The beginning of October not only brought cooler weather to much of North Carolina; it also marked the beginning of a federal government shutdown and reduced Medicaid rates for health care providers in our state. This week’s policy update highlights the impact of these October phenomena (other than the cooler weather) on nonprofits. We highlight the IRS’s plans to release guidance on issues of tax exemption and nonpartisanship for 501(c)(3) nonprofits. And we share details of a new U.S. Department of Justice memo on efforts to prevent political violence against ICE and what that could mean for nonprofits.
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IRS Hints at Forthcoming Guidance on Tax Exemption, Nonpartisanship for 501(c)(3) Nonprofits |
On Tuesday, the Internal Revenue Service (IRS) released its 2025-2026 Priority Guidance Plan that highlights the IRS’s plans for new guidance – potentially including regulations, revenue rulings, and fact sheets – on tax-related issues from July 1, 2025 through June 30, 2026. Two of the IRS’s guidance priorities could have significant impacts on nonprofits’ operations and tax-exemption:
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Nonpartisanship requirements for 501(c)(3) nonprofits. The IRS plans to issue “guidance on the statutory provision in §501(c)(3) against participation or intervention in political campaigns (the “Johnson Amendment”).” The IRS last released formal guidance on the nonpartisanship provision in 2007 (Revenue Ruling 2007-41). It is possible that its forthcoming guidance on nonpartisanship could:
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formalize the assertion from the IRS’s pending consent agreement that the nonpartisanship provision has a narrow exemption for communications from churches and other houses of worship to their congregations “through [their] customary channels of communication on matters of faith in connection with religious services”; and/or
- assert that the nonpartisanship provision limits the ability of 501(c)(3)s to engage in nonpartisan voter registration, voter education, or get-out-the vote activities.
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Racial discrimination and tax-exempt status. The IRS plans to issue “guidance on the application of fundamental public policy against racial discrimination, including consideration of recent caselaw, in determining the eligibility of private schools for recognition of tax-exempt status under §501(c)(3).” The concept of a “fundamental public policy against racial discrimination” comes from the 1983 U.S. Supreme Court ruling in Bob Jones v. United States where the Court found that the IRS could revoke a nonprofit private college’s tax-exemption under Section 501(c)(3) because its policy of denying admission to individuals in interracial relationships violated a “fundamental public policy” of eradicating racism in education. It is quite likely that the “consideration of recent caselaw” is a reference to the U.S. Supreme Court’s 2023 Students for Fair Admission v. Harvard decision, where the Court ruled that affirmative action admission programs at Harvard University and the University of North Carolina were unconstitutional because they violated the equal protection clause of the Fourteenth Amendment. Notably, Chief Justice Roberts wrote in his majority opinion: “Eliminating racial discrimination means eliminating all of it.” Potentially, IRS guidance combining the reasoning from these two cases could lead to a conclusion that nonprofit private schools with race-based practices – including those with diversity, equity, and inclusion (DEI) policies and practices – are not eligible for tax-exemption under Section 501(c)(3) of the Internal Revenue Code.
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Several other items in the IRS’s priority guidance plan could affect some nonprofits, including: |
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Final regulations on donor advised funds (DAFs), “including excise taxes on sponsoring organizations and fund management.” In November 2023, the IRS issue proposed regulations that would have established definitions of donor advised funds, donors, and donor-advisors. They also would have provided clarity on exemptions from the definition of a DAF and on taxable distributions from DAFs. The proposed rule could impact the way that nonprofits administer their DAFs, and the broad definitions could mean that some other types of nonprofit arrangements – including fiscal sponsorships, giving circles, certain scholarships, and other types of restricted funds – could be treated as DAFs and be subject to more stringent rules. The Center submitted public comments on the proposed rule, sharing our own assessment of the proposal and the feedback that we received from community foundations and other nonprofits. It is unclear how similar the final rule will be to the proposed rule.
- Regulations on expenditure responsibility requirements for private foundations. Potentially, these rules could affect the grantmaking decisions and policies of private foundations.
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Guidance on the tax credit for contributions to 501(c)(3) scholarship granting organizations that was part of the One Big Beautiful Bill Act. That provision allows taxpayers to receive a federal tax credit of up to $1,700 per year for contributions to 501(c)(3) nonprofits that qualify as “scholarship granting organizations,” starting in 2027. The provision requires states to opt in to the new tax credit, and the NC General Assembly passed legislation (H.B. 87) in July – which was vetoed by Governor Stein – that could make North Carolina the first state to opt in to the tax credit. IRS guidance could clear up ambiguities in the statute, including providing clarity around self-dealing rules (i.e., preventing a scholarship granting organization from providing scholarships for children of its donors and other insiders) and on the types of public school, private school, and homeschool expenses that scholarship granting organizations can cover with scholarships.
- Guidance on excise taxes on investment income of certain nonprofit private colleges and universities. This guidance could incorporate changes to these excise taxes from the One Big Beautiful Bill Act.
- Guidance on Trump accounts, the new savings accounts established by the One Big Beautiful Bill Act that can receive large contributions from private foundations and other 501(c)(3) nonprofits.
- Guidance on excess compensation paid by some tax-exempt nonprofits, including the expanded definition of “covered employee” from the One Big Beautiful Bill Act.
- Guidance on the reporting of charitable contributions of trusts. It is unlikely that this guidance will change the information that nonprofits need to provide to trusts that provide charitable contributions.
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Final regulations and related guidance on multiple employer retirement plans (MEPs). The Center does not anticipate that these final rules will affect the MEP that the Center offers our members through Mutual of America, but we will track the regulations when they are released.
