As the nation prepared to celebrate its 250th birthday last weekend, there were plenty of (proverbial) fireworks at the state legislature last week. This week’s update provides details of items of interest to nonprofits in the newly-passed state budget and on two Center-initiated bills that legislators approved. Note that because there were so many significant policy developments affecting nonprofits over the past two weeks, we will be sending a second policy update with details on other developments later this morning.
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Governor Stein Signs State Budget into Law |
Last week, the NC Senate and NC House of Representatives both passed the state budget for FY2025-27, which began on July 1, 2025. On Tuesday, Governor Josh Stein signed the budget (S.257) into law. Many of the provisions and appropriations in the 1,350-page budget (divided into two documents) will affect funding and operations for charitable nonprofits, including:
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Tax rate changes. This year, North Carolina’s current individual income tax rate is 3.99% (down from 4.25% in 2025). The state budget lowers the individual income tax rate to 3.49% next year, to 3.24% in 2030, and to 2.99% in 2033. Eventually, the rate could go as low as 2.49%, depending on total state revenue. The budget also maintains the scheduled phase-out of the corporate income tax, which is currently set at 2% and is scheduled to go down to 1% in 2028 and be eliminated in 2030. The tax rate changes in the budget will reduce state revenue in future years, which could impact future state funding for grants and contracts with nonprofits and for a variety of state programs and services that are important for people served by nonprofits.
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Medicaid funding. The budget includes full funding for Medicaid for the current fiscal year. Last year, legislators did not fund the full amount that the NC Department of Health and Human Services (DHHS) projected for Medicaid expenses and instead waited until April 2026 to pass legislation providing full Medicaid funding for FY 2025-26. This led to DHHS cutting Medicaid provider rates last fall, although DHHS ultimately rescinded these rate cuts after several groups of providers brought lawsuits challenging the cuts. The budget also includes new investments in resources for DHHS, the NC Attorney General, and the NC State Auditor to identify and prevent fraud and waste in Medicaid payments.
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Directed grants to nonprofits. The budget includes significant new (mostly one-time) funding for a wide variety of nonprofits around the state. By the Center’s count, the budget includes a total of $539.7 million in directed grants to 498 nonprofits. A few highlights include $15.8 million in new funding for SmartStarts through the NC Partnership for Children, $9 million in funding for food banks, and $208.5 million to help with construction of the new nonprofit children’s hospital in the Triangle area.
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Reinstating the Healthy Opportunities Pilot program. The budget provides about $25 million in funding to reinstate the Healthy Opportunities Pilot (HOP) program that provides grants to nonprofits to enable Medicaid beneficiaries in parts of eastern and western North Carolina to have access to food, housing, and transportation services. The HOP program was discontinued last year since legislators had not enacted a state budget for FY2025-26 to continue funding it.
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Defunding legal services nonprofits. The budget removes a major source of funding for legal services nonprofits by making fundamental (and problematic) changes to the Interest on Lawyers’ Trust Accounts (IOLTA) program. A state law from last year (S.429) had forced the NC State Bar to stop making grants through the NC IOLTA program through June 30, 2026. The IOLTA grant program typically provides grant funding to a variety of legal services programs, so this state law essentially defunded many legal services nonprofits for the first half of 2026. The budget redirects much of the NC IOLTA funding to the Commission in Indigent Defense Services (a program that provides support for public defenders to provide criminal defense services to low-income North Carolinians) instead of to nonprofit legal services organizations. It also creates onerous new eligibility requirements for the NC IOLTA funds that would still technically be available for legal services nonprofits, including prohibitions on awarding grants to nonprofits that provide immigration services, engage in representation related to gender transition, or engage in a wide range of lobbying and advocacy activities. These restrictions render all legal services nonprofits ineligible for NC IOLTA grants, even though NC IOLTA funds do not come from state revenue sources.
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Limitations on sales tax refunds for nonprofit hospitals. A provision in the budget will limit sales tax refunds for nonprofit hospitals that operate as part of larger health systems by forcing them to combine all of their affiliated entities for the purpose of the $45 million annual cap on nonprofit sales tax refunds. Collectively, this change is expected to cost nonprofit hospitals about $22 million a year. Unfortunately, it sets a precedent of increasing taxes on nonprofits to help offset tax cuts to individuals and for-profit businesses.
- Increasing support for child care. The budget includes $97 million in new, recurring funding to increase access to child care by increasing child care subsidy rates and establishing a floor rate, which is intended to ensure that subsidized child care is available in all communities in the state.
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Support for food assistance. The budget provides funding for Supplemental Nutrition Assistance Program (SNAP) administrative cost increases (mostly by passing along these administrative costs to counties) to help ensure that SNAP benefits remain available to eligible North Carolinians. It also provides funding for the state match for the SUN Bucks program, which provides $120 per eligible child in one-time funding for the purchase of groceries when schools are out during the summer (meaning that many children don’t have access to subsidized meals at school).
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Along with the main budget bill, legislators also passed (and Governor Stein signed into law on Tuesday) a second bill (H.B. 56) making several technical changes to the budget. Legislators are also planning to pass another bill making additional changes to the budget later this summer.
For more details, you can read the full 634-page budget bill text (which includes various policy provisions in the budget) and the 716-page conference committee report (which includes details on the various appropriations in the budget).
