What steps should nonprofits take to ensure compliance with the new law in OBBBA?
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To ensure compliance with the new law in the One Big Beautiful Bill Act (OBBBA, P.L. 119-21), nonprofits—especially those recognized as tax-exempt under IRC §501(c)(3)—should take the following steps, focusing on both the substantive changes to the tax law and the ongoing compliance and reporting requirements:
1. Understand and Implement New Charitable Deduction Rules
- For tax years beginning after December 31, 2025, a floor applies to charitable contribution deductions: individuals may only deduct contributions exceeding 0.5% of their adjusted gross income (AGI), and corporations may only deduct contributions exceeding 1% of taxable income. Nonprofits should update donor communications and acknowledgment letters to reflect these new limitations, as donors may have questions about the deductibility of their gifts.
- The above-the-line charitable deduction for nonitemizers is permanently reinstated and increased to $1,000 ($2,000 for joint filers) for cash contributions to public charities (excluding donor-advised funds and supporting organizations). Nonprofits should ensure their receipts and acknowledgments clearly state the type of organization and the nature of the gift to help donors substantiate their deductions.
2. Monitor and Communicate Changes to Donor Substantiation and Disclosure
- Continue to provide contemporaneous written acknowledgments for contributions of $250 or more, including the required information about the amount, date, and whether any goods or services were provided in exchange.
- For quid pro quo contributions (where donors receive something of value in return), provide written disclosures stating the fair market value of goods or services provided, as required by IRC §6115 and related regulations.
3. Update Recordkeeping and Reporting Systems
- Ensure that all contributions, grants, and other receipts are properly documented, including donor correspondence, receipts, and bank records. This is essential for substantiating the organization’s income and for supporting donors’ tax deductions.
- Maintain records of all expenditures, including those related to grants, program services, and administrative costs, to support annual reporting on Form 990 or 990-EZ.
4. File Required Annual Returns and Notices
- Continue to file the appropriate version of Form 990, 990-EZ, or 990-N (e-Postcard), based on the organization’s gross receipts and assets. Supporting organizations and donor-advised fund sponsors must file Form 990 or 990-EZ regardless of gross receipts.
- Ensure timely and accurate completion of all required schedules, such as Schedule A (public support), Schedule B (contributors), and others as applicable.
5. Review and Update Governance Policies
- Review and, if necessary, update governance policies, including conflict of interest, executive compensation, and document retention policies, to ensure compliance with IRS expectations and best practices.
- Ensure the board of directors is active, independent, and engaged in overseeing the organization’s operations and finances.
6. Monitor Activities for Compliance with Tax-Exempt Status
- Avoid private inurement and excess benefit transactions. Any transaction that provides more than incidental private benefit to insiders (officers, directors, key employees) must be avoided and, if it occurs, reported on Form 990.
- Refrain from political campaign intervention and ensure that any lobbying activities are insubstantial or within the limits set by the expenditure test (if elected).
7. Prepare for Enhanced Public Disclosure and Transparency
- Make exemption applications (Form 1023/1023-EZ), determination letters, and annual returns (Form 990 series) available for public inspection as required by law. Consider posting these documents on the organization’s website for broader accessibility.
8. Stay Informed About Additional OBBBA Provisions
- Be aware of other OBBBA changes that may affect the organization, such as modifications to unrelated business income tax (UBIT), changes to the excise tax on investment income for large endowments, and expanded reporting or penalty provisions.
9. Consult Professional Advisors
- Given the complexity and the potential for further regulatory guidance or clarifications, consult with qualified tax professionals or legal counsel to interpret new provisions, especially where statutory language may be ambiguous or subject to future IRS or Treasury regulations.
1. Monitor for Future IRS Guidance
- Watch for new IRS regulations, notices, or revenue procedures that may clarify or expand on OBBBA’s requirements, especially regarding reporting, substantiation, and the application of new deduction floors and limits.
Summary of Key Action Items:
- Update donor communications and acknowledgment practices.
- Revise internal policies and recordkeeping systems.
- Ensure timely and accurate annual filings.
- Maintain compliance with all requirements for tax-exempt status.
- Monitor for further guidance and seek professional advice as needed.
By taking these steps, nonprofits can position themselves to comply with the new requirements under OBBBA and continue to maintain their tax-exempt status and donor confidence.
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