Tax Deductions for Nonprofit Organizations in 2025

Disclaimer: The information provided on this website is for general informational purposes only and should not be construed as professional tax advice or a guarantee of specific results. Estimated tax savings are illustrative, based on prior client experiences, and actual outcomes will vary depending on individual circumstances and applicable tax laws. For personalized advice, please consult directly with our tax professionals.

What Are Tax Deductions for Nonprofit Organizations?

Tax deductions for nonprofit organizations in the United States refer to specific financial expenses that the organization can deduct (if it has a taxable income) or donors can deduct when contributing to a qualified nonprofit.

Under the Internal Revenue Code sections, most nonprofits recognized under Section 501(c)(3) are tax-exempt, meaning they don’t pay federal income tax on income related to their mission. 

However, suppose a nonprofit earns income from unrelated business activities (like renting property or selling merchandise unrelated to its mission). In that case, it must report that income and may owe Unrelated Business Income Tax (UBIT).

• The nonprofit organization is affected when it engages in unrelated business activities. It can claim deductions to offset taxable income and reduce its UBIT liability.
• Donors are also affected. Contributing to a qualified 501(c)(3) nonprofit may be eligible to deduct the donation from their personal or corporate tax return, reducing their taxable income, provided they itemize deductions.

The itemized deductions system is designed to allow taxpayers to reduce their taxable income by deducting specific eligible expenses. It promotes fairness and encourages socially beneficial spending. Specifically, it aims to:

• Support charitable giving by providing tax incentives
• Ensure fairness when nonprofits engage in commercial activities 
• Require nonprofits to track income sources and expenses clearly to maintain transparency and accountability

Latest Updates on Nonprofit Tax Deductions

In 2025, nonprofits will face pivotal junctures regarding tax deductions and charitable giving. The impending expiration of the Tax Cuts and Jobs Act (TCJA) at this year’s end will bring challenges and opportunities that could significantly impact the philanthropic space.​

The TCJA, enacted in 2017, introduced substantial changes to the tax code, notably increasing the standard deduction. For 2025, the standard deduction is $15,000 for single filers and $30,000 for married couples filing jointly. 

This higher threshold has led to decreased taxpayers’ itemizing deductions, reducing the tax incentive for charitable contributions.

Anticipated Changes Post-TCJA

Should the TCJA provisions sunset as scheduled, several key changes are expected:​

• Reduction in standard deduction. The standard deduction would revert to pre-TCJA levels, making itemizing more attractive for taxpayers and reinstating the tax incentive for charitable giving.​
• Adjustment in AGI limits. The limit for cash contributions to public charities is anticipated to decrease from 60% to 50% of Adjusted Gross Income (AGI).​
• Estate tax exemption. The tax exemption is projected to decrease, which may encourage high-net-worth individuals to consider charitable bequests as a strategic estate planning tool.​

In light of these potential changes, nonprofits should proactively engage in the following strategies:​

• Donor education. Inform donors about the benefits of “bunching” donations by combining multiple years’ worth of contributions into a single year to surpass the standard deduction threshold and maximize tax benefits.​
• Promotion of Donor-Advised Funds (DAFs). Encourage the use of DAFs, which allow donors to make a charitable contribution or charitable gifts, receive an immediate tax deduction, and recommend grants from the fund over time.​
• Advocacy for legislative support. Support initiatives like the proposed Charitable Act, aiming to allow non-itemizers to deduct charitable contributions, thereby broadening the base of taxpayers who receive tax benefits for their cash donations.

Eligible Deductions and Credits for Nonprofits

Even though nonprofits are generally tax-exempt organizations, they can still take advantage of important charitable deductions and credits to save money. Many qualifying organizations overlook valuable deductions and credits that could significantly reduce their tax liability. 

This is especially true when engaging in unrelated business activities or operating programs that qualify for federal government incentives. 

Below are some of the most prominent deduction categories you might want to monitor. These include breaks on certain types of income, tax credits for hiring specific groups, and savings for making energy-efficient upgrades. 

Unrelated Business Income Tax (UBIT) Considerations

Even if a nonprofit holds tax-exempt status, it can still owe taxes on income from activities unrelated to its core mission. This is where the UBIT comes in. If a nonprofit earns $1,000 or more in gross income from unrelated business activities, it must file Form 990-T with the IRS.

Who is affected?

Applies specifically to organizations under sections 501(c)(7), 501(c)(9), 501(c)(17), and 501(c)(20) of the Internal Revenue Code.

What Qualifies as Unrelated Business Income?

• Revenue from trade or business that is not substantially related to the organization’s exempt function.
• Does not include income from dues or fees used directly for exempt purposes (known as “exempt function income”).

