Starting in 2026, the One Big Beautiful Bill Act significantly tightens the rules governing charitable deductions for both corporations and their owners. Businesses that have historically relied on charitable giving as a tax planning tool will find the new framework meaningfully less favorable—and in some cases, actively counterproductive.
The legislation introduced mandatory deduction “floors” that erode or eliminate the tax benefit of charitable contributions made through a business. Whether the entity is a C corporation or a flow-through, the calculus has changed.
Understanding how the new floors interact with existing caps is essential to making informed giving decisions in 2026 and beyond, since charitable giving that once produced a full, dollar-for-dollar deduction may now produce significantly less tax value—or none at all.
The Corporate Deduction Floor: How the Math Has Changed
The prior law framework was well understood: corporate charitable deductions were capped at 10% of taxable income, with any excess carried forward up to five years. The OBBBA layers a new 1% floor on top of that structure. For a corporation with $1,000,000 in taxable income making $170,000 in charitable contributions, the revised calculation works as follows:
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Step 1 — Floor Calculation: 1% of $1,000,000 = $10,000. Only contributions exceeding this threshold are eligible for a deduction.
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Step 2 — Cap Calculation: 10% of $1,000,000 = $100,000 maximum allowable deduction. Of the $170,000 contributed, only $100,000 is deductible in the current year.
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Carryover: The remaining $70,000 carries forward to the following year, but it is subject to the same 1% floor and 10% cap when the deduction is used. For corporations whose giving tends to cluster near the 1% threshold, a portion of accumulated carryovers may become permanently undeductible. The compounding nature of this problem is particularly acute for corporations with consistent mid-range giving programs, as the 1% floor accumulates year over year.
Pass-Through Entities: An Even More Complicated Picture
S corporations, partnerships and LLCs taxed as partnerships present a distinct—and in many ways more complicated—set of planning challenges under the OBBBA.
Because these entities do not deduct charitable contributions at the entity level, contributions flow through to owners via Schedule K-1 as separately stated items. Deductibility is then determined at the individual level, based on each owner’s personal tax situation—including whether they itemize and the application of the OBBBA’s individual-level floors and caps.
To illustrate: assume Member A and Member B each own 50% of an LLC, which makes $20,000 in cash charitable contributions in a tax year. $10,000 allocated to each member on Schedule K-1.
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Member A takes the standard deduction. Under the OBBBA’s new above-the-line charitable deduction provision, Member A may deduct only $1,000 of the $10,000 pass-through. The remaining $9,000 generates no tax benefit.
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Member B itemized deductions with an AGI of $100,000, the floor is 0.5% or $500, but their limit is $60,000 (60% of AGI).
The result is that the same business-level payment yields dramatically different tax outcomes depending on each owner’s personal circumstances. For entities with any diversity in their ownership base, planning charitable contributions at the entity level has become an unreliable strategy.
For many of these payments, however, a well-established planning alternative exists—one that is entirely unaffected by the OBBBA’s new limitations.
Section 162 of the Internal Revenue Code provides a path worth careful examination.
Under IRC 162 and Treas. Reg. 1.162-15, payments made to charitable organizations may be treated as fully deductible ordinary and necessary business expenses—rather than charitable contributions under 170—provided two conditions are satisfied:
Under Internal Revenue Code § 162 and Treasury Regulation § 1.162-15, certain payments made to charitable organizations may be fully deductible as ordinary and necessary business expenses—not as charitable contributions—if two conditions are met:
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The payment is directly connected to the taxpayer’s trade or business; and
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The taxpayer has a genuine, reasonable expectation of receiving a financial return commensurate with the amount paid.
The importance of this distinction cannot be overstated. Deductions taken under 162 fall entirely outside the OBBBA’s charitable deduction framework—no 1% corporate floor, no 10% taxable income cap, no 35% itemized deduction benefit limitation. A properly characterized § 162 deduction is simply a deductible business expense, treated no differently than rent or salaries.
Qualifying Payments: Examples and Limitations
Treasury Regulation 1.162-15 provides concrete examples of payments that may qualify:
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The IRS’s own example in Treas. Reg. 1.162-15 is instructive: a sole proprietor who manufactures and sells musical instruments through a website pays $1,000 to a local church—a 170(c) charitable organization—for a half-page advertisement in the church’s concert program. The program acknowledges the business as a sponsor. Because the sole proprietor reasonably expects the advertisement to attract new customers and increase sales, the payment may be treated as an ordinary and necessary business expense under 162, not as a charitable contribution under 170. The same result follows even if the state in which the business operates provides a tax credit equal to the amount of the payment, provided the credit is not a state or local income tax credit passed through to a partner or sole proprietor.
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A payment that is otherwise deductible as a charitable contribution under 170 cannot be simultaneously claimed as a 162 business expense. The two characterizations are mutually exclusive. Facts must genuinely support 162 treatment, and that support must be documented in real time – not reconstructed after the fact.
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The regulations also recognize a safe harbor for cash payments made in exchange for state or local tax credits, permitting § 162 treatment to the extent the credit reduces the economic cost of the payment.
Advisors should also be mindful that 162 treatment requires more than mere favorable intent—the underlying transaction structure must be consistent with an arm’s-length business arrangement, and the documentation must reflect that from the outset.
Building a Documentation Record That Holds Up
Asserting 162 treatment without a contemporaneous factual record is the most common way this position fails on examination. A defensible file should include:
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A clear articulation of the nexus between the payment and the taxpayer’s business—identifying the specific customer segment, market, or commercial relationship the payment is intended to support;
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Evidence of reasonable financial return expectation, such as audience data, estimated customer reach, comparable market rates for equivalent advertising or sponsorship, or prior-year performance metrics;
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Documentation showing whether the payment is contingent on business performance or revenue outcomes – a strong indicator of genuine business motivation; and
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Records demonstrating how the payment was actually used in the business’s marketing activities—logo placement, event signage, digital mentions, printed collateral and similar deliverables.
Weak or after-the-fact documentation is the single most common reason a 162 position does not survive IRS scrutiny.
Planning Steps for the 2026 Tax Year
The OBBBA’s new provisions are already in effect. Advisors and their business clients should be taking the following steps now rather than at year-end:
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Review all current charitable payment programs to identify which payments have a genuine direct business connection and a supportable expectation of financial return.
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Where warranted, update or restructure payment agreements to accurately reflect and memorialize the business purpose.
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For pass-through entities, model the new floor and cap provisions at both the entity and individual owner levels to quantify the impact across different owner profiles.
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Establish a contemporaneous documentation protocol for all 2026 payments that may be characterized as 162 business expenses.
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Engage qualified tax counsel before reclassifying any existing payment program, particularly where prior returns have treated those payments as 170 charitable contributions.
Key Takeaways
The OBBBA has substantially increased the effective cost of charitable giving through a business entity. The new 1% corporate floor operates in direct tension with the existing 10% income cap, and the individual-level floors and benefit caps can reduce the tax value of a pass-through charitable deduction to a small fraction of its face amount – or eliminate it entirely.
Where the underlying facts support it, characterizing payments to charitable organizations as ordinary and necessary business expenses under § 162—rather than as § 170 charitable contributions—is the most direct way to preserve full deduction value. This is not an aggressive position; it is a long-standing statutory and regulatory framework. What it requires is a genuine business rationale and a contemporaneous record that demonstrates it.
Business owners who continue to treat these payments as 170 charitable contributions without evaluating § 162 alternatives risk forfeiting real and recurring tax value—not as an isolated oversight, but as a structural feature of their giving program that compounds each year the analysis is deferred.
