Raise your hand if you understand federal tax laws related to nonprofits! If your hand is up (and you can put it down now), get ready to learn some new rules over the next 12 months, as the IRS announced this week that it plans to write or revise a wide variety of forms, rules, and guidance for tax-exempt nonprofits. Today’s policy update includes the latest on the proposed changes to the U.S. Census and encourages all nonprofits to submit public comments. We share election-related tips about giving your staff paid time off to vote, engaging on state constitutional amendments, and reminding people about upcoming voter registration deadlines. And we share the latest on the IRS’s most recent court action in the Johnson Amendment case and President Trump’s (probably illegal) rescission of federal grants to nonprofits.
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IRS Plans to Issues Significant Guidance Affecting Nonprofits in the Next Year
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On Tuesday, the Internal Revenue Service (IRS) released its 2026-2027 Priority Guidance Plan that highlights the IRS’s plans for new guidance – potentially including regulations, revenue rulings, and fact sheets – on tax-related issues from October 1, 2026 through September 30, 2027. Several of the IRS’s guidance priorities could have significant impacts on nonprofits’ operations and tax-exemption:
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A final rule on “fundamental public policy” and race discrimination by nonprofit private schools. The IRS plans to issue a final ruled based on its recent proposed rule that would allow it 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). While the proposed rule would only apply to nonprofit K-12 schools and nonprofit private colleges and universities, it could create a precedent that could lead to future challenges to the tax-exempt status of other 501(c)(3) nonprofits with race-based policies, programs, or services. For more, see the Center’s updated analysis of the proposed rule. The proposed rule is open for public comments through November 3 (the Center is currently working on our comments), and the IRS has scheduled a public hearing on the proposed rule on December 2 at 10 a.m.
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Nonpartisanship requirements for 501(c)(3) nonprofits. The IRS plans to issue “guidance on the statutory provision in §501(c)(3) against participation or intervention in political campaigns (the “Johnson Amendment”).” The IRS last released formal guidance on the nonpartisanship provision in 2007 (Revenue Ruling 2007-41). It is likely that the forthcoming IRS guidance will formalize the IRS’s assertion from its pending litigation that the nonpartisanship provision has 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” (see the sixth item in today’s policy update for more details). It is also possible that the IRS could issue a broader Revenue Ruling that changes its longstanding position that 501(c)(3) nonprofits can legally engage in nonpartisan voter registration, voter education, or get-out-the vote activities.
- Form 990. The IRS plans to issue “guidance under §6033 regarding exempt organization reporting requirements, including with regard to fiscal sponsorship arrangements.” Translation from tax law to English: A revision to Form 990 will be coming out in the next 12 months.
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Guidance on donor advised funds (DAFs). In November 2023, the IRS issued proposed regulations that would have established definitions of donor advised funds, donors, and donor-advisors. They also would have provided clarity on exemptions from the definition of a DAF and on taxable distributions from DAFs. The proposed rule could impact the way that nonprofits administer their DAFs, and the broad definitions could mean that some other types of nonprofit arrangements – including fiscal sponsorships, giving circles, certain scholarships, and other types of restricted funds – could be treated as DAFs and be subject to more stringent rules. The Center submitted public comments on the proposed rule, sharing our own assessment of the proposal and the feedback that we received from community foundations and other nonprofits. It is unclear how similar the forthcoming IRS guidance will be to the proposed rule.
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Regulations on the tax credit for contributions to 501(c)(3) scholarship granting organizations that was part of the One Big Beautiful Bill Act. That provision allows taxpayers to receive a federal tax credit of up to $1,700 per year for contributions to 501(c)(3) nonprofits that qualify as “scholarship granting organizations,” starting in 2027. IRS regulations could clear up ambiguities in the statute, including providing clarity around self-dealing rules (i.e., preventing a scholarship granting organization from providing scholarships for children of its donors and other insiders) and on the types of public school, private school, and homeschool expenses that scholarship granting organizations can cover with scholarships. For more on the proposed and temporary rules, which were published this morning, see the seventh item in today’s policy update.
- Regulations on excise taxes on investment income of certain nonprofit private colleges and universities. This guidance could incorporate changes to these excise taxes from the One Big Beautiful Bill Act.
- Regulations on excess compensation paid by some tax-exempt nonprofits, including the expanded definition of “covered employee” from the One Big Beautiful Bill Act.
- Regulations on the place for public inspection for materials relating to tax-exempt organizations. This rule could change how nonprofits make their Forms 990 available to the public.
