Episode 10: OB3’s Impact on Nonprofits

In this week’s episode of Tackling Tax, we break down how OB3 affects nonprofits—focusing on endowment and executive compensation taxes.

Episode Transcript

(00:00):
On this episode, we'll look into waysOB3 affects the tax exempt space,
specifically looking at waysOB3 directly impacted nonprofits
like the revised endowmenttax on higher ed and excise
tax on excess executive compensation.
Additionally,we'll dive into its indirect impacts,
including those on philanthropy,tax credits, and more.

(00:24):
We welcome Krystal Creach,
a partner in our firmthat focuses on tax exempts in healthcare.
She's joined by a manager on her team,Graham Godfrey.
From your one stop for taxupdates and analysis, I'm Iris.
And I'm Devin.
It's Tuesday, September 16th
and this is Tackling Tax.

(00:47):
Before we get startedwith our much anticipated guest,
we always start our show
with four stories that we thinkmight be most impactful to you.
So, let's jump right in to these FastFour stories of the week.
With a 35-28 party-line vote,
the House Appropriations Committeehas approved the fiscal year 2026

(01:11):
Financial Services and General GovernmentAppropriations Act, serving
as one of the initial steps towardsadvancing the appropriations bill
in the Senate.
Included inthis is a proposal that would cut the IRS
annual budget by $2.8 billion.
The 23% reduction would result in the IRS
having its lowest annual budgetsince 2001.

(01:31):
The bill also contains measuresthat would eliminate the Direct
File programthat was launched by the IRS last year.
We're still in the earlierstages of the process.
So much of this may be subject to change.
Congress has until 9/30,that's the end of the fiscal
year, to pass the billand have it signed into law.
So, that does leave many skepticalthat the deadline

(01:53):
will be met and might resultin a shutdown of the federal government.
Another episode,
another Fast Four on the leadershipchanges at the IRS.
On September 8th, the Senate is scheduledto hold a nomination hearing
for Donald Korb, Trump'snominee to serve as IRS chief counsel.
Now having served as George W Bush’sIRS chief counsel from 2004 to 2008,

(02:13):
he should have an easier timetransitioning into the role if confirmed;
however, with the Office of Chief Counselhaving lost 353,
or 13%, of its staffsince the beginning of Trump's
second term, Korb may find his workcut out for him.
As for other positions at the IRS,
the search continues for the replacementnominee for the IRS commissioner.

(02:33):
Additionally,Jennifer Best, the acting commissioner
of the Large Business and InternationalVision, has left the agency.
Best inherited the role after Holly Pazwas put on administrative leave in July.
As it stands, around
half of the 30 leadership positionsat the IRS remain unfilled.
As of the recording of this episodeon September 8th,
the Supreme Court is set to decidewhether they'll hear a lawsuit

(02:55):
involving the legality of PresidentTrump's “Liberation Day” tariffs,
a decision that could impact other tariffsand results in U.S.
consumers receiving refunds on tariffsthey've already paid.
This comes after the Federal Circuitand Court of International Trade
have both held that the Liberation Daytariffs are illegal.
If SCOTUS decides to hear the case,oral arguments

(03:16):
could be scheduled as early as November.
Now Iris, what would happenshould SCOTUS decide not to hear the case?
Yeah,so if SCOTUS decides not to hear the case,
the Federal Circuit's ruling banningthe tariffs would go into effect.
As indicated by TreasurySecretary Scott Bessent,
this could result in American consumersreceiving refunds
for about half of the tariffs alreadypaid.

(03:39):
Treasury and IRS have recently releasedupdated guidance on the
No Tax on Tips and Overtime provisions.
To start, we have receiveda copy of the 2026 form W-2.
Now, the new form has revisionsthat include new codes for box 12 for both
tips and overtime, with those codesbeing TP and TT, respectively.

(04:00):
Additionally, box 14 was split into boxes14 A and 14 B,
with 14 B being titled TreasuryTip Occupation Code.
Now, while we don't have an official listof occupation codes yet,
Treasury did releasea preliminary list of occupations
that could be eligible for this qualifiedtip deduction.
The list is fairly extensiveand includes industries

(04:20):
such as beverage and food service,entertainment and events,
hospitality and guest services, homeservices, and personal services.
Devin, you know you play in this spacea lot.
Were there any occupations in the list that took you by surprise?
Great question Iris.
You know,
the list was certainly more expansivethan I initially expected,
but most of the positionscertainly make sense.

