In 2023, foundations gave more than $103 billion to nonprofits, according to Giving USA. That figure comprises 19% of total giving.

Nonprofit sector organizations that oppose this measure view this as Congress paying for the tax cuts by taxing foundations. With many federal government grants in limbo and litigation, nonprofits are looking to other revenue streams to fill the gap. Private foundations have been stepping up to fill the gap, but, if passed, this effort would move money away from the nonprofit sector and its various causes.

“Allowing the IRS to snatch charitable dollars out of communities and the hands of Americans in need, and instead funnel those dollars to the U.S. Treasury to pay for Uncle Sam’s out-of-control spending habit is not something that advocates of limited government and individual freedom should get behind,” Christie Herrera, president and CEO of Philanthropy Roundtable, said in a statement.

This proposal would save the government almost $16 billion over the next decade, according to the Joint Committee on Taxation.

Taxation of Transportation and Parking Fringe Benefit for Nonprofits

At the moment, the costs of qualified transportation and parking fringe benefits are exempt from unrelated business taxable income. The proposed revision would increase the unrelated business taxable income for nonprofits by the cost for these benefits. Any “church-affiliated organization” is exempt.

Employee benefits like these help organizations recruit and retain staff, an important tool when the for-profit sector notoriously pays more.

This change would save the government almost $3 billion over the next decade, according to the Joint Committee on Taxation.

Addition of Nonprofits for Tax on Brand Royalties

Currently, nonprofits are exempt from paying unrelated business taxable income on name and logo sales and licensing deals. The original provision in the bill aimed to tax figures from these deals, which would have mainly affected nonprofits' sponsorship and partnership agreements that contain brand usage, CBIZ, a financial advisory firm, shared in a post.

CBIZ also noted that this was proposed in the 2017 budget reconciliation process but did not make the final version. It met a similar fate Sunday night when it was removed from the latest version of the bill.

Expansion of Excise Tax on Highly Compensated Nonprofit Employees

Currently, the law imposes an excise tax on select highly compensated employees paid more than $1 million annually at applicable tax-exempt organizations, but the proposal would expand that to any employee that fits that description.

This tax would raise nearly $4 billion over the next decade, according to the Joint Committee on Taxation.

Revocation of Tax-Exempt Status

Though there are ways nonprofits can lose their tax-exempt status, each includes wrongdoing, yet provides the nonprofit due process protections.

This proposal — cited in the original bill but removed Sunday night — would have granted the secretary of the Treasury Department sole authority to suspend an organization’s tax-exempt status if it is deemed the organization provided support or resources to a terrorist organization — as designated by the secretary — within the past three years.

Support and materials approved by the secretary of state and attorney general, as well as humanitarian aid approved by the Office of Foreign Assets Control, would have been exempt.

Instead of sending a letter notifying the nonprofit of an investigation into wrongdoing, the nonprofit would have received a letter noting the alleged offense if national security allows, and provided the nonprofit 90 days to resolve it or lose their tax-exempt status. The revocations could have begun as early as 2026, as originally proposed

“The bill hands unchecked power to [Treasury] Secretary [Scott] Bessent to punish organizations that do not fall in line with the administration’s ideology, by labeling them as terrorist-supporting groups without due process, without a third-party investigation and without public evidence — all while concealing details under the pretext of national security,” Diane Yentel, president and CEO of the National Council of Nonprofits, said in a statement after the original bill was unveiled.

This move would have had a negligible impact on the budget over the next decade, according to the Joint Committee on Taxation.

The House introduced a bill that threatened nonprofit’s tax-exempt status last year. It eventually passed the House, although the Senate never took action on it. Supporting terrorist organizations is already illegal, and opponents of the move cite its potential to become a partisan tool aimed at limiting nonprofit sector speech and activity.

Requiring nonprofits to prove their innocence runs counter to constitutional due process, the Independent Sector and Council on Foundations said in a joint statement after the original bill was unveiled.

“We appreciate that the authors include an appeals process, but this opportunity would be too little, too late for designated organizations,” the organizations said. “Those that appeal successfully would still face irreparable damage to their reputation with the people they serve, their donors and the American public.”

The Good Versus the Bad for the Sector

Though nonprofits have been advocating for the inclusion of this tax policy, the deductions are much lower than previously proposed. A past iteration of the bill sought to allow taxpayers to claim up to a third of their standard deduction, or up to $4,500 for individuals and $9,000 for married couples filing jointly.

This proposal even falls below the temporary policy during the pandemic where individuals could claim up to $300 and couples could claim up to $600 on top of their standard deduction. The IRS found that policy resulted in $10.9 billion in charitable donations, with about 29% of taxpayers — or 42 million people — utilizing that deduction.

But with small-dollar donor rates continuing to fall, this could be the incentive the sector needs to turn around this trend. Last year, donors who gave less than $100 fell 9% year over year, and overall donor decline fell for the fourth straight year, according to the Fundraising Effectiveness Project.

Despite its inclusion, many nonprofit advocates felt the negatives of the overall proposal outweighed the inclusion of the desired tax deduction when it was announced on May 12.

“We are sounding the alarm: Several provisions in this package would dismantle critical support structures for our communities,” Deborah Aubert Thomas, president and CEO of United Philanthropy Forum, said in a statement. “This isn't merely about policy; it's about safeguarding the future of how our interconnected philanthropic sector can address societal needs, spark innovation and buttress the vibrant fabric of our civil society.”

As of press time, the brand licensing and tax-exempt status revocation sections are no longer in the bill, but Yentel noted nonprofits must stay alert to ensure these proposals don't return in future iterations of the bill.

"The removal of the harmful provision giving the Trump administration sweeping authority to strip certain nonprofits of tax-exempt status is a significant victory for nonprofit advocates, though we must remain vigilant to ensure the language doesn’t get added back into the bill on its way to enactment," she said in a statement.

This permits cautious celebrations for nonprofits as they address the remaining challenges ahead.

"Dropping the provision granting unprecedented authority to the executive branch to revoke nonprofit status from organizations without due process represents a significant step forward in the current draft of the House bill," Shannon McCracken, president and CEO at The Nonprofit Alliance," told NonProfit PRO via email. "However, many troubling provisions remain in the legislation, including various tax policy changes that will discourage charitable giving by both individuals and corporations. Collectively, these tax policy modifications will impose nearly $50 billion in new and increased taxes on the charitable and philanthropic sector to fund other tax cuts."