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New Law Modernizes North Carolina’s Nonprofit Corporation Statute |
Last Wednesday, the NC House of Representatives gave final approval to a bill (H.B. 517) that makes a variety of changes to modernize the NC Nonprofit Corporation Act to bring it into closer alignment with best practices for nonprofits and with nonprofit corporation laws in other states. These changes include:
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- Creating a simple annual report for North Carolina nonprofits. This change would help protect the reputation of our state’s nonprofits by helping prevent fraud and abuse of defunct nonprofits. Almost all other states currently have annual reporting requirements for nonprofits. The first filing deadline for nonprofit annual reports will be November 15, 2027.
- Allowing nonprofits to merge with unincorporated nonprofit associations or limited liability companies (LLCs) that are treated as 501(c)(3) charitable organizations for federal tax purposes. As more nonprofits are looking to collaborate with other organizations or consolidate their operations, this revision would help ensure that they have the option of merging with other charitable organizations, regardless of their corporate form.
- Simplifying the process for nonprofits incorporated in other states to become North Carolina nonprofit corporations. This type of “domestication” provision could allow nonprofits to relocate to North Carolina without having to re-apply for tax-exempt status with the Internal Revenue Service.
- Creating a process for other business entities to convert to nonprofit corporations.
- Requiring nonprofits incorporated in North Carolina in the future – other than private foundations – to have at least three board members. This would make the North Carolina law consistent with nonprofit best practices and with most other state nonprofit statutes.
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Clarifying that donor acknowledgment statements that follow the requirements of federal tax law are also acceptable for state law purposes. This clarification would help ensure that nonprofits are not unwittingly penalized for using donor acknowledgment language that is consistent with federal law and nonprofit best practices.
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The Senate approved the bill the previous week, and Governor Stein signed it into law on Wednesday.
The Center has worked with the NC Bar Association on the details of this bill to modernize state nonprofit laws for nearly a decade. The Center is appreciative of Representative Heather Rhyne (R-Lincoln) for her leadership in getting the House to pass the bill, to Senator Benton Sawrey (R-Johnston) for his advocacy for the bill in the Senate, and to Representative Brandon Lofton (D-Mecklenburg), who is another primary sponsor of the bill and who has been a champion of modernizing the state’s nonprofit laws for the past seven years.
The Center will soon provide information for nonprofits about compliance with the new law. |
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NC House Unanimously Approves Bill to Address Nonprofit Challenges Accessing Bequests from IRAs |
Last Wednesday, the NC House of Representatives unanimously approved a bill (S.675) that would address a variety of challenges to accessing charitable donations made through bequests from individual retirement accounts (IRAs). Examples of these challenges, which typically result from policies of some financial institutions that hold IRAs, include:
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- Forced Account Creation. Instead of simply closing the IRA and issuing a check, some institutions require nonprofits to open an “Inherited IRA account” and become new customers of the financial institution.
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Invasive Personal Data Requirements. To open these accounts, nonprofits are often asked to provide personal information about an officer, including Social Security number, home address, and driver’s license – exposing staff to identity theft and data breaches, despite already providing proof of their tax-exempt status as an organization.
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Unnecessary Delays and Denials. If a nonprofit declines to provide this personal data, the institution may refuse to distribute the donation – contradicting the donor’s intent.
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The bill would address these issues by: |
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Defining acceptable (and reasonable) documentation that nonprofits could provide to financial institutions to verify their eligibility;
- Prohibiting financial institutions from requiring personal information of nonprofit staff and board members to process charitable distributions; and
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Requiring financial institutions to deliver charitable bequests to nonprofits within 60 days of receiving documentation.
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The Senate still needs to vote on the bill one more time before it goes to Governor Stein for his consideration. The Senate could vote on it when the General Assembly returns to Raleigh later this summer.
The Center has worked with the North Carolina Council of Charitable Gift Planners in advocating for the General Assembly to take up this bill. We are appreciative of Representative Celeste Cairns (R-Carteret) for her leadership in getting the House to pass this important nonprofit legislation. |
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NC General Assembly Likely to Return to Raleigh Later This Month |
After passing the state budget and many other bills last week, the NC House of Representatives and NC Senate passed a temporary adjournment resolution (H.J.R. 1244) that will enable the General Assembly to return to Raleigh on Monday, July 27 to continue the 2027 short session. During that portion of the legislative session, lawmakers could take up several bills that could affect nonprofits, including:
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Final vote(s) on legislation (S.675) addressing challenges nonprofits have in accessing charitable donations that are made through bequests from IRAs (see the third item in this policy update for more details);
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Revisions to the new state budget and technical changes to other legislation that was recently signed into law;
- A possible override of Governor Stein’s veto of a bill (H.B. 437) addressing homelessness (the second policy update we’ll be sending later this morning will have more details);
- A possible Senate override of Governor Stein’s veto of a bill (H.B. 171) that would eliminate diversity, equity, and inclusion (DEI) programs and practices in state government;
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Changes to property tax laws, including possible Senate consideration of a House-passed bill (H.B. 1042) that would require either government financing or 100% nonprofit ownership for the nonprofit affordable housing property tax exemption;
- Election law changes; and
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Additional state constitutional amendments for inclusion on this fall’s ballot.
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