August 21, 2026

With lawmakers in both Washington and Raleigh on vacation (or campaigning) this month, federal agencies are picking up the slack and ensuring that there are new policy developments affecting nonprofits. Today’s policy update provides details about two forthcoming IRS proposed rules that have major implications for 501(c)(3) nonprofits and about a proposed rule from this week that could impact refundable tax credits for many nonprofits’ clients. We share details of a new court ruling that will prevent (at least for now) two federal agencies from requiring nonprofit grantees to agree to several new grant conditions. And we provide information on Governor Stein’s veto of an election bill and on a webinar and several resources to help your nonprofit get ready for election engagement this fall.

On Monday, the Office of Management and Budget (OMB) concluded its review of a forthcoming proposed rule from the Internal Revenue Service with “guidance on the application of the fundamental public policy against racial discrimination in schools” to the Office of Management and Budget (OMB) for review. The OMB review is typically the final step in the process before agencies issue proposed regulations, meaning the IRS is likely to issue the proposed rule in the coming days or weeks. While the text of the proposed rule is not yet available to the public, the notice explains that “these proposed regulations would amend existing regulations under section 501(c)(3) to clarify that certain schools that discriminate on the basis of race are not operated exclusively for charitable purposes.”

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. Based on the Trump Administration’s interpretation that diversity, equity, and inclusion (DEI) programs and practices are “illegal discrimination”, it is quite likely that the forthcoming proposed regulations will provide that nonprofit private schools with certain race-based practices – including those with DEI policies and practices – are not eligible for tax-exemption under Section 501(c)(3) of the Internal Revenue Code.

Last Friday, a federal court in Rhode Island issued a ruling requiring the U.S. Department of Health and Human Services (HHS) and the U.S. Department of Housing and Urban Development (HUD) to remove new conditions that were added last year to grant agreements with nonprofits that “help support survivors of domestic violence and  sexual assault as well as members of society who are unhoused or without stable housing.” The HHS and HUD grant conditions required nonprofit grantees to comply with several executive orders from President Trump related to: gender ideology, DEI, elective abortions, and antidiscrimination. The ruling requires HHS and HUD to remove the grant conditions from the grant agreements with all grantees in the affected programs. It is unclear whether HHS and HUD will appeal the court’s ruling.

[WARNING: The following paragraph includes a bit of legalese!] Some readers may recall that the U.S. Supreme Court issued a ruling (in Trump v. CASA) in June 2025 holding that federal courts do not have the authority to issue universal or nationwide injunctions. The ruling in Trump v. CASA essentially means that federal courts can only issue injunctions that stop federal agency actions against the plaintiffs in a particular lawsuit, rather than against all aggrieved parties (in this case, every nonprofit with certain federal grants). However, the plaintiffs in the case that was decided last week cleverly asked the court to vacate the grant conditions in addition to seeking an injunction, so the court was able to issue a ruling vacating the grant conditions against all grantees in the affected grant programs (rather than just against the plaintiffs and their members) without violating the Supreme Court’s ruling in Trump v. CASA.

Yesterday, the U.S. Treasury Department and the Internal Revenue Service published a proposed rule on the Federal Register that would create new eligibility requirements for individuals and married couples claiming four refundable tax credits – the Earned Income Tax Credit, the child tax credit, the adoption tax credit, and the American Opportunity Tax Credit. Under the proposed rule, to be eligible for a tax refund for any of these four tax credits, individuals or married couples would need to:

Individuals and married couples can receive tax refunds if the amount of any (or all) of these tax credits exceeds their annual federal income tax liability. Many low- and moderate-income individuals, many of whom receive services from nonprofits, receive refundable tax credits, particularly the four tax credits that would be subject to new eligibility requirements. The rule would only change the refunded portion of these four refundable tax credits, meaning that it would not affect taxpayers who have income tax liability that is greater than the amount of these credits. However, it is possible that, if the rule is finalized, changes to individual income tax forms (specifically IRS Form 1040) could cause confusion for other individuals or couples claiming these credits. If the rule is ultimately finalized, it is quite possible that many nonprofits will need to help educate the people they serve about the new requirements so that they don’t lose out on these tax credits.

The proposed rule is open for public comments through October 5. 

With mail-in absentee voting for this fall’s election starting next month, now is a great time for your nonprofit to plan for nonpartisan voter engagement. To help with your planning, the Center and our partners are offering several free resources on nonpartisan voter engagement for nonprofits:

The November 2026 ballot in North Carolina will include three state constitutional amendments:

Each amendment would be added to the state constitution if a majority of voters approve it in this fall’s election.

As the Center has explained in a blog post, charitable nonprofits can take positions on state constitutional amendments and other ballot measures. Efforts by 501(c)(3) nonprofits to advocate for citizens to vote for or against constitutional amendments is treated as direct lobbying for federal tax purposes, which is a legal activity for charitable organizations. With three constitutional amendments on the ballot this fall, nonprofits may want to consider whether it makes sense to take a position on these ballot measures. To learn more about ballot measure advocacy, we encourage you to join the August 28 webinar described in the previous item.

In April, the U.S. Department of the Treasury announced that the IRS will propose changes to the Form 990 later this year. The Treasury Department announcement explains that the proposed changes to Form 990 are intended to “improve transparency, strengthen tax administration, and provide clearer reporting on certain activities of tax-exempt organizations described in section 501(c)(3) of the Internal Revenue Code, including government contracts, government grants, and fiscal sponsorship arrangements.” The additional information about public funding and fiscal sponsorships is intended to help identify and reduce “fraud, abuse, and extremist activities” in tax-exempt nonprofits.

A news report this week suggests that the IRS is considering adding a line to the Form 990 requiring nonprofits to indicate whether any of their board members or staff leaders have been convicted of certain financial or terrorism-related crimes. This requirement could mean that nonprofits would have to conduct background checks of all of their board members.

The Treasury Department and IRS plan to release proposed regulations with potential changes to Form 990 filing requirements. The Center will likely seek feedback from North Carolina nonprofits and submit public comments once the proposed regulations are released.

On Monday, Governor Josh Stein vetoed a bill (H.B. 958) that would make a variety of changes to state election laws. Notably, the bill would reduce the early voting period for primary elections and runoff elections from 17 days to 10 days, but would maintain the 17-day early voting period for general elections. Many nonprofits encourage their staff, volunteers, and the people they serve to vote during the early voting period. It is possible that legislators could consider overriding Governor Stein’s veto of the bill when they return to Raleigh for voting sessions after the November election.

Nonprofit Policy Update is the weekly newsletter on state and federal policy issues affecting 501(c)(3) nonprofits. Learn more about the Center's public policy agenda.
©2026 North Carolina Center for Nonprofits

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