The New Tax Law Gives Nonprofits a Charitable Deduction — Then Takes More Away

Nonprofit leaders scanning the headlines might have seen encouraging news: the One Big Beautiful Bill Act, now signed into law, includes a permanent above-the-line charitable deduction for non-itemizing taxpayers. Starting in tax year 2026, individuals who take the standard deduction can deduct up to $1,000 in charitable contributions.

That sounds like a win. Then you read the fine print.

The same law introduces new floors and caps on charitable deductions that the National Council of Nonprofits estimates will reduce giving by $81 billion over the next decade — far exceeding the roughly $74 billion the new non-itemizer deduction is expected to generate. For nonprofits that depend on donations to supplement grant funding, the math doesn't add up.

What Actually Changed

The charitable giving provisions in the One Big Beautiful Bill are a bundle of trade-offs, and the net effect depends heavily on where your donors sit on the income spectrum.

The new non-itemizer deduction allows individual filers who take the standard deduction to deduct up to $1,000 in cash charitable contributions ($2,000 for joint filers). This is genuinely new — since the pandemic-era universal charitable deduction expired after 2021, non-itemizers have had no tax incentive to give. An estimated 87% of taxpayers now take the standard deduction, so this reaches a large population.

But the law also introduces restrictions that didn't exist before:

New floor for itemizers. Charitable deductions for itemizing taxpayers now only kick in for donations that exceed 0.5% of adjusted gross income. For a household earning $200,000, the first $1,000 in donations is no longer deductible. This effectively creates a deductible for charitable giving — you have to clear a threshold before the tax benefit activates.

Rate cap. The maximum tax benefit from charitable deductions is now capped at 35%, regardless of the donor's marginal tax rate. For donors in the 37% bracket — the high-income individuals who drive a disproportionate share of major gifts — this reduces the after-tax incentive to give.

Corporate restrictions. Corporations can now only deduct charitable contributions that exceed 1% of taxable income. For large companies with modest giving programs relative to their revenue, this eliminates the deduction entirely.

DAF and foundation exclusions. Contributions to donor-advised funds and private foundations are excluded from the new non-itemizer deduction. Donors who use DAFs as their primary giving vehicle — an increasingly common practice — get no benefit from the new provision.

Who Wins, Who Loses

The winners are relatively clear: small-dollar donors who take the standard deduction and give directly to operating nonprofits. A family earning $75,000 that gives $800 to their local food bank now gets a tax deduction they didn't have before. At the margin, this should increase small-dollar giving.

The losers are harder to quantify but potentially much larger in dollar terms. High-income itemizers face reduced incentives. Corporate giving programs lose deductibility at the margins. And the entire donor-advised fund ecosystem — which held over $230 billion in assets as of 2024 — is explicitly carved out of the new benefit.

For nonprofits, the practical concern is that the donors who give the largest gifts are the ones facing new restrictions, while the donors gaining new incentives tend to give smaller amounts. The aggregate effect, according to multiple tax policy analyses, is a net reduction in total charitable giving.

What This Means for Grant-Dependent Organizations

If your organization relies primarily on government grants, the direct impact is limited — tax policy doesn't change federal grant appropriations. But most nonprofits operate on a blended funding model where donations supplement grants, cover match requirements, or fund the administrative capacity needed to pursue and manage grants.

Three specific scenarios deserve attention:

Foundation grant applicants. Private foundations may see reduced contributions from donors who previously used them as a giving vehicle. If foundation assets grow more slowly — or decline — that eventually flows through to smaller grant programs. This is a long-cycle effect, not an immediate one, but it's worth monitoring if foundation grants represent a significant share of your revenue.

Organizations dependent on corporate sponsors. The new 1% floor on corporate deductions could reduce corporate giving to nonprofits, especially from mid-size companies where the charitable program was valued partly for its tax efficiency. If you receive significant corporate support, this is worth discussing with your corporate partners now, while they're still figuring out their tax strategy.

Match-dependent grants. Many federal grants require matching funds, typically 25-50% of the award amount, often raised through donations. If the charitable giving environment tightens, raising match becomes harder. Organizations that rely on donor-funded match should start planning now for potentially tighter fundraising conditions.

The Broader Funding Landscape

These tax changes land in a funding environment that's already strained. Federal grants across multiple agencies face budget uncertainty. State governments are stepping in to fill some gaps, but not uniformly. And now the incentive structure for private giving is shifting in ways that may reduce the total pot of philanthropic dollars.

For nonprofits, the strategic response isn't panic — it's diversification. Organizations that depend on a single funding stream, whether government grants or major donor philanthropy, are more exposed than those with multiple revenue sources. The new non-itemizer deduction may open doors to grassroots fundraising campaigns that weren't previously tax-efficient. Small-dollar recurring donor programs could become more attractive when every $50 monthly gift comes with a visible tax benefit.

What to Do Now

First, understand your donor base. If most of your individual donors are non-itemizers giving under $1,000, the new law may actually help your fundraising. If your donor base skews toward high-income itemizers or corporate sponsors, prepare for potential headwinds.

Second, talk to your major donors and corporate partners. They're hearing about these changes from their tax advisors right now. Having a proactive conversation about giving strategy — before they make decisions — is better than reacting after the fact.

Third, shore up your grant pipeline. In a tightening philanthropic environment, competitive grants become relatively more valuable because they're not subject to individual donor sentiment. Building a stronger grant-seeking capacity now is a hedge against donation volatility — and Granted can help you identify and pursue opportunities that match your mission before the landscape shifts further.