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Major 2026 Updates for Nonprofits and CPAs – IRS Executive Compensation Tax, Group Exemption Rules, and Virginia Budget Changes

Virginia and Washington DC nonprofits and CPAs face a rapidly changing landscape in 2026, with significant new rules from the IRS, a major Virginia budget agreement, and critical compliance deadlines. This guide covers the most impactful developments, including the expanded executive compensation excise tax, new group exemption oversight, and the Virginia budget’s tax and regulatory changes.

I. Expanded Excise Tax on Nonprofit Executive Compensation (IRC Section 4960)

The One Big Beautiful Bill Act (OBBBA), enacted on July 4, 2025, has fundamentally altered the landscape of executive compensation for tax-exempt organizations. On June 5, 2026, the Treasury Department and IRS issued Notice 2026-36, providing crucial guidance on these changes.

The New Definition of “Covered Employee”

Section 4960 of the Internal Revenue Code imposes a 21% excise tax on applicable tax-exempt organizations (ATEOs) that pay a “covered employee” more than $1 million in remuneration in a taxable year, or an excess parachute payment.

Previously, only an ATEO’s five highest-compensated employees were covered. For taxable years beginning after December 31, 2025, any current or former employee of an ATEO (going back to 2017) is now a covered employee — dramatically broadening the scope of the tax.

This expansion is particularly significant for universities, academic medical centers, hospital systems, national charities, trade associations and similar organizations with substantial deferred-compensation programs.

Critical Interpretation and Exceptions

The Treasury Department and IRS interpret the effective date to mean the expanded definition applies only to taxable years beginning after December 31, 2025. The old “top five” definition still governs whether someone was a covered employee in prior years (2017–2025).

The new rules drop the old “limited services” exception, since it was only relevant under the prior “top five” framework. The proposed regulations are expected to retain the “limited hours” and “nonexempt funds” exceptions, which allow certain employees of related non-ATEO organizations to be excluded.

Until the forthcoming proposed regulations are issued, ATEOs may rely on the IRS’s interpretation described in this notice. A worked example in the notice walks through how these rules apply to three hypothetical employees.

Action Steps for Nonprofits

  • Review compensation practices to identify any employees who may be affected by the expanded definition

  • Monitor guidance as the IRS has requested comments by August 4, 2026

  • Consider qualified retirement plan design, as benefits provided through these plans can reduce the compensation that counts toward the excise tax

II. Virginia Nonprofit Group Exemptions Face New Oversight After IRS Rule Change

On January 20, 2026, the IRS issued Revenue Procedure 2026-8, modernizing the group exemption program for the first time since 1980. The IRS began accepting new group exemption applications on January 20, 2026, after a moratorium that began in mid-2020.

What is a Group Exemption?

A group tax exemption allows a “central organization” to obtain tax-exempt status for its affiliated “subordinate” organizations without each subordinate having to apply individually to the IRS. The new guidance tightens who qualifies, what has to be documented, and how often central organizations must report back to the IRS.

Key Changes in Revenue Procedure 2026-8

The new rules establish minimum size requirements for the group: at least five subordinate organizations to obtain a group exemption and at least one to maintain it.

Key definitions have been clarified:

  • Affiliation is now determined by a “facts and circumstances” standard looking at the relationship between the central and subordinate organization.

  • General Supervision requires the central organization to annually obtain, review, and retain information on the subordinate organization’s finances, activities, and compliance with annual filing requirements.

  • Control exists if the central organization appoints a majority of voting directors or officers, there is a majority overlap of directors or officers, or there is a written agreement evidencing control.

Subordinate organizations that share the same purpose must adopt a uniform purpose statement in their governing documents. Each subordinate must sign a written authorization to be included in the group.

Ineligible Subordinate Organizations

Certain entities are now ineligible to be subordinates, including:

  • Foreign organizations

  • Private foundations

  • Type III supporting organizations

  • Qualified nonprofit health insurance issuers

  • Organizations that have had their exempt status revoked and not reinstated

Transition Relief and Deadlines

The IRS is providing a one-year transition period (January 20, 2026, to January 22, 2027) for existing central organizations to comply with several new requirements. For Virginia’s many large nonprofit networks and associations, this is a critical deadline to act on.

III. Virginia Passes Budget with New Data Center Energy Tax and Standard Deduction Increases

Virginia finalized a $207 billion biennial budget on June 22, 2026, which Governor Abigail Spanberger signed into law on June 30, 2026. The budget includes significant tax policy changes.

New Data Center Electricity Consumption Tax

The budget introduces a first-of-its-kind electricity consumption tax on data center operators at a rate of **$0.011 per kilowatt hour (kWh)** for all electricity consumed. This tax applies from July 1, 2026 through July 1, 2028, with a cap of $600 million in annual revenue. Any amount raised above this cap will be refunded to data center operators on a pro rata basis.

A notable feature is that the tax applies to self-supplied electricity from wind or solar with no exception. The tax is to be reported and remitted to the State Corporation Commission, not the Virginia Department of Revenue.

Standard Deduction Increases

For individual taxpayers, the budget raises Virginia’s standard deduction over the next several years. For 2026, single filers can claim $8,750 and joint filers $17,500. In 2027, these amounts will increase to $9,200 and $18,400, respectively. In 2028, they will rise again to $9,300 and $18,600.

Other Tax Provisions

The budget allows localities to hold referendums on a 1% sales tax increase to fund school construction. It also establishes a regulated adult-use retail cannabis market with sales starting July 1, 2027, with a 6% excise tax for the first two years, increasing to 8% in 2029, and localities able to add an additional 3.5% tax.

IV. Virginia CPA License Renewals Open with New Inactive Status Policy

The Virginia Board of Accountancy opened 2026 license renewals on March 1, 2026, with a deadline of June 30, 2026. The renewal fee for individual licenses is $60, and for firm licenses is $75 .

New Inactive Status Policy Effective July 1, 2026

Effective July 1, 2026, the Board’s policy on inactive status is changing significantly. All CPAs currently approved for Inactive status must begin including “Inactive” in their professional title. The policy also adds a new “Emeritus” status for retirees .

CPE Requirements for Virginia CPAs

Virginia uses a rolling three-calendar-year period for CPE compliance, requiring at least 120 CPE hours within that rolling window, including at least eight hours of accounting and auditing and two hours of VBOA-approved ethics coursework . The CPE deadline is January 31 for the prior calendar year’s CPE hours, and the license renewal deadline is June 30 each year.

Scam Alert

The Board has issued a warning about a phishing attempt targeting CPAs, involving an email appearing to come from NASBA claiming a formal ethics complaint has been filed. CPAs should not click on or respond to these emails and can report them to examsecurity@nasba.org.

V. Single Audit Threshold Rises to $1 Million

Effective for fiscal years beginning on or after October 1, 2024, the threshold triggering a Single Audit (Uniform Guidance) has increased from $750,000 to **$1 million**. This is part of the 2024 Uniform Guidance overhaul.

While this reduces the audit burden for smaller organizations, it doesn’t eliminate compliance obligations. The 2024 Uniform Guidance also introduced other changes impacting audit planning and execution. Federal agencies still expect clear categorization and consistency, even if a formal Single Audit isn’t required.

Additional Resources

Official Government and Regulatory Links

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