#1: Expanded Excise Tax on High Compensation. The bill amends Internal Revenue Code (IRC) Section 4960, expanding the 21% excise tax on compensation exceeding $1 million. Previously, under the 2017 Tax Cuts and Jobs Act, this tax applied only to the five highest-compensated employees of a tax-exempt organization, current or former, with liability allocated proportionally among the exempt entity and related organizations via Form 4720. Starting in 2026, the tax will cover all employees—current or former—of the tax-exempt organization earning over $1 million who were employees during any taxable year beginning after December 31, 2016. This means that tax-exempt organizations must now review compensation records from 2017 and onward to identify any current or former employees paid over $1 million, even if they weren’t among the top five earners in such past years.

For example, a retired executive receiving a $1.2 million deferred payout from a related for-profit subsidiary would trigger the tax, with the subsidiary liable for its share on the $200,000 excess. This broader scope could increase compliance costs and push nonprofits to restructure compensation to avoid tax liability. Advisors should review compensation agreements and related-entity structures to mitigate exposure.

#2: Charitable Deduction Changes. The bill reshapes charitable deductions for individuals and corporations. For individuals, it establishes a permanent above-the-line deduction for non-itemizers, capped at $1,000 ($2,000 for joint filers), encouraging modest giving among the roughly 90% of filers who don’t itemize.

For itemizers, a new 0.5% floor on adjusted gross income (AGI) applies, meaning only contributions exceeding this threshold are deductible. Carryforwards are also allowed only if this 0.5% floor is met.

The 60% AGI limit for cash contributions to public charities is made permanent, preserving incentives for larger donations. However, the tax benefit for itemized deductions is capped at 35 cents per dollar, down from 37 cents for top-bracket taxpayers, slightly reducing high-earner incentives.

For corporations, a 1% floor on taxable income is imposed, so only contributions exceeding this threshold are deductible, up to the existing 10% limit. Independent Sector estimates this could reduce corporate charitable giving by approximately $4.5 billion annually, straining nonprofit budgets, particularly for smaller organizations.

A new nonrefundable tax credit of up to $1,700, starting in 2027, applies to donations to organizations granting scholarships to private or religious K-12 schools, potentially diverting funds from broader charitable causes.

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• The bill amends Internal Revenue Code (IRC) Section 4960, expanding the 21% excise tax on compensation exceeding $1 million. Previously, under the 2017 Tax Cuts and Jobs Act, this tax applied only to the five highest-compensated employees of a tax-exempt organization, current or former, with liability allocated proportionally among the exempt entity and related organizations via Form 4720. Starting in 2026, the tax will cover all employees—current or former—of the tax-exempt organization earning over $1 million who were employees during any taxable year beginning after December 31, 2016.¹ This means that tax-exempt organizations must now review compensation records from 2017 and onward to identify any current or former employees paid over $1 million, even if they weren’t among the top five earners in such past years.
• For example, a retired executive receiving a $1.2 million deferred payout from a related for-profit subsidiary would trigger the tax, with the subsidiary liable for its share on the $200,000 excess. This broader scope could increase compliance costs and push nonprofits to restructure compensation to avoid tax liability.² Advisors should review compensation agreements and related-entity structures to mitigate exposure.

Charitable Deduction Changes

• The bill reshapes charitable deductions for individuals and corporations. For individuals, it establishes a permanent above-the-line deduction for non-itemizers, capped at $1,000 ($2,000 for joint filers), encouraging modest giving among the roughly 90% of filers who don’t itemize.³
• For itemizers, a new 0.5% floor on adjusted gross income (AGI) applies, meaning only contributions exceeding this threshold are deductible.⁴ Carryforwards are also allowed only if this 0.5% floor is met.
• The 60% AGI limit for cash contributions to public charities is made permanent, preserving incentives for larger donations.⁵ However, the tax benefit for itemized deductions is capped at 35 cents per dollar, down from 37 cents for top-bracket taxpayers, slightly reducing high-earner incentives.⁶
• For corporations, a 1% floor on taxable income is imposed, so only contributions exceeding this threshold are deductible, up to the existing 10% limit.⁷ Independent Sector estimates this could reduce corporate charitable giving by approximately $4.5 billion annually, straining nonprofit budgets, particularly for smaller organizations.⁸
• A new nonrefundable tax credit of up to $1,700, starting in 2027, applies to donations to organizations granting scholarships to private or religious K-12 schools, potentially diverting funds from broader charitable causes.⁹

SALT Cap and Itemization Trends

• The bill raises the SALT deduction cap from $10,000 to $40,000 for filers with modified AGI under $500,000, with a 1% annual increase through 2029 (subject to a phaseout for taxpayers with incomes in excess of $500,000), before reverting to $10,000 in 2030.¹⁰ This could make itemizing more attractive for some, boosting charitable deductions for those who itemize. However, the standard deduction, permanently increased to $15,750 for single filers, $23,625 for heads of household, and $31,500 for joint filers, increased for inflation in future years, likely means that fewer taxpayers will itemize.¹¹ This trend could reduce the pool of donors claiming charitable deductions, further challenging nonprofit funding.

