With the holidays quickly approaching, this week’s policy update begins with two gifts for your nonprofit: (1) the Center’s recap of the many policy developments affecting nonprofits in 2025; and (2) two short surveys to give you an opportunity to shape the Center’s policy priorities and advocacy/policy programming in 2026. We include information about the first meeting of the new state legislative committee on property tax law changes that could have significant implications for nonprofits. We also share developments in the Johnson Amendment case, the latest on congressional health care legislation, and an explanation of why the just-passed defense spending bill could have implications for nonprofit indirect cost rates.
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Learn More about Unprecedented Policy Developments for Nonprofits in 2025...and What to Expect in 2026
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In many ways, 2025 was an unprecedented year for public policy developments affecting nonprofits, with many new challenges (and a few good changes) coming from all three branches of the federal and state government nearly every week. As a result, this year's Nonprofit Policy Update emails have often been lengthy, so we know many readers haven’t been able to read them in their entirety. |
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Do you want to make sure you didn’t miss any policy developments that might be important for your nonprofit? Then we encourage you to spend a few minutes reading the Center’s 2025 Nonprofit Policy Year in Review blog post to learn more about the (many) policy trends in the nonprofit sector this year and what to expect in 2026.
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Take Two Quick Surveys to Help the Center Identify Our Policy Priorities and Programming for 2026
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As a reader of these weekly policy updates, you are probably aware that the Center advocates on state and federal public policy issues that affect most or all 501(c)(3) nonprofits in North Carolina, and that we also provide information and training to nonprofits on public policy issues and effective advocacy. As the Center plans for our 2026 public policy and advocacy work, we are seeking your input on both of these components. |
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Thank you in advance for taking a few minutes to complete two quick surveys to provide: |
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Your input on federal and state policy priorities for the nonprofit sector in 2026. Take the survey.
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Your input on the types of in-person or virtual public policy and advocacy programs that would be most beneficial for your nonprofit in 2026. Take the survey.
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NC House Committee Explores Property Tax Laws
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The NC House of Representatives Select Committee on Property Tax Reduction and Reforms held its first meeting on Wednesday, launching its effort “to study options to reduce the property tax burden on taxpayers in North Carolina.” Most of the three-hour meeting consisted of a (very comprehensive) overview of property tax laws and housing market trends from nonpartisan legislative staff. Most of the committee members’ discussion focused on the increasing property tax burdens on homeowners in many parts of the state, as many counties have increased property tax rates and/or have reassessed property values (and higher property values lead to higher property tax burdens) in recent years.
The committee’s next meeting will be on Wednesday, January 14, and the committee will meet several more times this winter and spring and will likely make recommendations for changes to property tax legislation for the House (and potentially the Senate) to consider during the 2026 short session that begins in April. Over the course of these future meetings, it is quite possible that the committee will explore nonprofit property tax exemption and could make recommendations to limit or eliminate property tax exemption for some or all 501(c)(3) nonprofits to keep property tax payments lower for North Carolina individuals, families, and businesses.
Many charitable nonprofits that own their property are exempt from paying property tax on it if they use their property (or distinct parts of it) “wholly and exclusively” for their nonprofit’s mission-related purposes. North Carolina’s nonprofit property tax exemption law is somewhat complicated, with seven different statutes that provide for property tax exemption for certain types of 501(c)(3) nonprofits.
Rented property that is used by 501(c)(3) nonprofits is not exempt from property tax in North Carolina. Consequently, some nonprofits that lease their property wind up paying higher rents to cover their landlords’ property tax bills. Near the end of yesterday’s committee meeting, one of the committee chairs also addressed concerns about the challenges that small businesses – including those that lease their property and ultimately bear the cost of their landlords’ property taxes – are facing with increasing property tax burdens.
The North Carolina Constitution requires property tax exemptions to be enforced uniformly in all 100 counties of the state. County assessors determine whether nonprofits are exempt from property tax, and each county assessor has its own process for making this determination. Municipalities (cities and towns) generally follow the decisions of county assessors in determining whether nonprofits are exempt from municipal property taxes, but they are not required to do so.
As the Center advocates for lawmakers to protect nonprofits’ tax exemption, we are seeking input from nonprofits. If you haven't already done so, please take five minutes to complete a brief survey about your nonprofit’s property tax exemption (or lack thereof) and the potential impact of changes to state nonprofit property tax exemption laws. Thank you to the many of you who have already completed the survey!
