If you are a regular reader of these policy updates, you know that we have been warning you for the past 11 months about a proposed IRS regulation jeopardizing the 501(c)(3) status of nonprofit schools with DEI policies and practices. That proposed regulation was formally published this morning, so today’s update begins with an analysis of the proposal and what it could mean for 501(c)(3) nonprofits. We share details of the continuing resolution approved by the U.S. House on Tuesday, which would fund the federal government through December 11 and also prevent the Office of Management and Budget from finalizing its new rules for nonprofits with federal grants until then. And we share information about a free upcoming policy update webinar that the Center is offering and several resources to help nonprofits provide clear, accurate, and nonpartisan information about this fall’s election.
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Proposed IRS Rule Would Jeopardize 501(c)(3) Status of Nonprofit Schools with Race-Based Programs and Policies |
This morning, the Internal Revenue Service published a proposed rule on the Federal Register that would allow the IRS to revoke the 501(c)(3) status of any nonprofit private school that “discriminates on the basis of race, color, or national or ethnic origin in administration of its educational, admissions, scholarship, athletic, or other policies, based on the fundamental public policy of the United States against such practices.” The IRS explanation of the proposed rule specifies that it “would further define race-based action for the purpose of ameliorating societal discrimination as a form of discrimination” (translation of the phrase from legalese to English: nonprofit schools with diversity, equity, and inclusion (DEI) policies and practices would lose their 501(c)(3) status if the rule is finalized).
The IRS anticipates publishing a final rule in the first five months of 2027 and that the rule would take effect for taxable years beginning after May 31, 2027. The IRS is accepting public comments on the proposed rule through November 3.
Based on our initial analysis of the proposed rule, the Center shares the following observations about its details and implications for nonprofit schools and other 501(c)(3) organizations: |
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The proposed rule would only apply to nonprofit K-12 schools and higher education institutions. It would not apply to early childhood education nonprofits, and it would not jeopardize the tax-exempt status of other 501(c)(3) nonprofits that provide services based on race, color, or national or ethnic origin of program recipients or that have DEI programs or practices in place. However, the Center is concerned that, if this rule becomes final, it could set a precedent that would enable the IRS to extend its application to other 501(c)(3) nonprofits, ultimately leading to a policy that DEI policies and practices are forbidden for 501(c)(3) nonprofits.
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The text of the new proposed nondiscrimination requirement for nonprofit schools is: “A private school is not operated exclusively for exempt purposes if it adopts, maintains, or enforces any policy or practice that discriminates on the basis of race, color, or national or ethnic origin in the administration of any educational policy, admissions policy, scholarship or loan program, athletic program, or other school-administered or school-supported program. For purposes of this section, discrimination on the basis of race, color, or national or ethnic origin includes any discrimination on the basis of race, color, or national or ethnic origin for any purpose.” The two italicized phrases in the last sentence of the proposed definition (which we italicize here but are not italicized in the text of the proposed rule) are the parts that would jeopardize the 501(c)(3) status of schools with DEI practices or policies in place.
- The IRS explanation of the proposed rule specifies that the rule would not prohibit nonprofit private K-12 schools or higher education institutions from having religious affiliations or from using religion as a factor in admissions or awarding financial aid.
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The proposed rule avoids using the phrase “diversity, equity, and inclusion” and the “DEI” acronym. However, the IRS explanation of the rule makes clear that a wide range of programs and policies at nonprofit schools that would typically be classified as “DEI” could lead to the revocation of schools’ 501(c)(3) status.
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In the IRS explanation of the proposed rule, the concept of a “fundamental public policy against racial discrimination” comes from the 1983 U.S. Supreme Court ruling in Bob Jones University 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. In the majority opinion in the Bob Jones decision, then-Chief Justice Warren Burger emphasized that the “fundamental public policy” of eradicating racism in education was established by three decades of federal court cases and executive actions and was not merely based on recent legal or societal changes. In proposing to extend the fundamental public policy doctrine to prohibit nonprofit schools from having DEI policies and practices, however, the IRS does not cite decades of court rulings and executive actions but rather relies primarily on very recent legal developments, including the 2023 Supreme Court ruling in Students for Fair Admission v. Harvard (holding that the affirmative action admission policies of Harvard and UNC-Chapel Hill violated the Equal Protection Clause of the 14th Amendment and Title VI of the Civil Rights Act of 1964) and two anti-DEI executive orders (EO 14173 and EO 14280) that President Trump issued in 2025.