Endowment Tax Increase

• The bill amends IRC Section 4968, increasing the excise tax on net investment income in a new tiered structure for certain private colleges and universities with endowments exceeding specific per-student thresholds, from 1.4% to as much as 8%, effective after December 31, 2025.¹² This targets wealthier institutions, aiming to curb excess accumulation. The higher tax may pressure affected universities to adjust investment strategies or increase spending on mission-driven programs, though it could strain financial aid budgets.

Implications for the Charitable Sector

• These changes create a mixed outlook. The above-the-line deduction and higher SALT cap may encourage some giving, but the 0.5% and 1% floors, coupled with fewer itemizers, could reduce contributions, with total charitable giving ($557 billion in 2023) at risk of decline.¹³ The expanded IRC Section 4960 tax and endowment tax add financial and administrative burdens, particularly for smaller nonprofits and select universities. Advisors should counsel clients on restructuring compensation, optimizing deduction strategies, and monitoring related-entity payments to navigate these rules. The bill’s complexity underscores the need for proactive planning to sustain the charitable sector’s vitality.

The post Navigating the One Big Beautiful Bill Act: Key Tax Changes for Exempt Organizations appeared first on Foundation Source.

WM: Key Tax Changes for Exempt Organizations in the OBBBA

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For starters, making GTIs lets a foundation control exactly who will receive support. (By contrast, when a foundation grants through a public charity, the charity selects the grantees.) Also, granting to individuals enables a foundation to have an immediate and direct charitable impact because there’s no middleman (a public charity) involved. For disaster relief grants in particular, there may not even be a public charity serving the impacted region, or if there is one, it might have high administrative costs, which a foundation can circumvent by making GTIs. Further, such a charity might be stretched too thin, and a foundation can help to fill in the gaps with GTIs.

Additionally, if a foundation wants to support a specific individual, to perhaps enhance the person’s special skill or talent such as writing a textbook, composing a musical score or choreographing a dance recital, GTIs are the ideal tool for doing so. This capability underscores the tremendous flexibility that private foundations offer for giving.

Can all private foundations make GTIs?

Yes, as long as a foundation’s charter documents don’t prohibit GTIs and its grant agreements don’t include funding restrictions against GTIs. For example, a foundation’s bylaws may require that the foundation make grants only to public charities or only for a specified purpose, such as cancer research, which would be inconsistent with providing disaster relief or scholarships directly to individuals.

Are there rules or requirements for making GTIs?

Yes. All GTIs must be in support of a charitable purpose and comply with foundation tax law, specifically with the IRS’s taxable expenditure rules, which impose a 20% penalty for noncompliance. These expenditure rules also require that a foundation obtain advance IRS approval if its GTIs are for travel, study or similar purposes (e.g., a scholarship, fellowship or study abroad experience). Fortunately, for foundations with GTI programs that support these purposes, advance approval is needed only for the grant program as a whole and not on a grant-by-grant basis. If any material changes are made to the program, though, the foundation would then need to obtain IRS approval of the revised program.

It’s also fortunate that the IRS does not require advance approval if foundations make GTIs to provide hardship and emergency assistance. This enables foundations to help people in need immediately and make greater charitable impact. The IRS also does not require advance approval for awards programs—as long as the awards are given in recognition of past accomplishments and do not impose conditions on how the funds must be spent by the recipient.

For GTIs that require advance approval from the IRS, when and how should a foundation pursue the approval?

A foundation may apply for advance IRS approval at any point in its life cycle. If a foundation knows from the start that it wants to make grants that will require approval, it may submit a request with Form 1023 which is the IRS’s application for recognition of exemption. Form 1023 needs to be filed within 27 months of the foundation’s formation. In our experience though, it’s not typical that a foundation knows at the very beginning of its existence that it will want to make GTIs that will require IRS approval. In this case, if a foundation wants to request approval after receiving its favorable determination letter, it would submit its request using IRS Form 8940 and would need to pay an IRS user fee that’s currently $3,500. It’s important to keep in mind that no matter when a foundation decides to apply for advance approval, it must always do so prior to making any grants that require it.

Can GTIs be given to anyone?