Key Points to Note

• Investment income can remain tax-free if set aside for qualified purposes, such as education, charity, or member benefits (e.g., health or life insurance).
• Any income used for non-qualified purposes or exceeding allowed reserves becomes taxable.
• Corporate dividend deductions aren’t allowed when calculating unrelated business taxable income.

• Gains on the sale of exempt-use property may be tax-exempt if the proceeds are reinvested in similar property within 1 year before or 3 years after the sale.

The nonprofit can deduct ordinary and necessary business expenses like a for-profit to reduce the taxable amount. These deductions may include employee wages, insurance, office expenses, maintenance, etc.

These must be both ordinary and necessary. Here’s what typically qualifies:

• Wages and salaries paid to employees, including reasonable bonuses, are deductible. 
• Employee benefits such as health insurance, retirement plan contributions, and group-term life insurance (within IRS limits) can also be deducted.
• Routine repairs and maintenance for facilities are deductible, while significant improvements must be capitalized.
• Staff licensing, job training, and continuing education expenses can be deducted.
• Marketing and outreach costs that directly support the organization’s mission are deductible.
• Any other operational expenses that are necessary and connected to the nonprofit’s exempt purpose or business activity may also qualify.

Employment-Related Tax Credits 

The Work Opportunity Tax Credit is a federal tax credit available to employers who hire individuals from certain targeted groups that have faced significant barriers to employment. Eligible groups include veterans, individuals receiving government assistance, and others. 

Employers can claim a credit equal to 40% of up to $6,000 of wages paid to qualified individuals, resulting in a maximum credit of $2,400 per employee. 

To claim the credit, employers must obtain certification that the new hire is a targeted group member by submitting IRS Form 8850 to their State Workforce Agency within 28 days of the employee’s start date.

Energy-Efficient Building Incentives

Under IRC Section 179D, building owners who install energy-efficient systems in commercial buildings may be eligible for a tax deduction. The deduction applies to improvements in interior lighting, heating, cooling, ventilation, hot water systems, or the building envelope. 

The maximum deduction is $1.80 per square foot, depending on the energy savings achieved. For buildings owned by the government or certain tax-exempt entities, the deduction can be allocated to the designer of the energy-efficient property. ​

Research and Development Tax Credits 

While traditionally associated with for-profit businesses, certain nonprofit organizations engaged in qualified research activities may be eligible for the Research Credit under IRC Section 41. 

This credit applies to expenses incurred for qualified research, including wages for employees conducting research, supplies used in research, and amounts paid to third parties for contract research. Nonprofits should consult with a tax professional to determine eligibility and ensure compliance with IRS requirements. 

State and Local Incentives for Nonprofits

Nonprofit organizations may be eligible for various state and local tax incentives that can significantly reduce operational costs.​

Property Tax Exemptions

All 50 states offer property tax exemptions for certain nonprofit organizations. These exemptions typically apply to properties used exclusively for charitable, religious organizations or educational purposes. Eligibility criteria and application processes vary by state and locality.  

For example, the Board of Equalization in California administers property tax exemptions for qualifying nonprofits. 

In Illinois, 100% of property taxes can be exempt if the property is used for charitable purposes under 35 ILCS 200/15.

Sales Tax Exemptions

Nonprofits may be exempt from paying sales tax on purchases made for their official operations.

• Applies to. Office supplies, furniture, computers, and other mission-related goods/services.
• Required. Sales tax exemption certificate (varies by state).

For example, in Texas, 501(c)(3) organizations are exempt from state sales tax when purchasing items directly related to their exempt function.

State-Specific Credits or Deductions

Some states incentivize charitable giving or nonprofit activity with unique credits or deductions.

• Charitable giving credits. Donors may receive a state tax credit for contributions to qualifying nonprofits (e.g., Missouri’s Champion for Children tax credit).
• Nonprofit hiring incentives. Certain nonprofits hiring from targeted populations may qualify for state hiring credits.

For example, Arizona offers a dollar-for-dollar tax credit to individuals donating to qualifying charitable organizations (up to $841 for married couples filing jointly in 2024).

Note: Rules vary by state. Always check your state’s Department of Revenue or Secretary of State website for up-to-date forms, thresholds, and qualifying criteria.

