After taking a week off for Thanksgiving, today’s update has information on policy developments affecting nonprofits over the past two weeks, including the latest developments in the Johnson Amendment litigation and requests from the IRS for public input on two parts of the One Big Beautiful Bill Act with implications for 501(c)(3) nonprofits. We also share the latest on court limitations on some Medicaid rate cuts and on new data on donations to nonprofits through licensed professional solicitors in North Carolina.
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Federal Court Hears Oral Arguments in Johnson Amendment Case |
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Last Tuesday, a federal court in Texas heard oral arguments in a case in which the Internal Revenue Service has requested a consent judgment that would allow two churches to make political endorsements to members of their congregations. Like other 501(c)(3) tax-exempt organizations, churches may not “participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.” Essentially, the IRS is interpreting the nonpartisanship requirement (sometimes known as the Johnson Amendment) as having 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.”
If the court were to issue the consent judgment, it would not be appealable and would limit the exception to the Johnson Amendment to the two churches that are parties to the case. However, Americans United for Separation of Church and State (AU), a left-leaning advocacy group, filed a motion to intervene in the case in July, effectively arguing that it has a legal interest in the case and that none of the parties to the case adequately represent its interest. During last week’s oral arguments, AU made its case for intervening in the dispute. AU explained that: “AU’s attorneys argued that the proposed decree contains sweeping, erroneous statements of law, and they challenged the parties’ assertions that their proposed outcome was constitutionally required. Further, they argued that what the plaintiffs and IRS are asking the court to do is unusual and would go behind Congress’s back to rewrite the law. In spite of previous efforts from advocates, Congress has repeatedly declined to exempt houses of worship from the Johnson Amendment.”
The court could issue a ruling on AU’s motion to intervene – and potentially on the requested consent judgment – later this month. If the court grants the motion to intervene, AU would have the right to appeal the consent judgment, which could ultimately lead to a broader appellate court ruling (perhaps ultimately by the U.S. Supreme Court) on whether the nonpartisanship provision in Section 501(c)(3) of the Internal Revenue Code is allowable under the First Amendment. (Spoiler alert: There is a strong chance that an appellate court would strike down the nonpartisanship provision in its entirety, potentially affecting all 501(c)(3) nonprofits.)
Separately, several Democratic members of Congress sent a letter to the Internal Revenue Service last week urging the IRS to follow the 70+ year old nonpartisanship law and drop its request for a consent judgment. |
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New Nonprofit Privacy Law Now in Effect |
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On Monday, a new nonprofit privacy law took effect in North Carolina. The new law prohibits state and local government agencies from: |
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Requiring nonprofits to provide the names of their donors, members, or volunteers;
- Publicly disclosing the names of any nonprofit donors, members, or volunteers that it obtains; and
- Requiring any current or prospective contractor or grantee from identifying any nonprofits to which it has “provided financial or nonfinancial support.”
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The law includes several exceptions, including reports or disclosures required by the state campaign finance statute, investigations by the Attorney General or Secretary of State, information requested pursuant to a court warrant, certain litigation discovery requests, and information that will be evidence in litigation. The limitation on state and local government agencies collecting and disseminating information about people associated with nonprofits does not cover nonprofit board members, officers, or staff.
Notably, the law applies not just to charitable nonprofits but to all organizations exempt from federal income tax under Section 501(c) of the Internal Revenue Code. This includes 501(c)(4) social welfare organizations, 501(c)(5) labor unions, and 501(c)(6) trade associations, all of which are permitted to accept donations that can be used for partisan political intervention. |
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Second Court Stops Medicaid Rate Cuts for Certain Providers |
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On October 1, the NC Department of Health and Human Services (DHHS) cut rates for Medicaid providers, including many nonprofits. The cuts came after the NC Senate and NC House of Representatives were unable to agree on legislation to fully fund Medicaid for the current fiscal year. Specifically, DHHS: |
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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;
- 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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Over the past month, some health care providers have successfully challenged the rate cuts in court: |
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In early November, a state court judge issued an injunction preventing DHHS from implementing rate cuts for providers of one type of service to children with autism.