No. GTIs may not be given to the foundation’s “disqualified persons,” also known as insiders, which include those who run the foundation such as the directors, officers, trustees, as well as substantial contributors, and certain family members of those persons. These individuals are not allowed to reap a financial benefit from their foundations because, if they do, they’re personally subject to tax penalties. Additionally, GTIs of all types must be chosen from a “broad charitable class,” meaning a group of people that’s large enough or sufficiently open-ended to ensure that the number of people in the class cannot be reduced to a fixed list. For example, if a foundation program offers relief only to cancer patients presently in a specific hospital, that would not be open-ended enough because all of the members of the class could in fact be listed. However, the present and future cancer patients located in a defined geographical area like Washington, D.C., for example, would be an open-ended class because it’s impossible to predict who in that area will be diagnosed with cancer and eventually be added to that class. And for this reason, disaster relief GTI programs are often designed to afford relief not only to the victims of a specified disaster, but also to victims of future disasters.

How do foundations establish eligibility criteria for their GTIs?

First and foremost, the criteria must be related to the grant’s purpose. It’s also important to ensure that grant recipients are selected in a fair and even-handed way to preclude discrimination.

Does the IRS require documentation of how GTIs are given and used?

Yes. Foundations are expected to document their eligibility criteria, selection process, OFAC screening, the fact that the recipients were not foundation insiders, and any additional due diligence the foundation may have conducted. In the context of a scholarship, selection information might include a record of the grant recipient’s grades. For hardship assistance, it would include recording the grant recipient’s severity of financial need. For emergency assistance, it should include a description of the emergency experienced by the applicant. Overall, bear in mind that documentation is key.

This is a condensed, edited version of the conversation. Get full insights by watching the entire video of the presentation here. Check out our blog and white paper about GTIs as well.

The post Exploring Grants to Individuals: Clearing Up Misconceptions and Compliance Considerations for Foundations – Q&A appeared first on Foundation Source.

Private foundations are increasingly making GTIs to expedite their assistance and cast a wider net of charitable support. To grant directly to individuals and families, foundations do not need to set up a separate nonprofit, and they don’t always need to seek prior approval from the IRS. Plus, they have full control over who will receive support. (By contrast, when a foundation grants through a public charity, the charity selects the grantees.) The support foundations can provide with GTIs is more immediate and impactful because there’s no middleman (a public charity) involved.

For disaster relief grants in particular, there may not even be a public charity serving the impacted region, or if there is one, it might have high administrative costs, which a foundation can circumvent by making GTIs. Further, such a charity might be stretched too thin so a foundation can help to fill in the gaps with GTIs.

Our private foundation clients took advantage of GTIs in 2020 to help address the emergency and hardship scenarios due to the COVID-19 pandemic shutdowns. We then observed a resurgence of them in 2022 in response to challenging macro-economic conditions, and again in early 2025 in the wake of the southern California wildfires.

2. Foundations Can Give Creatively with Grants to Individuals

Making GTIs for out-of-the-box projects underscores the tremendous flexibility that private foundations offer for creative giving. With GTIs, foundations can support projects aimed at enhancing an individual’s skill or talent such as writing a textbook, composing a musical score or choreographing a dance recital.

GTIs even offer an easier way to give internationally. As an alternative to granting to foreign charities directly, which requires extensive due diligence and oversight procedures, foundations can make simple, direct grants to a national, regional or local government anywhere in the world as long as the grants have a charitable purpose, such as disaster relief.

3. The Rules Around Grants to Individuals Vary

Some types of GTIs need advance IRS approval and others don’t. Two types of GTIs that do not require IRS approval are grants designed to alleviate human suffering, such as those given in the aftermath of a natural disaster, and grants that are made in recognition of past accomplishments, such as an award for writing a brilliant and original poem.

GTIs that do require advance IRS approval include scholarships or fellowships as well as grants made to achieve a specific objective, produce a report or similar product that will be delivered in the future. Finally, GTIs made to improve or enhance a literary, artistic, musical, scientific, teaching or similar capacity, skill or talent require IRS approval, too.

Regardless of whether IRS approval is needed or not, these rules govern all GTIs:

• Grants can’t be made to the foundation’s disqualified persons, (aka “insiders” such as directors, officers, trustees, substantial contributors and certain family members of those persons), which would constitute self-dealing.
• Grantees must come from a broad charitable class—a group of people that’s large enough or sufficiently open-ended to ensure that the number of people in the class cannot be reduced to a fixed list.
• The selection criteria must be related to the purpose of the grant.
• Grantees have to be selected on a non-discriminatory basis.
• Foundations must publicize the programs so individuals other than the foundation’s own officers and directors know about them.