(04:42):
And it really hammers home how widelyapplicable tipping is for many industries.
As for surprising, believe it or not,
social media influencers were included.
Well, with that, let's moveon to the main attraction of today:
our segment called Planning Insights.

(05:04):
On today's segment of Planning Insights,
we're joined by Krystal Creach and GrahamGodfrey, who are here to talk about
the primary ways that the OB3 has directlyand indirectly
impacted the tax-exempt sector.
Krystal is a partner on our Tax-Exemptteam,
and Graham is a manager on the same teamand I'm told that he is a rising star.

(05:24):
So welcome to TacklingTax, Krystal and Graham.
Thanks for having us. Happy to be here.
Well Krystal,I would like to start with you.
Now, I've had a lot of opportunitieslately
working with your team,particularly on the OB3.
And while there have been a lot of directand indirect impacts of the OB3,
on tax exempt, I'd like to start offfirst with what didn't make the cut.

(05:51):
Yeah.
There hasn't been a ton of media attentionon the tax exempt pieces,
but there weresome of those key provisions.
We were really monitoringa lot of the different versions
that were coming through.
And one of the really big things
that was coming outwas the return of the parking tax.
That was UBIthat came from parking to employees

(06:12):
that many of our organizationsremember from several years ago.
Thankfully,that did not make it into the final bill,
and I think that was some welcome relief.
And one thing to add, Krystal,and another welcome release is that,
private foundations generally pay
1.39% excisetax on their net investment income.

(06:33):
That was on the House version of the bill
that would set the tiered rate up to 10%
for large endowments and
that was leftout of the final bill as well.
Well, that certainly sounds like,in general, some of those things
that didn't make it into the actthat might be welcome news.

(06:54):
But I do know that there were some thingsthat did end up in the bill.
Things like the changes to the endowmenttax on higher ed.
So, Krystal, what changed here?
And how might it impactthose that are subject to it?
Yeah.
It's no surprise thateducational institutions were targeted.
We've seen a lot in the political arena.

(07:17):
Especially, you know, President
Trump really going after universitieslike Harvard with those large endowments.
So we weren't surprised to seea little bit of a change to this.
This is an endowment taxthat began under the prior Tax Act,
which was the Tax Cutsand Jobs Act in 2017,
and it is an endowment taxfor private colleges and universities

(07:38):
that have at least 3,000 studentsand a $500,000 per student endowment.
So it doesn't affect a ton of universitiesonce you get into that math.
It was previously a flat tax of 1.4%,
and now it's a tiered systemthat goes up to 8%.
So previously it was about 50to 60 universities in the whole country

(07:59):
that were affected by it.
And something like Harvardis certainly affected.
And this will expandto some additional universities
but still won't impact the majority.
So, a little bit of a changethat will help kind of get some of that
revenue increase to offset some of the taxdeductions that came through the bill,
but still won't affect a majorityof our educational institutions.

(08:20):
So you said; what was the original rate?
It was originally 1.4%.
And so the 1.4% is still there,but now it's a tiered
system, up to 8%depending on the size of the endowment.
How did they structure the tiering?
It's based on the size of the endowment.
And so, they also changed some of the calculations

(08:43):
to show the student adjusted endowmentnow calculated
by the total value, divided by the number of students.
And then they also changed some of thatdefinition of net investment income.
But reallylooking at that size of endowment, similar
to kind of how a tax bracket would beor it's based on taxable income similarly,
and they've got new bracketsfor that tiered structure.

(09:06):
Well Graham, I want to talk to youabout this next direct change.
And that was on the section 496021% excise tax.
Now, because this is a comp and ben itemI did touch on it last month briefly.
But can you againwalk us through, you know, what is 4960?
When did it go into place?
What is this changeand how is it going to,

(09:28):
or at least how do we expect that itsgoing to impact our tax-exempt entities?
Yeah, Devin, section4960 was really introduced
back with the TCJA in 2017.
It's essentially a 21% excise
tax for tax-exempt organizationsthat pay compensation over

(09:49):
$1 million to employeesor certain parachute payments, as well.
So really, 4960 isn't new.
It's not going away.
But the definition of covered employeesis just really broadened under OB3.
So, as opposed to being
the top five compensated employeesover the $1 million threshold,

(10:14):
it's covering all employees.
One item to point out herethat's important for our,
you know, health systemsand other healthcare organizations
is there is a carve outthat has existed since 2017
and it didn't go away in OB3and that's for medical services.

