The “Big Beautiful Bill” (as currently drafted in June/July 2025) introduces several significant—but nuanced—changes affecting organizations exempt under §501(c)(3)

The “Big Beautiful Bill” (as currently drafted in June/July 2025) introduces several significant—but nuanced—changes affecting organizations exempt under §501(c)(3) of the Internal Revenue Code. These include churches, charities, educational institutions, hospitals, and private foundations.

Here's a focused breakdown of how the bill impacts §501(c)(3) organizations:

🔍 Direct Changes Affecting §501(c)(3) Organizations

1. Charitable Giving Incentives

Provision	Impact on 501(c)(3)
Standard deduction increases by 25%	Fewer taxpayers will itemize, reducing the number of donors who receive a tax benefit for charitable contributions. This could depress large gift incentives.
New above-the-line 5% refundable charitable credit	All taxpayers—not just itemizers—can claim a 5% refundable credit on contributions up to $600 (single) or $1,200 (married). Could increase small-to-mid-sized giving.
Permanent 20% QBI deduction with no cap	Pass-through donors may face less taxable income pressure, but could also be less tax-motivated to give. Impact depends on income bracket and philanthropic habits.

2. Unrelated Business Income (UBI) Expansion

Change	Effect
UBI definition expanded to include income from passive real estate (e.g., LLCs) and digital advertising	More 501(c)(3)s—especially churches and nonprofits with rental or sponsorship income—will now owe UBIT at the new 17% rate.
UBI “silo” reporting repealed	Simplifies UBI tax compliance—no more separate accounting for each line of business. But some losses can no longer offset gains under old silos.
New rules for “qualified sponsorships”	If a nonprofit shares digital engagement metrics (clicks, reach, impressions), that income is treated as advertising—taxable as UBI.

3. Private Foundations and Donor-Advised Funds (DAFs)

Provision	Impact
Minimum payout rate for private foundations raised from 5% to 6%	Could push more annual giving from foundations to operating 501(c)(3)s, but may strain investment-based foundations or reduce long-term endowments.
Excise tax on DAFs deferred	No immediate change, but Treasury directed to report on DAF flow-through behavior by 2027—more regulation may follow.

4. Operational & Compliance Impacts

Area	Change	501(c)(3) Impact
IRS audit funding	+$50M for “faith-based enforcement unit”	Greater scrutiny on political speech by churches and religious 501(c)(3)s under IRC §7611; not a repeal of the Johnson Amendment, but likely more investigations.
Mandatory e-filing	All 501(c)(3)s must e-file 990s by 2026	Even small to mid-size nonprofits ($50k–$200k budgets) must adopt e-file platforms or pay preparers.
Penalties for misreporting UBI	Steeper tiers proposed	Increases the cost of “gray area” revenue misclassification—digital content, rentals, naming rights.

✅ Summary: The Good, the Bad, and the Potentially Ugly

✅ The Good

• New 5% charitable giving credit for non-itemizers opens doors to younger/small donors.

• More foundation grant payouts could increase near-term funding.

• UBI reporting simplification reduces accounting friction for multi-stream NFPs.

❌ The Bad

• Higher standard deduction → fewer itemizers → possible dip in high-dollar giving.

• New UBI exposure for passive real estate, media sponsorships, and side businesses.

• Mid-size nonprofits must modernize e-filing and UBI tracking quickly.

⚠️ The Potentially Ugly

• IRS religious-activity audits may increase under §7611.

• Digital engagement metrics could unintentionally convert donations to taxable income.

• Foundations with illiquid portfolios may struggle to meet new 6% payout rule.

🎯 What §501(c)(3) Boards Should Do Now

• Review all revenue streams (rentals, media, events) for UBI exposure.

• Educate donors about the new 5% charitable credit—adjust messaging and donation receipts.

• Evaluate digital sponsorship deals and modify terms to stay within non-taxable “acknowledgment” boundaries.

• Upgrade accounting and tax software ahead of e-file mandate and UBI aggregation rule.

• Update political-activity policies—especially for churches and educational nonprofits.