- Guidance on group exemption letters for nonprofits.
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Submit Public Comments on Proposed U.S. Census Changes by November 2 |
Last month, the U.S. Census Bureau published a proposed rule on the Federal Register that would make three fundamental changes to the 2030 U.S. Census and future decennial censuses: |
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It would change the way “usual residence” is determined from where people are living on April 1 to the place where “they have lawfully spent the greatest number of days” between January 3 and April 1, as evidenced by their tax records. This could create challenges and mistakes for many people who receive services from nonprofits, including people experiencing homelessness, people who do not file taxes, and college students.
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It would change the criteria that are used for counting residents of states for the purpose of the apportionment of U.S. House of Representatives districts among states. Specifically, the proposed rule would exclude many non-citizens from the count in this apportionment, despite language in the U.S. Constitution that provides that the decennial census is an enumeration of “persons” living in each state rather than U.S. citizens living in each state. The Census Bureau’s explanation of the proposed rule strongly hints that the change in residence criteria would require the 2030 U.S. Census to include a question about the citizenship status of U.S. residents.
- It would prohibit the decennial census from including questions about race, ethnicity, and sexual orientation. Every decennial census since 1790 has asked about race and ethnicity of U.S. residents, but the decennial census has never sought information about sexual orientation.
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The proposed changes to the Census could have significant impacts for North Carolina nonprofits. Among other things, these changes could: |
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Create significant challenges in getting a complete and accurate count of communities with significant immigrant populations;
- Reduce North Carolina’s representation in Congress;
- Jeopardize significant federal funding for North Carolina by reducing the number of people counted; and
- Eliminate important demographic data that many nonprofits use in assessing how and where to provide services.
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The Census Bureau announced this morning that it has extended the public comment period through November 2. The Center encourages all nonprofits to submit public comments explaining the potential impact of the proposal on their nonprofits and their communities. Two resources that can help nonprofits prepare public comments are:
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- The NC Counts toolkit on the proposed Census rule, including more details about the proposal and its impact on North Carolina and tips on submitting public comments; and
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The National Council of Nonprofits public comments guide.
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Election Tip of the Week: Consider Giving Your Staff Paid Time off to Vote |
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: With busy professional and personal lives, many nonprofit workers have difficulty finding time to vote in elections. Consider giving your staff paid time off to vote on Election Day (November 3) or during the early voting period (October 15-31). To make it easy for your nonprofit, the Center is sharing our own board-approved policy on staff taking paid time off to vote. The Center’s policy also enables staff to take a paid day off work to serve as nonpartisan poll workers. Feel free to copy the Center’s policy and use it for your nonprofit.
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October 9 is North Carolina’s Voter Registration Deadline |
North Carolina citizens who plan to vote on Election Day (Tuesday, November 3) must be registered to vote at their current address by next Friday, October 9 at 5 p.m. Unregistered voters and people who have moved within the same county can also register or update their registration during the early voting period (October 15-31). Now is a great time for nonprofits to remind their staff, volunteers, clients, and communities to register to vote!
For more on important election dates and details about the 2026 election in North Carolina, check out You Can Vote’s nonpartisan voter guide. |
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Learn About Impact of Three Constitutional Amendments on 2026 Ballot in North Carolina |
This fall’s ballot will include three state constitutional amendments with implications for nonprofits and the people they serve. The three amendments would: |
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Require all voters to provide photo ID when voting;
- Cap the state income tax rate at 3.5%; and
- Limit the ability of local governments to set property tax rates in the future.
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The Center encourages nonprofits to understand these amendments and to communicate to their staff, volunteers, and communities about their potential impacts. Two Center partners have great information and resources on the amendments: |
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You Can Vote has a one-page educational fact sheet about the three amendments that translates the ballot language into plain English, clearly explaining what the amendments would mean for various North Carolinians (and for the nonprofits that serve them).
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The NC Budget & Tax Center has several excellent resources explaining the potential (negative) impacts that the tax amendments could have on North Carolina communities.
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IRS Files Brief to Appeal Dismissal of Johnson Amendment Lawsuit
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Last year, the IRS asked a federal court in Texas to approve 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” (a provision often called the “Johnson Amendment”). Essentially, through the proposed consent judgment, the IRS would interpret 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.” In March, the court dismissed the case, ruling that it did not have jurisdiction to decide the case under the Tax Anti-Injunction Act since the case involved the potential revocation of the churches’ 501(c)(3) tax-exempt status, which would create tax liability for them.