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The proposed rule limits its nondiscrimination provisions to express use of race, color, or national or ethnic origin and would not prohibit nonprofit educational institutions from using other criteria – such as income and geography – in determining students’ eligibility for scholarships and loans, even if these other criteria may correlate closely to the students’ race. This is a narrower interpretation of anti-DEI policy than other guidance from the Trump Administration, most notably the July 2025 memo from the U.S. Department of Justice explaining that antidiscrimination provisions for nonprofits with federal grants prohibit these nonprofits not only from explicit use of race, but also from using proxies for race – including factors like geography and income – in providing programs and services.
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U.S. House Approves Continuing Resolution that Would Delay Major Changes to Federal Grant Rules |
On Tuesday, the U.S. House of Representatives approved a continuing resolution that would provide temporary funding for the federal government from October 1 through December 11. The Senate approved the continuing resolution last month.
Notably, the continuing resolution includes a provision (Section 157) that would prevent the U.S. Office of Management and Budget (OMB) from issuing a final rule making changes to the OMB Uniform Guidance, the rules that govern federal grants to nonprofits, until December 11. This spring, OMB had issued proposed changes to the OMB Uniform Guidance, and it had planned to issue a final rule early this month with an October 1 implementation date. The Center submitted public comments on the proposed rule, highlighting its potential impacts (most of them negative) on North Carolina nonprofits. Among other things, the OMB proposal would modify federal grant rules to:
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- Establish a new pre-issuance review of grant applications by political appointees;
- Require federal grant programs and grant applicants to be aligned with the policies and priorities of the President;
- Create a preference for grant applicants with lower indirect cost rates;
- Significantly expand the ability of federal agencies to terminate and/or suspend federal grants, including those that are deemed contrary to “the national interest” without an opportunity for nonprofits to contest or appeal their grant terminations or suspensions;
- Eliminate fixed-amount grant awards, which could create more red tape and payment delays for nonprofits;
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Expand the current prohibition on the use of federal grant awards for lobbying activities to also prohibit federal grants from being used for voter registration, state regulatory advocacy, and public messaging activities; and
- Require nonprofits to receive prior approval from federal agencies to use grant funds to attend conferences and other training programs.
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President Trump signed the continuing resolution into law on Wednesday. |
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Join a Free Nonprofit Policy Update Webinar on Sept. 17
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The Center is offering a free Nonprofit Policy Conversation webinar on Thursday, September 17 from 1:00-2:30 p.m. This webinar will provide the latest information about several public policy issues that are important to charitable nonprofits and the people and communities they serve, including: |
- Recent changes and challenges to federal grant rules, processes, and administration;
- Highlights of key provisions in the state budget and other recent state legislation affecting nonprofits;
- A preview of possible state legislation of interest to nonprofits in the remainder of 2026 and 2027;
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Whether nonprofit diversity, equity, and inclusion programs and policies are now “illegal discrimination”;
- Implications of the One Big Beautiful Bill Act (the major tax and spending bill that Congress passed in 2025) for nonprofits and the people they serve; and
- Information about state constitutional amendments on the ballot this fall, and what nonprofits can do about them.
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Attendees will have opportunities to ask questions and share their insights about policy and legislative priorities and issues.
The Center is presenting this webinar in partnership with the Dan River Nonprofit Network, which serves nonprofits in Person County (as well as nonprofits in the Dan River region of Virginia). Register today!