If you want to learn (a lot) more about nonprofit property tax exemption in North Carolina, check out the North Carolina Law Review's comprehensive 2018 article on the topic. |
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Court Could Issue Final Ruling in Johnson Amendment Case in Early 2026
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Last Friday, a federal court in Texas issued an order denying an advocacy group’s request to intervene in a lawsuit 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. The court’s ruling from last Friday denied AU’s request and indicates that the court will not issue a ruling on the consent judgment for at least 60 days (meaning for at least 53 days from today) or until any potential appeal of the order by AU is still pending.
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North Carolina Will End 2025 without a State Budget |
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This week, state legislators did not hold any votes during their scheduled mini-session, meaning that the NC Senate and NC House of Representatives remain at an impasse on a state budget for FY2025-27. This means that North Carolina will finish the year as the only state in the country without a state budget in place, as lawmakers are not scheduled to return to Raleigh for votes until mid-January. |
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While state law prevents a government shutdown when legislators and the Governor are unable to pass a budget, the lack of a budget has a variety of consequences for state government operations, for nonprofits, and for North Carolinians. |
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U.S. House Passes Health Care Legislation |
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Health care affordability has been a major priority for Congress this month. Without congressional action, the enhanced premium tax credits on Affordable Care Act (ACA) Marketplace health plans are scheduled to end after 2025. |
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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.
The U.S. House of Representatives took two actions on Wednesday to attempt to address issues of health care affordability: |
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The House passed the Improving Health Care Options for Workers Act (H.R. 6703) by a 216-211, mostly party-line vote. Instead of extending the ACA premium tax credits, the bill would pay for cost-saving reductions (which, in theory, would create lower out-of-pocket health care costs without lowering health premiums), would increase transparency f prescription drug costs, and would make a variety of changes to federal laws governing association health plans (including allowing employers with one employee to participate in AHPs). The Senate is unlikely to pass the bill, since it does not have bipartisan support.
- A majority of house members signed a discharge petition that will require the House to take a vote on legislation to extend the ACA premium tax credits for three years. The House won’t vote on this legislation until early 2026 (after health premiums on ACA Marketplace plans will have already increased). While there is a good chance that the House will pass this bill in early 2026, it is unlikely to pass the Senate in its current form.
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Congress could pass health care legislation in early 2026, either through Senate modifications to one of the House bills or through the budget reconciliation process, which would allow the Senate to consider and pass the bill by a simple majority vote (most legislation needs the support of at least 60 Senators for consideration). |
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Congress Passes Defense Authorization Bill with Implications for Nonprofit Indirect Cost Rates |
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On Wednesday, the U.S. Senate passed the National Defense Authorization Act (NDAA), a bill that provides funding for the Department of Defense for FY2025-26. The House passed the bill last week, and it now goes to President Trump for his signature. While most parts of the 3,086-page bill do not directly affect nonprofits, one provision will affect indirect cost rates of nonprofits that receive grants through the Department of Defense. The provision requires the Department of Defense to maintain existing indirect cost rates with nonprofit grantees unless it has certified to Congress that it is lowering all indirect cost rates and that it has developed “an implementation plan with adequate transition time to change budgeting and accounting process for affected . . . nonprofits.”
In a helpful article analyzing the provision and recent litigation related to federal indirect cost rates, the Venable law firm explains that the indirect cost rate provision in the NDAA signals that Congress is trying to prevent “abrupt changes to how indirect cost rates are handled and reimbursed.” The article also notes that nonprofits may soon see lower indirect cost rates – and changes to how these rates are calculated – either through congressional appropriations legislation or through changes to the Office of Management and Budget (OMB) Uniform Guidance in the not-too-distant future. Last year, OMB made significant improvements to the Uniform Guidance, including increasing the de minimis indirect cost rate on federal grants to nonprofits to 15% of modified direct costs. The Venable article explains: “Although the language suggests that Congress has interest in finding ways to limit indirect cost rates, it also conveys that Congress understands that indirect cost rates are real costs of research, is calling for collaboration with the regulated community in evaluating possible alternative models, and is mandating an orderly transition in the event that any alternative model is adopted.”
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Reminder: IRS Seeks Public Comments on Guidance on Scholarship Granting Organizations through December 26
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Three weeks ago, 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.
The new federal law provides rules for how nonprofits would qualify as “scholarship granting organizations.” Among other things, scholarship granting organizations would need to: |
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- 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;
- 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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![Fictional character Col. Nathan R. Jessep from the movie, A Few Good Men, caught mid-sentence as though he is shouting. Meme text reads: 'We can handle the truth [so please complete these surveys].'](https://feathr-api-template-assets.s3.amazonaws.com/images/68878179ba649cbf1f41587b/AFewGoodMen_truth.jpg "Fictional character Col. Nathan R. Jessep from the movie, A Few Good Men, caught mid-sentence as though he is shouting. Meme text reads: 'We can handle the truth [so please complete these surveys].'")