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Two weeks ago, an administrative law judge issued an injunction preventing DHHS from implementing 8% rate cuts for personal care services at adult day care facilities.
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The court rulings in these two cases do not prevent DHHS from implementing other cuts in Medicaid rates.
A variety of nonprofits and individuals receiving Medicaid benefits have shared with legislators the impacts of the Medicaid cuts on the lives of North Carolinians. Both the NC Senate and NC House of Representatives have unanimously passed bills (three bills for the House) to fully fund Medicaid, but the chambers have been unable to agree on whether to include other provisions in the Medicaid funding legislation.
Legislators are not expected to return to Raleigh for voting sessions on Medicaid – or on a broader state budget for FY2025-27 – until sometime next year. |
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NC Secretary of State Report Finds Significant Increase in Donations Through Professional Fundraisers |
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Last week, the NC Secretary of State released its annual report on charitable solicitation in North Carolina. The report found that donations to North Carolina nonprofits made through licensed fundraising professionals increased from $27 million in FY2023-24 to $48 million in FY2024-25. The report also found that about 74.53% of the amount of contributions made through licensed fundraisers went to support the work of nonprofits (with the remaining 25.47% presumably being retained by these contract fundraisers).
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While the apparent increase in contributions to nonprofits highlighted in the report is dramatic, it is important to remember that contributions through licensed professional fundraisers reflects only a small percentage of the overall revenue for nonprofits – and only a small percentage of overall donations to nonprofits. Overall, North Carolina nonprofits have total expenditures of more than $66 billion per year, so donations raised through licensed professional fundraisers only account for about 0.07% of total funding for nonprofit organizations. The vast majority of nonprofits’ revenue comes from other sources including fees for service, government grants and contracts, foundation grants, bequests, and individual and corporate donations that are made directly to nonprofit organizations rather than through professional fundraisers. While charitable contributions are indeed increasing, the increase in overall charitable giving last year was much smaller than the new charitable solicitation report would suggest. The annual Giving USA report found that individual giving increased by 3.3% relative to inflation last year.
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IRS Seeks Public Comments on Guidance on Scholarship Granting Organizations |
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Last week, the IRS published a request for comments on forthcoming guidance on a new federal tax credit of up to $1,700 per year for contributions to 501(c)(3) nonprofits that qualify as “scholarship granting organizations.” The new tax credit is part of the One Big Beautiful Bill Act that Congress passed this summer. It would take effect for contributions made beginning in 2027.
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The new federal law provides rules for how nonprofits would qualify as “scholarship granting organizations.” Among other things, scholarship granting organizations would need to: |
- Be 501(c)(3) public charities;
- Provide 10 or more scholarships to students attending more than one school;
- Spend at least 90% of their income on scholarships for eligible students;
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Have systems in place to prevent the co-mingling of contributions that are eligible for a tax credit from other revenue sources and to verify the household income and family size of students eligible for scholarships; and
- Be included on the list of eligible scholarship granting organizations provided by the state each year.
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The Center has heard a number of questions from nonprofits, elected officials, and others about this new federal tax credit. Here are answers to three of the most common questions we have heard (at least so far): |
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Why does it matter that donations to scholarship granting organizations are eligible for tax credits instead of tax deductions? As noted above, taxpayers will be able to receive a tax credit of up to $1,700 per year for their contributions to scholarship granting organizations. This means that their federal income tax will be reduced on a dollar-for-dollar basis (up to $1,700 per year) for their contributions to scholarship granting organizations. A tax-deductible contribution to another 501(c)(3) nonprofit merely reduces a taxpayer’s taxable income, which means that the amount of their federal income tax will only be reduced by a percentage (the effective tax rate that they pay) of their total contributions. Translation: This new tax credit creates a larger tax incentive to give to scholarship granting organizations than to give to other 501(c)(3) nonprofits.
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Doesn’t North Carolina already have the Opportunity Scholarship program to provide vouchers to help pay for private school tuition? Yes, but unlike the Opportunity Scholarship program, which only covers tuition and required fees at certain private K-12 schools, scholarship granting organizations can provide scholarships that cover a wider range of education-related expenses (including tutoring, certain technology expenses, school uniform costs, and transportation fees) for students attending public or private K-12 schools.