(10:35):
So, if you have physicianswith compensation over $1 million,
this will not apply to them.
We'll really see it impact
some large nonprofits and universities.
But with the medical services carve out
it'll apply less to our hospitals.
Yeah.
Certainly initially thoughtthat the biggest recipient of this

(10:58):
excise tax would have been hospitals.
But because of that carveout,it really does help
alleviate that strainon a lot of healthcare organizations.
So, yeah, I'm thinking what universities,
what are some examplesof some of the larger tax-exempt entities
that you can think of that aren'tuniversities
that might be subject to this?
So, I would say, yes, it was great to

(11:20):
see that physician carveoutwas still there for the medical.
We were certainly monitoring thatbecause it wasn't clear in
some of the earlier versions of the bill.
And that was definitely talking about,being talked about a lot by organizations
who are really monitoring that, becausethat could have had a really big impact
on being able to provide healthcareby some of our large hospitals.

(11:40):
Krystal, do you, are there otherorganizations outside of universities,
to answer Devin's question,that you really see this impacting?
I mean, universities are definitely whereit's going to have the biggest impact.
I would also say some of our really large,well-known types
of tax-exempt organizationsprobably have several high-paid

(12:04):
officersthat would be subject to this, that
now they may have a little bitof an expansion with this, additional
having more than just five employeesbeing subject to it.
But, for the most part, it's probablygoing to be more like universities.
That is what we're seeing isprobably going to have more of the impact.

(12:25):
Well, Krystal,I'll stay with you here for a minute.
Let's talkabout charitable contributions.
So I do know there were some changes
on this front, both right to businesses and individuals.
What were they? What were the changes?
And maybe what are some strategiesthat both businesses
and individuals might consider, in light of those changes?

(12:47):
Yeah.
This is kind of one of the areasthat we watch for the indirect
changes to nonprofits.
And so, a lot of times
they're just looking for those thingsthat are directly affecting them,
you know,what new tax filings and things like that,
but when we look at anythingthat's changing charitable giving,
that really can impacta lot of our tax-exempt organizations.

(13:08):
And so, for individuals,there's a couple new things.
There's a 0.5% floor,and then there's also for your top tax
bracket, high earners, they have a limiton the itemized deductions.
Which of course, part of itemizeddeductions is charitable contributions.
And so, those are both going to impact

(13:30):
the amount of givingthat individuals are going to do.
Now this starts in 2026so we're seeing some people
who are really talking right nowabout what maybe needs to happen in 2025
to where they can getthe best bang for their buck.
So we're seeing a lot of thosehigh earners, people in the highest
tax brackets and people that have a lotof giving that they want to do, really

(13:51):
trying to accelerate their contributionsinto 2025,
maybe by bunching, by doing large donoradvised fund contributions.
Lots of different thingscan happen to where they can try to avoid
losing out on some of their deductionsin the coming years.
So it's really important,I think, for tax-exempt organizations
to get in front of some of those donorsso that they can be the recipients

(14:15):
of those funds or they can just helptheir donors navigate how they can give.
The other piece of it, too,is that they would want to be watching
how is this going to impact their nextfew years from a budgetary standpoint?
You know, a lot of timeswhen nonprofits are making their budgets,
they're kind of rolling overfrom last year expecting the same levels.
They may get a big bump in 2025,or they may be the same in 2025,

(14:39):
and then it's going to go downfor the next couple of years.
So, really looking at what your donor baselooks like, working with them
right now before the end of 2025,and kind of trying to figure out what it's
going to look like for the next few yearswith these changes is important.
All good points, Krystal.
And I think certainly somethingthat our tax-exempt entities

(15:00):
should be thinking about.
Graham, to turn to you, what about theindividual above-the-line deduction?
Yeah, Iris.
So, starting in 2026, individualscan deduct up to $1,000, or $2,000 for
married filing joint, of cash donations,even if they take the standard deduction.