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Get Free Resources on Nonpartisan Voter Engagement for Nonprofits |
ith mail-in absentee voting for this fall’s election starting this month, now is a great time for your nonprofit to plan for nonpartisan voter engagement. To help with your planning, the Center encourages nonprofits to check out You Can Vote’s extremely helpful free resources on voting and elections (available in both English and Spanish). The You Can Vote resources include a succinct voter guide card, fact sheets with information about offices on the ballot, why these elected officials matter on issues of importance to nonprofits, and voting rights for various populations served by nonprofits. It is absolutely worth 15 minutes of your time to peruse these great resources and share the ones that are most relevant for your nonprofit’s work and mission.
To learn more about nonpartisan voter engagement in this fall’s election, check out the recordings of two recent webinars from the Center: |
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You Can Vote has many great resources on elections for North Carolina nonprofits. The Center is sharing these two important updates from You Can Vote's recent newsletter.
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Register! Register! Register! |
That's our mantra for this month. With National Voter Registration Day on September 15 and the voter registration deadline on October 9, voter registration is our top priority for the next 30+ days.
If you're not registered, now's the time to do it. If you are registered, check your registration to make sure it's accurate and up to date. Whether you're registered or not, we can train and equip you to help other voters get registered.
Whoever you are and whatever your situation, you can help make sure that every voter – even if it's just you! – is ready to make their voice heard this year. Click the buttons to get started. |
Voting by mail in NC: Only do it if you have to – and request your ballot now! |
There's been a lot of drama recently about the president's executive order on voting by mail. The fact is, voting by mail in North Carolina is difficult enough that whatever happens with the USPS, our advice to NC voters remains the same: Only vote by mail if you have to – and request your ballot now!
If you can vote during early voting or on Election Day – do it. The strict deadlines and increasingly persnickety rules for voting by mail put your ballot at greater risk of being thrown out than if you vote in person. If you have to vote by mail, request your ballot now and click the button to check out our guidance for voting by mail effectively.
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Check Out Your Sample Ballot for This Fall’s Election (and Make Sure You are Registered to Vote)
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With the 2026 election coming up soon, the Center will be offering some concrete (and simple) ways that your nonprofit can provide clear and accurate (and, of course, nonpartisan) information about the election to your staff, volunteers, and community in the coming weeks.
Today’s Tip: Check your voter registration on the NC State Board of Elections (NCSBE) Voter Search tool to confirm that you are registered at your current address. If you are not currently registered or if your address is not current, you still have time to register to vote or update your registration through the voter registration deadline of Friday, October 9 or during the early voting period (October 15-31).
While you are on the Voter Search tool, you can check out your sample ballots for the general election to see what will be on your ballot this fall (hint: it’s a lot!). |
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Reminder: Nonprofits Can Advocate For or Against Constitutional Amendments |
If you looked at your sample ballot after reading the last item in today’s policy update, you probably noticed that the November 2026 ballot in North Carolina will include three state constitutional amendments: |
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An amendment that would lower the constitutional cap on state income tax rates from 7% to 3.5%. The Center is opposed to this constitutional amendment because it would be harmful to nonprofits by limiting state revenue options. The NC Budget and Tax Center has a helpful fact sheet explaining the potential harm of the tax cap constitutional amendment as well as a several other resources for nonprofits on the tax cap amendment.
- An amendment that would require the NC General Assembly to establish limits on how much counties and municipalities may increase property tax levies. If the constitutional amendment were to pass, legislators would then work on the details of these levy limits next year.
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An amendment that would require all voters to provide photo ID when voting. North Carolina currently has a voter ID statute, so the amendment would have little practical impact on elections.
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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.
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New U.S. House Bill Would Limit “Weaponization” of IRS Against Certain Nonprofits |
Yesterday, two members of the U.S. House of Representatives announced that they have filed the Protecting the Rights Of Organizations Fairly (PROOF) Act of 2026, which is “to guarantee that the IRS cannot strip a nonprofit of its tax-exempt status without evidence and without a fair process.” The legislation would require the IRS to provide notice to a nonprofit before launching an examination of its 501(c)(3) status, including the (legal) reason for the investigation, and would provide nonprofits with due process rights during the IRS examination process. The full text of the bill is not yet available.
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