Threats to Nonprofits — and an Opportunity — on Capitol Hill in 2025

The populist loathing for big philanthropy could have a silver lining: Congress might provide an incentive for small donors.

The 2025 legislative session is filled with peril for the nonprofit world — including threats to foundations, big endowments, donor-advised funds, and charities with close counterparts in the for-profit sector, such as hospitals.

One bright spot is the increasing support in Congress for a new tax incentive aimed at encouraging all Americans to give.

The charitable tax deduction has been around for more than 100 years, but its significance has waned since Congress expanded the standard deduction in 2017. Today, only about one in 10 taxpayers have enough itemized deductions, including charitable deductions, to exceed the standard deduction. As a result, most tax incentives for giving go to the small group that itemizes — typically the wealthy.

“The charitable deduction as it exists is almost to the point of being seen as a handout to the rich,” Republican Sen. James Lankford says.

Graeme Sloan, Sipa USA via AP

Lankford, who spent 15 years as director of a nonprofit Christian youth camp before joining Congress, says he and Democratic Sen. Chris Coons of Delaware have been working to build bipartisan support for a charitable deduction for non-itemizers. Incoming Senate Majority Leader John Thune is also a strong supporter of the charitable deduction.

Even as lawmakers look for areas to trim spending to help pay for the expected extension of the 2017 tax cuts, Lankford believes they’ll be willing to absorb the cost of an expanded charitable deduction to help get people back in the habit of giving. Fewer than half of Americans give to organized charities, down from nearly two-thirds in 2008.

“A lot of folks who didn’t work in the nonprofit sector don’t understand the impact of small-dollar donations to nonprofits,” Lankford says. “It’s not just the dollars they bring, but also the volunteer connections.”

Caps on the proposed non-itemized deduction are likely to be set at $5,000 for individuals and $10,000 for couples, says Brian Flahaven, chairman of the Charitable Giving Coalition, which has been working to defend and expand the charitable deduction since 2009.

“We’re not big fans of caps, but if you’re giving over $10,000 to charity, you’re probably already an itemizer,” says Flahaven, who is also vice president of strategic partnerships for the Council for Advancement and Support of Education.

Inviting Target

That’s the hopeful news. But at the same time, lawmakers may pursue multiple angles to strip money from nonprofits and foundations. Congress needs to find revenue to pay for the expected extension of the tax cuts, and some corners of philanthropy present an inviting target. And some Republicans — notably Vice President-elect JD Vance — are highly critical of big foundations and endowments that they see as too progressive.

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“The threat to the sector right now is probably the greatest and the most existential since 2000,” says Sandra Swirski, a lobbyist who works for foundations and nonprofits.

Here are some ways Congress may look to rein in the nonprofit world and generate revenue:

Revoking the tax-exempt status of business-like charities. Two recent reports from conservative think tanks — the Cato Institute and the Tax Foundation — call on Congress to essentially revoke the tax-exempt status of business-like charities that work in the same areas as for-profits. The Tax Foundation report, written by Scott Hodge, calls out insurance companies, hospitals, universities, professional athletic associations, and consulting firms, among others, as “business-like” in function. “Many of these organizations use their tax-exempt status to compete with taxpaying for-profit firms,” Hodge writes.

Sara Barba, who works with Swirski at the lobbying firm Integer, says their concern is that the reports are now “on the public shelf” and might be used by lawmakers in legislation. While hospitals and other big institutions are most at risk, “smaller organizations that fall within the same categories or do similar work could also get caught up in the shuffle,” Barba says.

Higher taxes on endowment and foundation income. Congress took a small step in this direction in 2017, establishing a small excise tax (1.4 percent) on investment income at colleges and universities with endowments worth at least $500,000 per student. The criticism of elite universities by members of Congress has accelerated sharply since then. A year ago, Vance introduced legislation that would have raised the excise tax on investment income at big college endowments to 35 percent.

Charles Krupa, AP

On a post-election webinar held in November by DonorsTrust, former Trump economic adviser Stephen Moore, now a fellow at the Heritage Foundation, said he expects Congress to look at increasing taxes on the big endowments. “You’ve got a conservative Congress that’s extremely angry at the left-wing practices on campuses, and there’s a revolt against that,” Moore said.

“Nonprofits and philanthropy should not underestimate the extent to which those in political power hold them in deep contempt,” says Benjamin Soskis, a senior research associate in the Center on Nonprofits and Philanthropy at the Urban Institute. “Alarm bells should be going off across all sorts of institutions, and they should be planning for an effective defense.”

Critics of big institutions may find common ground with those looking to pay for tax cuts — or underwrite the cost of an expanded charitable deduction. Howard Husock, a senior fellow at the American Enterprise Institute, suggests a steep increase in the excise tax on net foundation investment income — from 1.39 percent to 20 percent. Congress could use the proceeds to help pay for the expanded charitable deduction, he says.

“This is a way to shift the needle back toward the everyday donor, rather than have the growth curve be on the foundation side,” Husock said in an interview with the Chronicle.

More scrutiny of donor-advised funds. The Internal Revenue Service held hearings last spring on proposed regulations governing donor-advised funds, which allow donors to take an upfront tax deduction when they set aside funds for charity, even if that money isn’t transferred to the actual beneficiaries for many years. The proposed regulations’ status is unclear: They could be made final as the Biden administration winds down — or not. Although aspects that addressed the compensation of financial advisers to donor-advised funds were controversial, the proposed regulations were relatively minor compared with bigger changes that may be on the horizon.

On the DonorsTrust webinar, Christie Herrera, president of the Philanthropy Roundtable, said she worries that components of the 2021 Accelerating Charitable Efforts Act might resurface in tax legislation in 2025. That bill, which failed to gain traction amid intense opposition by DAF providers, would have set a 15-year payout requirement on DAFs and prohibited private foundations from counting DAF gifts toward their own minimum payout requirements.

“We have to make sure these bad ideas don’t take root,” Herrera said on the webinar.

Not everyone agrees. Even some DAF providers now say they’re open to the notion of a payout requirement. Ron Ransom, CEO of the American Endowment Foundation, a large provider of DAFs, says he’s far more concerned about aspects of the proposed IRS regulations that might discourage financial advisers from recommending that their clients start donor-advised funds.

“I think we should have minimum granting; there’s no reason that we shouldn’t,” he says.

Brian Mittendorf, a professor at Ohio State University who specializes in nonprofit accounting, says that preventing private foundations from counting DAF gifts toward their payout requirements would help on two fronts: It would get more money to working charities, and it would provide more transparency about where private-foundation money is going.

“I think that’s the lowest-hanging fruit,” Mittendorf says.

For a sector that likes to talk about the advantages of self-regulation, now may be the time. In November, two former leaders of state-based groups for nonprofits — Jan Masaoka and Jon Pratt — announced the Philanthropy Project, a reform effort focused on the lack of transparency at foundations and donor-advised funds.

Separately, Indiana University’s Lilly Family School of Philanthropy is starting a new project to convene philanthropic leaders and use design principles to envision the ideal regulatory structure for the nonprofit and philanthropic sectors.

Amir Pasic, the school’s dean, says it makes sense for philanthropy to explore solutions before Congress comes up with its own.

“With every election, there’s always the potential for opening up the conversation more deeply and radically,” Pasic says. “You have to wonder when and if the time will come for some of these larger reconsiderations.”