Last week, the IRS and the plaintiffs in the lawsuit filed a brief with the U.S. Court of Appeals for the Fifth Circuit arguing that the trial court has the authority to approve the consent judgment and asking for the appellate court to send the case back to the trial court for reconsideration. It is unclear how soon the appellate court will consider the case. As noted in the first item in today’s policy update, the IRS announced this week that (notwithstanding the pending litigation), it plans to issue guidance formalizing its non-enforcement of the Johnson Amendment against houses of worship.
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New Rule Provides Details on Permissible Nonprofit Contributions to Trump Accounts
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On Wednesday, the IRS published a temporary rule to the Federal Register with details about the implementation of Trump Accounts, a new form of savings accounts for children that was established by the One Big Beautiful Bill Act (OBBBA) that was passed into law in 2025. Under OBBBA, 501(c)(3) nonprofits may make contributions to a group of Trump Accounts in a “qualified class” as long as it contributes the same amount to each Trump Account in that class. The final rule provides clarity on two considerations for nonprofits making contributions to Trump Accounts:
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- They provide details on what constitutes a “qualified class.” It could include: (a) all Trump Account holders under the age of 18; (b) all Trump Account holders under the age of 18 who were born in a particular year; or (c) all Trump Account holders under the age of 18 who live in the same state or in another geographic area that includes at least 5,000 eligible Trump Account holders.
- The rule provides that donations made to 501(c)(3)s for the purpose of contribution to Trump Accounts are generally tax-deductible, and it enables private foundations and donor advised funds to make contributions to Trump Accounts.
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The IRS will likely publish a final rule, which will probably be very similar to the temporary rule, next year. |
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IRS Publishes Proposed and Temporary Rules on Scholarship Granting Organizations |
The One Big Beautiful Bill Act established a new federal tax credit of up to $1,700 per year for taxpayers’ contributions to 501(c)(3) nonprofits that qualify as “scholarship granting organizations,” starting in 2027. The organizations help students pay for tuition and certain other expenses to public, private, or charter schools. This morning, the IRS published a proposed rule on these tax credits and on scholarship granting organizations on the Federal Register. Among other things, the proposed rule:
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- Clarifies that any portion of a contribution to a scholarship granting organization that qualifies for the $1,700 tax credit does not also qualify as a deductible charitable contribution;
- Provides details on qualifications of students and families who may receive support from scholarship granting organizations;
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Provides scholarship granting organizations leeway to spend more than 10% of their income on overhead of non-scholarship expenses, despite a requirement in the statute that scholarship granting organizations must spend at least 90% of their income on scholarships;
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Establishes standards for the statutory prohibition on self-dealing by scholarship granting organizations by defining “disqualified persons” (whose families generally cannot receive support from scholarship granting organizations) to include major donors, officers, directors, and selection committee members of scholarship granting organizations;
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Requires annual audits of scholarship granting organizations, including outside audits of those with annual receipts of $500,000 or more;
- Provides details of donor substantiation requirements for scholarship granting organizations, which are somewhat similar to donor substantiation requirements for other 501(c)(3) nonprofits that receive charitable contributions; and
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Allows for the possibility of multi-state scholarship granting organizations.
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The IRS also published a temporary rule on the Federal Register this morning with fewer details than the proposed rule. This temporary rule will enable taxpayers to claim the tax credit – and will allow scholarship granting organizations to begin operating and making contributions – before the final rule is published next year. The proposed rule is open for public comments through December 1. |
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President Trump Rescinds $1 Billion in Federal Funding, Including Grants to Nonprofits
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Last Friday, President Trump announced that he had issued a “pocket rescission” that cancels about $1 billion in congressionally-approved funding for a variety of federal programs. Much of the rescinded funding is the elimination of grants to nonprofits (which Congress had approved) that are inconsistent with President Trump’s policy priorities. Among the cancelled funding are programs that would provide services to immigrants, grant programs that use race or sex as criteria for providing services, grants related to climate change and gender affirming care. Under federal law, a President typically needs congressional approval within 45 days of issuing a rescission order to cancel funding that has already been approved by Congress. Under a “pocket rescission,” which the U.S. Government Accountability Office and many legal scholars believe is impermissible under the Impoundment Control Act, a President cancels already appropriated funding without congressional approval by issuing a rescission order less than 45 days before the end of the federal fiscal year. It is unclear whether the pocket rescissions will be challenged in court. Last year, the U.S. Supreme Court allowed President Trump to move forward without pocket rescissions but did not rule on whether they are legal under the Impoundment Control Act.
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