Written By Abigail Stacks
The One Big Beautiful Bill Act (OBBBA), enacted on July 4, 2025, contains numerous tax provisions (H.R.1 - 119th Congress, 2025). Several of these provisions extend tax laws enacted in 2017 by the Tax Cuts and Jobs Act, while others repeal, modify, or add laws to the tax code. As tax laws continue to evolve, Darnall, Sikes & Frederick remains committed to keeping our clients informed about new provisions, such as the “1-Percent Floor on Deduction of Charitable Contributions made by Corporations” (H.R.1 - 119th Congress, Sec. 70426, 2025).
Section 70426 of the OBBBA, which takes effect for taxable years beginning on or after January 1, 2026, establishes a 1% floor on charitable contributions made by corporations (H.R.1 - 119th Congress, 2025). Under this provision, corporations may only deduct charitable contributions on their Form 1120 that exceed 1% of their taxable income. The 1% floor established by the OBBBA works in tandem with the 10% ceiling on the deduction of charitable contributions by corporations previously established in the tax law (S.Prt.117-24 – 117th Congress, 2022; Lautz, 2025). If charitable contributions exceed the 10% ceiling, the disallowed amount resulting from both the 1% floor and the 10% ceiling may be carried forward for five years (Lautz, 2025). However, if the 10% ceiling is not exceeded, any disallowed amount from the 1% floor cannot be carried forward.
The 1% floor established by the OBBBA has the potential to cause corporations to lose valuable deductions on their Form 1120. With the floor and ceiling working in tandem, it essentially allows a corporation to take, at most, a charitable contribution deduction of 9% of its taxable income per year instead of the 10% allowed before the OBBBA. For a simplistic example, if a corporation makes $250,000 in taxable income before charitable contributions are included in 2026, and spends $30,000 on charitable contributions during the year, $2,500 ($250,000 x 1%) of the $30,000 in contributions would be disallowed due to the 1% floor, and $5,000 (30,000 - ($250,000 x 10%)) would be disallowed due to the 10% ceiling. This leaves the corporation with only a $22,500 deduction allowed for 2026. In this scenario, the total disallowed amount of $7,500 could be carried forward for five years (Lautz, 2025). However, if the corporation paid less than $25,000 in charitable contributions during 2026, the $2,500 disallowed deduction from the 1% floor could not be carried forward. For this reason, corporations should monitor their charitable contributions made during the year and the disallowed deductions being carried forward.
With this new 1% floor in mind, if your corporation anticipates making charitable contributions during tax years beginning after December 31, 2025, monitor taxable income throughout the year in comparison with charitable contributions made in addition to any disallowed deductions carried forward. Near year-end, create a tax plan to aid in determining if more charitable contributions are needed to take full advantage of the deduction, and to ensure the disallowed amount from the 1% floor is carried forward.
It is crucial for businesses to stay informed of tax law changes, such as those implemented by the OBBBA. By staying informed, you set yourself up for success in identifying potential tax savings and optimizing tax deductions. If your corporation needs assistance in planning for the new 1% floor, contact us for further guidance. Thank you for trusting Darnall, Sikes & Frederick with your accounting and financial service needs.
References
- H.R.1 - 119th Congress (2025-2026): An act to provide for reconciliation pursuant to title II of H. Con. Res. 14. (2025, July 4). https://www.congress.gov/bill/119th-congress/house-bill/1/text
- Lautz, A. (2025, November 17). How the new charitable deduction floors work. Bipartisan Policy Center. https://bipartisanpolicy.org/issue-brief/how-the-new-charitable-deduction-floors-work/
- S.Prt.117-24 – 117th Congress (2021-2022): Tax expenditures compendium of background material on individual provisions. (2022, December 1). https://www.govinfo.gov/app/details/CPRT-117SPRT49569/CPRT-117SPRT49569/summary