(15:20):
So you don't have to itemizeto take this deduction.
If you think back a few yearsto some of the COVID years,
they implemented a similar above-the-line
deductionthat really increased charitable giving.
So it's something to keep in mindand think of going forward.
Will this deduction be subject to the, I'massuming it won't be,

(15:41):
but it will not be subjectto the 0.5% floor, correct?
Because it's not an itemized deduction?
That's correct. Okay.
So we could see individualswho are taking advantage
of this deduction firstand then any amounts that would,
you know, exceed the $2,000 that they willthen use as an itemized deduction?
Yes, that's correct.

(16:02):
And we really see,
you know, with the increaseto the standard deduction,
this will be a nice additionfor individuals that don't
itemize and just take the standard.
Now is there a ceiling?
We have a new floor, but is therea ceiling that individuals are subject
to on their charitable contributionsthat may have to be considered

(16:24):
when they're,
you know, looking at their bunchingor however they're going to handle things?
Yeah.
So, there are still the the old ceilingsin effect, in addition to the itemized
deductions ceiling, for the toptax bracket that's going to start in ‘26,
there's still the ceilingsfor 60% of their
adjusted gross incomefor charitable contributions in general.

(16:47):
And that's for 2025 and beyond.
Nothing has changed there.
And so they will still havethat limit in place,
but it does carry forward.
And so they can still take advantageof more than that in ‘25
and carry it forward.
But then they have to have that interplay
between the floorand standard and itemized.
So it'll just really make ita lot more complex in terms

(17:10):
of giving and really important, again,to be in front of donors,
to be able to help themgive in the most tax efficient way.
Yeah.
So, a lot of strategyinvolved on the individual side.
What about on the corporate side?
Yep. So the corporationsalso have a new 1% floor.
They had a 10% limit which remains.

(17:31):
And so essentiallythey can give a 9% deduction.
And that's 9% of their taxable incomethat they can give.
So, there's a new structure therewhere they have to consider that floor,
which may also impact
where individuals give,whether they give to their corporations
or whether they give through theirindividual dollars.

(17:53):
So, that is a new limit as wellthat can further make some strategy
a little bit difficult.
And there's a carryover for bothindividuals and businesses, correct?
Yes. There are carryovers available.
So even if they get over those limitsthey are able to carry them forward.
Generally it's for five years.
There are some optionswhere they can convert
to net operating lossesand things like that as well.

(18:15):
So they'd have to consider the long-termstrategy in terms of the amount
that they're giving as well,
and when they can use upthose contribution carryovers.
Yeah, a lot to think about.
And I think that, you know,it's a good segue into the next topic
I wanted to discuss,which is some tax credit changes.
One of those being somethingthat may help incentivize individuals

(18:36):
to making additional charitablecontributions with the new SGO credit,
but can you speak a little bitto what that SGO credit is?
What does SGO even mean?
Yeah.
So the SGO credit is an interestingnew concept that's been added.
And SGO stands for ScholarshipGranting Organizations.
And so, this is a new creditthat has been added.

(18:59):
A new, permanent federal tax credit,
which of courseyou've probably talked about already.
But the permanent in tax lawjust means there's no sunset.
So it could be changedin the future still.
But there's no sunset to this credit.
It's a $1,700 per-person,
per-year credit and is nonrefundable,but again, can be carried

(19:19):
forward, similar to whatwe just talked about, but for five years.
And this is for donations to those SGOs.
The scholarship granting organizationsand their specific requirements
for what those scholarshipgranting organizations are.
The interesting piece about this creditis that it's a federal credit,
but the states have to opt into join the program for donors to qualify.

(19:43):
We don't have really a full list of statesat this point.
As of last week, there were some statesthat they had stated they intend to opt
in. We've seen North Carolinaand Tennessee say they intend to opt in,
but we've seen, like Oregon
and New Mexico have both statedthey intend not to opt in.
So it will remain to be seenwho will opt in.

(20:03):
And so it's just very interestingto have states
sort of have control over it with itbeing a federal tax credit.
But I think the important piece is,if you're an organization that provides
scholarships to K through 12 students,
it'll be worth watching to seeif your state will opt in
and then how you can use thatto help with your funding.
I think one of the primary requirementsfor this

(20:25):
that may catch up a lot of organizationsis that
this can't be just like a scholarship
granting org for a single institution.
Is that correct?
There's a number of institutionsand students that these schools
are required to give scholarships to.
That's correct. Yeah.
They do have to have some specific rules,and they have to give 90% out

(20:49):
through scholarships to organizationsas well.
So, there's a lot of requirementsthat go into this.
It won't be a slam dunk,but anybody who is giving
those scholarships reallyshould be paying attention to this.
Now, Graham, I want to shuffle over to
you and talk about some of the changesto the new market tax credit.
And I believe we're going to havesomeone on our show here in the next month

(21:10):
or two to talk about new markettax credits,
but can you just give us a quick overviewof what changed here
and how that particularlyis going to impact tax exempts?
Yeah of course.
So I won't go intotoo much of the details today, but
essentially new markets tax credit has
been available prior to OB3.
And really it's just now permanent.