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Can a scholarship granting organization be abused to allow parents to receive a tax credit for a contribution that ultimately goes to a scholarship for their own children? No. The new federal law prohibits “self-dealing” by scholarship granting organizations, prohibiting these nonprofits from awarding scholarships to their donors and other “disqualified persons.” The U.S. Treasury Department is expected to develop regulations in the not-too-distant future with more guidance on self-dealing by scholarship granting organizations, presumably including penalties for organizations and/or their donors or other insiders who attempt to abuse scholarships for their own financial benefit. The IRS request for guidance seeks input on whether the IRS should use the same definition for “disqualified persons” as it uses for private foundations or whether it should establish different rules for self-dealing by scholarship granting organizations.
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The federal law requires states to opt in to the provision in order for the tax credit to be available to taxpayers in their states. North Carolina passed opt-in legislation (H.B. 87) in July, but Governor Josh Stein vetoed the bill. Legislators have not yet voted on overriding the veto, although the bill passed both the NC Senate and NC House of Representatives with enough votes to override the veto.
Nonprofits can submit comments to the IRS about rulemaking and guidance on the new scholarship granting organizations tax credit through December 26. |
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IRS Announces Plans for Regulations on Trump Accounts |
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On Tuesday, the IRS published a notice of intent to issue regulations on Trump Accounts, which are a new type of savings account that parents of children under the age of eight years old can create for their children. Trump Accounts were established as part of the One Big Beautiful Bill Act that Congress passed this summer.
When Trump Account holders turn 18, they will be able to use half of the money in these accounts for higher education, training, small business loans, or first-time home purchase, and they will then have access to the full amount of the accounts when they are 30 years old. Individuals and businesses can contribute up to $5,000 per year (indexed for inflation) to Trump Accounts. Certain tax-exempt nonprofits, including private foundations, can make unlimited contributions to Trump accounts to all children within a qualified class, such as a school district or educational institution or any other type of class that the Treasury Secretary “deems appropriate.” Among other things, the IRS is seeking public input on the other types of classes that would be appropriate for nonprofit contributions to groups of Trump Accounts. Nonprofits can provide comments on the proposed rules for Trump Accounts through February 20, 2026.
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Governor and Attorney General Oppose Proposed Duke Energy Rate Increases
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Two weeks ago, Duke Energy filed a request with the NC Utilities Commission to raise electricity prices for many North Carolinians by about 15% over the next two years. The rate hikes could mean new costs for many nonprofits that are served by Duke Energy Carolinas and Duke Energy Progress, particularly those that own their property. It also could increase energy costs for many North Carolinians who receive services from nonprofits, potentially meaning that they will rely more heavily on nonprofits to provide more assistance with other financial obligations as they spend more of their income on utility costs.
On Tuesday, the NC Department of Justice (NCDOJ) intervened in the case with the NC Utilities Commission to review the proposed rate increase. Attorney General Jeff Jackson explained: “With costs rising everywhere, it’s important we take a close look at Duke Energy’s proposed rate increase to ensure it is necessary. My office is intervening to make sure we find the right balance between investing in our energy infrastructure and protecting North Carolinians’ wallets.” Shortly after NCDOJ announced that it will intervene, Governor Stein issued a statement opposing the Duke Energy rate hike and supporting the NCDOJ action.
The Center will let you know if there are opportunities for nonprofits to provide input on the proposed Duke Energy rate hikes.
NOTE: The Center has not reported on Duke Energy rate hikes in these policy updates in the past. We are including information about this rate hike because several readers have shared with us that energy rate hikes can create significant hardship for nonprofit organizations and for the people and communities they serve and that it may be valuable for nonprofits to provide input to the NC Utilities Commission about the impact of rate hikes. We always appreciate readers’ input on topics that we should (or should not) include in these policy updates! If you have feedback on content for future policy updates (or on items in the current one), you can simply hit reply to share your input.
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