4. Documentation of Grant Recipients and Grant Activity is Required by the IRS

When making GTIs, foundations are expected to document their eligibility criteria, selection process, OFAC screening, the fact that the recipients were not foundation insiders, and any additional due diligence the foundation may have conducted. In the context of a scholarship, selection information might include a record of the grant recipient’s grades. For hardship assistance, it would include recording the grant recipient’s severity of financial need. For emergency assistance, it should include a description of the emergency experienced by the applicant.

To learn more about these key takeaways and other important insights, check out the full conversation here. Check out our blog and white paper about GTIs as well.

The post Exploring Grants to Individuals: Clearing Up Misconceptions and Compliance Considerations for Foundations – Key Takeaways appeared first on Foundation Source.

If tickets are obtained for personal use by or on behalf of a disqualified person, the IRS can impose a penalty tax on the disqualified persons who engage in the act of self-dealing. The penalty, payable by the disqualified person who used the tickets (not by the foundation), will be equal to 10% of the amount involved.3 Further, the disqualified person must pay the foundation back for the ticket or otherwise correct the self-dealing violation. If the self-dealing act is not undone or “corrected” within a certain period of time known as the “taxable period,”4 the IRS may impose confiscatory second-tier taxes, currently 200% of the amount involved. Finally, the IRS may impose an additional 5% penalty on any foundation manager who “participated” in the self-dealing transaction “knowing” that the act was self-dealing.

#2: Taxable Expenditures
In addition to the prohibition on financial transactions with disqualified persons, the Code also imposes penalties on a foundation’s “taxable expenditures” (i.e., any expenditure that does not further charitable purposes5). So, even if the foundation’s use of an event ticket confers a benefit on someone who is not a disqualified person, that use may still violate the law if it does not further a charitable purpose. If the use of a ticket is a taxable expenditure, it carries a penalty, payable by the foundation, in the amount of 20% of the expenditure. In addition to the penalty, the IRS rules and regulations governing taxable expenditure violations require that the violation be corrected (which could include having the funds returned to the foundation), as is the case with self-dealing violations.

#3: The “Reasonable and Necessary” Exception
Foundation board members often have excellent reasons to attend a charity fundraising event, such as a need to monitor the use of foundation grants, interact with other donors, or meet the grantee’s board and staff so they can learn more about the charity and its programs. Sometimes, a charity desires the presence of foundation representatives because they might attract other influential donors. If the economic benefit received by the disqualified person is reasonable and necessary, and in furtherance of the foundation’s charitable purposes, using the foundation tickets is allowable. Accordingly, it will not constitute self-dealing if, for example, a board member attends an event to represent the foundation in an official capacity and to carry out work that is reasonable and necessary for fulfilling the exempt purposes of the foundation.

It is important to note that the above exception to the self-dealing rules only applies to, and tickets should only used by, foundation staff, officers, directors, and others who have an official role on the foundation and attend events for foundation purposes, not for personal reasons. Spouses or other family members who do not serve the foundation in an official capacity, and would attend the events purely for personal reasons, are not covered by this exception to the self-dealing rules and may not use foundation tickets. Because such family members likely are disqualified persons, they could be personally liable for self-dealing penalties if they were to receive the foundation’s tickets.

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1 Section 4941(a)(1) of the Internal Revenue Code of 1986, as amended (the “Code”), imposes a tax on each act of self-dealing between a disqualified person and a private foundation.
2 The term “disqualified person” includes directors, officers, trustees, substantial contributors, persons with a 20% or greater interest in an entity that is a substantial contributor, the family members of all such individuals, and certain entities partially or wholly owned, directly or indirectly, by disqualified persons.
3 The calculation of the “amount involved” for an act of self dealing varies depending on the type of transaction that triggered the self dealing violation. See section 4941(e)(2) of the Code and the section 53.4941(e)-1(b) of the Treasury Regulations.
4 Section 4941(e)(1) defines the taxable period as the period beginning with the date on which the act of self-dealing occurs and ending on the earliest of: (i) the date of mailing a notice of deficiency regarding the initial self-dealing tax, (ii) the date on which the initial self-dealing tax is assessed, or (iii) the date on which correction of the act of self-dealing is completed.
5 Among other transactions defined as “taxable expenditures,” section 4945(d)(5) includes within the definition “any amount paid or incurred by a private foundation for any purpose other than one specified in section 170 (c)(2)(B)”.

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ToE: So, You’re Splitting Up? What to Know When Dividing a Foundation

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ToE: How Private Foundations Can Avoid the Compliance Pitfalls of Fundraisers and Galas

The post How Private Foundations Can Avoid the Compliance Pitfalls of Fundraisers and Galas appeared first on Foundation Source.

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