(21:32):
So you're going to hear a lotmore conversation surrounding it with
it being extended through the bill.
This isn't truly a tax creditfor the tax-exempt organizations,
since there's generally no tax liabilityto offset with the credit.
But it's really a way for nonprofitsto get funds from additional investors.

(21:55):
So, if you have new construction projects
in economically distressed areas,
this is something to keep in mindand look into.
And that economically distressedarea is really determined by U.S.
census tracts.
So if you think you might qualifythat's something to definitely bring up

(22:17):
and talk with your tax advisor.
I think that's, you know, new markets taxcredit is always a wonderful opportunity.
And again we are going to be talking aboutthat in a future episode here in a few.
But to wrap up Krystal,I mean, we've worked a lot
in the clean energy spaceand we have had Troy Taylor on our podcast

(22:37):
to talk about OB3 specifically and how it does affect clean energy credits.
You know, I think a lot of people forgetthat tax-exempt entities are eligible
to benefit from clean energy creditsfrom that direct pay election.
You know,and I also think people, or tax exempts,

(22:57):
are probably surprised to hear that,you know,
maybe there are still opportunitieseven after OB3.
So, do you have any final commentson, you know, whether it be clean energy
or other indirect impacts from OB3that you want to talk about?
Yeah, definitely.
With the clean energy credits,definitely time is of the essence.

(23:18):
They’ve cut offsome of those programs to end earlier.
So if nonprofits were involvedwith that direct pay and had some wind,
solar projects,things like that in the pipeline,
really check their timelinesbefore they continue down that to
make sure that they can stilltake advantage of that and maybe
even accelerate some thingsto still be able to get those benefits.

(23:39):
Some of the previous podcastshave also discussed some other provisions,
especially like the payrolltax provisions, like no tax on tips,
no tax on overtime,these things can have impacts as well.
Any time that there'sanything with payroll tax,
payroll tax is no different for tax exemptthan it is for any other type of entity.

(23:59):
So, keeping on top of any of thosekinds of changes is very important
because there may be changesto how you're filling out W-2s.
There's some changes to the 1099requirements, things like that
that they should also stay on top of.
Well, Krystal, Graham, thank youboth so much for joining us today.
We're very excited to have youand hopefully we can

(24:21):
have you again in the future. Yeah.
Thanks for having us, Devin. Thank you.
Now, for those of you listening that wouldlike to learn more about this topic,
I invite you to join a webinar on October8th where a panel including myself,
Amy Bibby, the tax leader of our TaxExempt practice, Lauren Den, a managing
director on that practice, and TroyTaylor, a prior guest on our show.

(24:42):
We'll be
doing a deeper dive into these topics,so I promise it's going to be a great one.
So keep an eye outfor that registration for that webinar.
Each episode,
we'll bring you what we calla Focused FORsight of the week,
an article or recordingthat might be of interest to you.

(25:04):
This week's Focused FORsight is an articletitled Tax Exempt Entities
and OBBBA Tax Reforms That Matter.
It covers much of what we talkedabout today, as well as highlighting
additional areas impacting tax exempts.
You can always access our FORsightson the WNTO website
or the Forvis Mazars US websitemore broadly.

(25:26):
And that's our show.
Thanks for joining
and remember to subscribe and listen infor the next episode of the podcast.
Until next time...
The information set forth in this podcastcontains
the analysis and conclusionsof the panelists, based upon his, her,
or their research and analysis of industryinformation and legal authorities.

(25:46):
Such analysis and conclusionsshould not be deemed
opinions or conclusions by Forvis Mazarsor the panelists
as to any individual situationas situations are fact-specific.
The listener should performtheir own analysis and form
their own conclusionsregarding any specific situation.
Further, the panelists’ conclusionsmay be revised without notice,

(26:07):
with or without changes in industryinformation and legal authorities.