The New 1% Floor on Corporate Charitable Deductions: What Businesses Need to Know for 2026

Starting with tax years beginning after 2025, a major shift will affect how U.S. corporations deduct charitable contributions.

Under the One Big Beautiful Bill Act (OBBBA), the IRS has introduced a 1% floor on corporate charitable deductions, meaning that companies can only deduct donations that exceed 1% of their taxable income.

This new rule doesn't replace the existing 10% cap on deductions. Instead, it adds another layer, one that could lead to a permanent loss of tax benefits if businesses don't plan carefully.

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1. How the 1% Floor Works

Before 2026, corporations could generally deduct up to 10% of taxable income for donations to qualifying charities.

Now, under the new law, no deduction is allowed at all unless the company's total charitable giving for the year exceeds 1% of taxable income.

Here's a simplified example:

• A corporation earns $10 million in taxable income.

• It donates $80,000 (0.8% of income), no deduction allowed.

• It donates $100,000 (1%), still no deduction.

• It donates $110,000 (1.1%), it can deduct the $10,000 amount above the 1% floor.

If it contributes enough to reach the full 10% limit, it could deduct up to $900,000, but it would need to give 11% in total to get there.

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2. Carryovers and Lost Deductions

Corporate charitable contributions that exceed the 10% cap can still be carried forward for up to five years, but with a catch:

• Any portion disallowed by the 1% floor can only be carried forward if the total contributions for that year exceeded the 10% limit.

• If not, that 1% portion is permanently lost.

This makes timing even more important, giving just under the threshold could mean losing a deduction forever.

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3. Strategic Giving: Bunching Contributions

To reduce the annual hit from the 1% floor, companies may consider "bunching" several years' worth of giving into one large contribution.

For example, instead of donating 1% every year (and losing the deduction annually), a company could:

• Contribute 5% of income in one year,

• Then pause giving for the next few years.

This approach concentrates the deduction into one tax year, minimizing how often the 1% floor applies.

Donating to a corporate foundation or donor-advised fund (DAF) can also help, allowing funds to be distributed to charities over time, while claiming the deduction upfront.

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4. When a "Donation" Might Be a Business Expense

Not every payment to a nonprofit counts as a charitable contribution.

If a payment is made for a business purpose, for example, to sponsor an event, advertise a brand, or improve community relations, it might instead qualify as a deductible business expense under Section 162.

This distinction matters:

• Charitable contributions are subject to the new 1% floor and 10% cap.

• Ordinary business expenses are not, as long as they are "ordinary and necessary" for the company's operations.

Proper documentation is key. Corporations should record the business intent and expected benefit from any such payment.

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5. Planning Ahead for 2026

With the new 1% floor taking effect soon, corporations should take several steps now:

• Review past giving patterns. Identify years when donations fell below 1% and would have been disallowed under the new rule.

• Model the impact. Forecast how different giving levels will interact with taxable income and other limits (like NOLs and interest deductions).

• Coordinate with your tax adviser. Complex interactions between Section 170, Section 163(j), and Section 172 can make modeling tricky.

• Document intent early. Whether you treat a payment as a contribution or a business expense, contemporaneous records are essential.

• Consider 2025 timing. Contributions made before 2026 won't be subject to the 1% floor, so accelerating planned donations could preserve deductions.

How Margen Can Help

For corporate tax teams navigating the OBBBA changes, Margen makes planning faster and more reliable.

You can ask it questions like:

"How will the 1% floor affect our 2026 deductions if we donate 2% of taxable income?"

"Can this payment to a nonprofit qualify as a business expense instead of a charitable contribution?"

Margen checks your data against the latest IRS guidance and statutory language, helping you validate deductions before filing and stay compliant as the rules evolve.

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