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Note that the IRS has not yet published guidance about any of these topics, although guidance is expected sometime in the next nine months. Once the IRS issues guidance on these issues, the Center will provide an analysis of the implications for nonprofits. |
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Federal Government Shutdown Enters its Third Day |
Because Congress and the White House were unable to reach an agreement on appropriations legislation for the new federal fiscal year, parts of the federal government began to shut down on Wednesday. Two weeks ago, the U.S. House of Representatives approved a “clean” continuing resolution (H.R. 5371) that would extend federal funding through November 21. The bill needs 60 votes to pass the Senate. The Senate rejected the bill twice this week, once on Tuesday just before the shutdown started and again on Wednesday. The Senate will likely vote on the bill again today. Senate Democrats oppose the temporary spending bill for two reasons:
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Without congressional action, the enhanced premium tax credits on their Affordable Care Act (ACA) Marketplace health plans are scheduled to end after this year. Translation: The cost of ACA Marketplace health coverage will increase significantly for many North Carolinians in 2026, including for many people who are clients of nonprofits and employees of nonprofits that do not offer employer-provided health coverage. Some congressional leaders have indicated that Congress could consider extending the enhanced tax credits in December. Democrats have expressed concerns that this will be too late since open enrollment for ACA Marketplace plans opens on November 1.
- President Trump has twice this year used rescissions to cancel billions of dollars of congressionally-approved funding. Democrats want future appropriations legislation to include assurances that President Trump will not have the authority to rescind other funding approved by Congress.
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This week, various federal agencies have released their contingency plans for the government shutdown. A prolonged government shutdown could lead to lapses in service for many people served by nonprofits and for delayed or cancelled payments to nonprofits that provide services through federal grants and contracts. For nonprofits with federal grants or contracts, the National Council of Nonprofits has a helpful resource on what nonprofits should do to prepare for a federal government shutdown. Let us know if your nonprofit has been affected by the federal government shutdown.
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DHHS Decreases Medicaid Provider Rates |
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On Wednesday, the NC Department of Health and Human Services (DHHS) cut rates for Medicaid providers, including many nonprofits. The cuts come after the NC Senate and NC House of Representatives were unable to agree on legislation to fully fund Medicaid for the current fiscal year. As of October 1, DHHS has: |
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Implemented a 3% rate reduction for providers of most services to Medicaid recipients;
- Implemented a 10% rate reduction for acute care hospitals, nursing homes, psychiatric residential treatment facilities, and research-based Behavioral Health Therapy/Applied Behavior Analysis services for people with autism, and implemented an 8% rate reduction for intermediate care facilities; and
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Reduced Medicaid administrative costs, including ending or reducing some contracts, halting some projects, and cutting back on compliance and quality assurance activities.
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It remains possible that DHHS could end the rate reductions if legislators agree on full funding for Medicaid later this year. |
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DOJ Memo Focuses on Preventing Political Violence Against ICE |
On Monday, the U.S. Department of Justice published a memo aimed at preventing political violence against the U.S. Immigration and Customs Enforcement (ICE). The memo concludes with a warning that “the Department of Justice will arrest and prosecute to the fullest extent of the law every person who aids, abets, or conspires to commit these crimes, whether through funding, coordination, planning, or other means.” This warning suggests that nonprofits and their staff, volunteers, and board members, who are engaged in anti-ICE speech or activities could be subject to DOJ investigations and prosecution.
The DOJ memo follows up on, and references, President Trump’s National Security Presidential Memorandum (NSPM) from last Thursday that focused on countering domestic terrorism and organized political violence. The NSPM directs the National Joint Terrorism Task Force to “investigate, prosecute, and disrupt entities and individuals engaged in acts of political violence and intimidation designed to suppress lawful political activity or obstruct the rule of law,” including investigations of nonprofits and foundations that engage in or fund activities that could foster political violence. It also directs the U.S. Department of Justice (DOJ) to develop guidance on the types of activities on domestic terrorism, including “an identification of any behaviors, fact patterns, recurrent motivations, or other indicia common to organizations and entities that coordinate these acts.” Further, the NSPM implies that the Internal Revenue Service (IRS) can revoke the tax-exempt status of organizations and foundations that are deemed to be supporting political violence or domestic terrorism. While the NSPM does not directly impact nonprofits, it is possible that DOJ and IRS guidance stemming from the NSPM – including this week’s DOJ memo – could lead to threats to some nonprofits’ tax-exempt status and/or criminal prosecution against nonprofit employees and board members based on their organizations’ activities or policy positions.
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Join Nonprofit Policy Conversation in Wilson on October 16 |
The Center is partnering with the Healthcare Foundation of Wilson to offer a Nonprofit Policy Conversation in Wilson on Thursday, October 16 from 10 a.m.-12 noon. The policy conversation will bring together local nonprofit leaders from Wilson and surrounding communities for a discussion about the latest federal and state policy developments affecting the nonprofit sector. The Center will provide a public policy briefing that will include information about recent federal executive actions and court decisions that could affect nonprofits, an update on several parts of the One Big Beautiful Bill Act that may affect nonprofit funding and operations, the latest on the state budget, and details other state legislation of importance to nonprofits. We’ll also have a discussion for participants to share their insights about the impact of these and other policy issues on their organizations. Registration is open, and limited seats are available for nonprofit leaders outside of Wilson. Note: Nonprofits in Wilson can register for free and can reply to this email for more information.
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Third Quarter Lobbying Reports Due by October 21 |
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