Universal Charitable Deduction could become permanent under Senate proposal

The Senate released its updated version of the budget reconciliation bill June 16 as Congress moves forward with its goal to pass this legislation by July 4. 

The House passed the initial version of the bill on May 22, but the Senate made some revisions, including a proposal to make the universal charitable deduction permanent. While there is still no set date for a vote on the Senate’s version of “The One Big Beautiful Bill,” let’s take a look at the changes the Senate made to the key pieces of the legislation that will most affect nonprofits. 

There are still a number of measures that nonprofits are advocating against that remain in the Senate’s version of the bill. There are also some measures that the House cut prior to the passage of its bill that the Senate kept out of its version, too. Here’s what hasn’t changed between the two versions of the tax reconciliation bill. 

Pease limitation replacement for high earners’ deductions 

The Senate included the permanent revocation to the Pease limitation, which is set to go into effect again when the overriding provision in the Tax Cuts and Jobs Act of 2017 expires at the end of this year. If this new provision does not pass, the Pease limitation would apply to single filers with an adjusted gross income starting at about $340,000 and married joint filers with an adjusted gross income starting at about $408,000 in tax year 2026. 

The new provision would only apply to those in the highest tax bracket and cap each itemized dollar at $0.35 — 2 cents less than the limit for most taxpayers in that tax bracket now. 

Nonprofit advocates have rallied against this change, citing it would disincentivize charitable giving from high-income individuals, who are most likely to be among the supersize donors responsible for nearly 78% of total dollars given to charity, according to Fundraising Effectiveness Project. The Pease limitation has been found to not have a negligible impact on giving. 

Highly compensated nonprofit employee excise tax 

The proposal to expand the excise tax to cover all nonprofit employees making more than $1 million annually remains in the bill. 

Corporate charitable deduction floor 

The Senate retained the proposal that would force corporations to give at least 1% of its taxable income to charity to get a tax break for those contributions. The measure would also allow corporations to carry balances exceeding 10% for up to five years. Nonprofit advocates are against the measure, fearing it eliminates the incentive for small businesses to give to charity. 

The current tax law provides tax breaks to corporations — which contributed $36 billion to charity in 2023, according to Giving USA — up to 10% with no minimum contribution required. 

Brand royalties tax on nonprofits 

Nonprofits are exempt from paying unrelated business taxable income on name and logo sales and licensing deals. The House originally aimed to tax income on brand royalties but removed the provision prior to the bill’s passing. The Senate did not include this tax either. 

Tax-exempt status revocation 

This proposal, which aimed to give the Treasury Department the authority to strip tax-exempt statuses without due process, was removed from the House’s version of the bill before passage. Its intent was to prevent organizations from supporting terrorist organizations, but that is already illegal. 

What has changed 

The Senate removed two tax increases that may have affected nonprofits and improved the universal charitable deduction measure. Here’s more on those changes. 

Universal Charitable Deduction 

The Tax Cuts and Jobs Act of 2017 made it unnecessary for many taxpayers to itemize deductions, but an unintended consequence was the elimination of an incentive for those taxpayers to give to charity. Research concluded that change in tax law contributed to a $20 billion reduction in charitable giving. 

Both bill versions propose creating the universal charitable deduction, also known as the “Charitable Act,” to give taxpayers taking the standard deduction to also receive a tax break for all charitable gifts except those made through a donor-advised fund. The House's version would have allowed single filers to claim up $150 deduction for charitable donations while those filing jointly could double their claims. The Senate boosted those amounts to $1,000 for single taxpayers and $2,000 for married taxpayers filing jointly 

In addition, the measure would expire after the 2028 tax year in the House’s version, while the Senate would make this a permanent part of the tax law. 

Individual charitable deduction floor 

In addition to the corporate tax floor, the Senate added a provision that also adds a minimum charitable contribution rate for taxpayers who itemize their deductions. If adopted, this would require taxpayers to give at least 0.5% starting in 2026 to receive a tax break. 

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 the House proposed creating a tiered system that would tax foundations up to 10%. 

Nonprofits were concerned this could jeopardize the amount foundations could give — a figure that has surpassed $100 billion in recent years, according to Giving USA. 

The Senate removed this provision from its version of the bill. 

Taxation of transportation and parking fringe benefit for nonprofits 

The House also wanted to remove nonprofits’ tax exemption for qualified transportation and parking fringe benefits. However, the Senate removed that unrelated business taxable income provision for its version of the bill. 

With the help of various nonprofit advocacy organizations, thousands of nonprofits signed a letter, asking senators to reconsider provisions, including capping wealthy individuals’ itemizations, creating a minimum rate of giving for corporations to receive a tax break, increasing taxes on foundations and taxing more highly compensated nonprofit employees. The latter two measures were removed from the bill since the June 6 letter was sent. 

“While the bill includes some policies that aim to help our organizations do more good, it includes many more provisions that would hurt our organizations and those we serve,” the nonprofits said in the letter. “The nonprofit sector must not be used as a revenue source to pay for other unrelated policies. As the tax package advances through Congress, we urge you to remove these harmful provisions, which undermine the work of nonprofits, and to instead bolster support for these vital institutions.” 

Source: Nonprofit Pro