Tax Strategies & Planning for Nonprofit Organizations

Tax planning for nonprofits often gets boxed into compliance tasks like filing on time, meeting state thresholds, and checking off IRS requirements. But if you pause and look closer, there’s a strategic opportunity to shape a stronger, more resilient organization. Here are some tax strategies you can implement this tax year for more success and social welfare:

1. Start with budgeting. Align your budget with last year’s goals and anchor it to past performance. Also, recalibrate it around changing outcomes, grant cycles, and the current policy environment. 
2. Reassess your organizational structure. If your nonprofit operates earned-income ventures, manages a foundation arm, or is involved in public-private partnerships, it may be worth revisiting its structure. 
3. Maximize deductible expenses. Nonprofits should rigorously document all eligible business expenses, such as program-related travel and consultant fees. Many leaders overlook specific areas, like the depreciation of office equipment or utilities used for mission-driven operations. 
4. Track fair market value and community shifts. Nonprofits operate within a dynamic ecosystem, potential donor behaviors change, funding bodies adjust priorities, and your community’s needs may evolve faster than your programs.  
5. Leverage tax credits. If your organization hires veterans, individuals from underrepresented communities, or those facing employment barriers, you may qualify for the WOTC. Work with a tax advisor like The Pun Group to review eligibility.
6. Introduce a year-round tax strategy. Assign someone internally or a third-party expert like The Pun Group to maintain up-to-date records, track changing tax laws, and flag UBIT exposure early. That way, you’re not caught off guard and are always audit-ready, even if your nonprofit does not require one.

Benefits of Working With Specialized Tax Advisors

The benefits of working with specialized tax advisors go far beyond filing paperwork. At The Pun Group, our task is to bring clarity, compliance, and long-term savings to your organization. 

We understand nonprofit tax law, such as 501(c)(3) requirements, and identify exemptions and credits. Let’s see the benefits in detail:

1. Informed Compliance With Complex Tax Regulations

Tax law changes annually, and depending on your business type, size, industry, and location, your obligations shift too. A tax advisor’s job is to decode complex rules, interpret grey areas, and apply them to your context. 

2. Year-Round Strategic Tax Planning

Tax advisors are not limited to being used only in March or April. They can guide you through major financial decisions like restructuring, making capital investments, or planning a multi-year grant strategy. Their insight helps you avoid reactive planning and instead shape a tax strategy that supports long-term goals.

For example, if you’re considering expanding to a new state, they’ll factor in local tax codes, potential deductions, and credits that could affect your cost projections.

3. Time-Saving Organization and Expertise

Tax season can be overwhelming for anyone who juggles multiple roles, especially nonprofit leaders and small business owners. A tax advisor brings peace of mind and structure. Instead of drowning in paperwork, you’ll get clear checklists, document templates, and organized workflows.

And yes, showing up with a shoebox of receipts is still frowned upon, but a good advisor will help you create systems to avoid that next year.

4. Audit Support and Risk Reduction

Even if your records are clean, an audit can still come knocking. Tax advisors know what audit triggers to look for, such as misreported income or inconsistent filings. 

More importantly, if you’re ever audited, they can represent you directly, prepare all supporting documentation, and communicate with tax authorities. It’s like having an advocate who speaks fluent “IRS.”

5. Credible Documentation for Grants or Investors

Grantmakers often require clean financial records and transparency in fund usage for nonprofits. Investors want to see thoughtful tax planning for startups and growth-stage businesses as a sign of fiscal maturity. 

Tax advisors can prepare financial statements, projections, and summaries that reinforce your credibility.

6. Uncover Hidden Credits and Incentives

Many organizations aren’t aware of the incentives they qualify for, such as energy-efficiency credits, the WOTC, or state-specific deductions. 

A tax advisor brings knowledge of these often-underused opportunities, helping you recover funds you may have missed.

Make Nonprofit Taxes Easy With The Pun Group

Tax law changes in 2025 will bring new complexities and opportunities for nonprofits—and staying ahead of them could mean thousands in savings. With the sunsetting of the Tax Cuts and Jobs Act, donor incentives may shift, and nonprofits need to sharpen their tax strategies to protect funding and uncover new credits.

At The Pun Group, we help nonprofits navigate this new era of tax planning. From minimizing UBIT exposure and documenting deductible activities to claiming underused credits like WOTC and energy-efficiency incentives, our team makes sure you’re not leaving money on the table. Whether you’re running educational programs, hiring from underserved communities, or managing unrelated business income, we align your tax plan with your mission.

What You Should Do Next:

1. Review your income streams for UBIT exposure. If you’re earning from activities outside your mission—like facility rentals or retail—make sure you’re tracking and deducting eligible expenses to lower taxable income. 
2. Evaluate your eligibility for overlooked tax credits. From employment-related incentives to energy-efficient upgrades, work with a tax advisor to identify and apply for these valuable programs.
3. Connect with The Pun Group. We’ll help you stay compliant, find savings, and build a tax strategy that supports your long-term goals.

Partner with The Pun Group to bring clarity, strategy, and confidence to your nonprofit’s financial journey.

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