Filed under: Higher Education, IRS News And Updates, Not-for-Profits, Tax Compliance & Planning
September 8, 2026
Key Takeaways for Private Schools and Not-for-Profits
The Internal Revenue Service (IRS) has issued proposed regulations that could significantly affect private K-12 schools, colleges, universities, and other educational institutions that qualify as tax-exempt organizations under Code Sec. 501(c)(3). The proposal, published in September 2026, would clarify that private schools engaging in any form of racial discrimination would not qualify for federal tax-exempt status.
Proposed applicability date: If finalized, the regulations would apply to taxable years beginning after May 31, 2027. For an organization with a June year-end, compliance with the regulations begins with the July 1, 2027, through June 30, 2028, tax year.
Comment period: IRS accepts public comments, as well as requests for a public hearing, through November 3, 2026.
Read the proposal: Federal Register public-inspection PDF (REG-119986-25)
What the IRS Proposed Regulations Say
The U.S. Treasury Department and the IRS have issued proposed regulations under Code Sec. 501(c)(3), addressing racial nondiscrimination in private schools. The proposal states that a private school is not described in Code Sec. 501(c)(3) if it discriminates on the basis of race, color, or national or ethnic origin in the administration of educational, admissions, scholarship, athletic, or other policies. Importantly, the proposal states that discrimination would be prohibited regardless of the purpose behind it. This includes policies intended to advance diversity goals or remedy historical inequities.
In support of the policy change, the IRS and Treasury cite a long history of federal laws and court decisions establishing racial nondiscrimination as a fundamental public policy of the United States. The proposal references landmark cases including Brown v. Board of Education, Bob Jones University v. United States, and Students for Fair Admissions v. Harvard.
According to the IRS, educational institutions that engage in racial discrimination do not qualify as charitable organizations eligible for tax exemption under Section 501(c)(3).
Potential Impact on Private Schools
Many private schools have already modified admissions practices following the Supreme Court’s 2023 Students for Fair Admissions ruling. However, the new proposed regulations extend beyond admissions and would also affect:
- Scholarship and financial aid programs
- Loan assistance programs
- Athletics and extracurricular activities
- Other school-supported programs and policies
Schools with scholarship funds that restrict eligibility based on race or ethnicity may need to revise donor agreements or establish new eligibility criteria, such as income, geography, or first-generation student status.
Treasury estimates the proposed changes could affect approximately 18,000 tax-exempt private schools nationwide.
The proposed regulations do not apply to public schools and universities operated by a governmental unit, such as a school district or state college or university. The rules also would not apply to schools operated by tribal nation governments.
What the Proposed Rules Mean for Religious Schools
The proposal specifically notes that religious schools with tax-exempt status under Code Sec. 501(c)(3) may continue to select students based on religious affiliation and maintain faith-based missions and educational programs. The IRS states that religious selection criteria would not be considered racial discrimination, provided the criteria are based solely on religion and not on ancestry or ethnicity.
Why Other Not-for-Profits Should Pay Attention
While the proposal directly targets private educational institutions, it highlights the IRS’s continued focus on aligning tax-exempt status with shifting public policy principles. Educational not-for-profits, foundations that fund scholarship programs, and organizations with school-related grantmaking activities should monitor the rulemaking process and assess whether existing programs could be affected if the regulations become final.
Outside of private schools and grantmaking or scholarship organizations, the applicability of the IRS’s position on racial discrimination remains uncertain. This guidance does not provide a comprehensive framework for evaluating every DEI-related activity, nor does it describe how the IRS would examine particular programs. Organizations should avoid treating the proposal as a definitive answer for all race-conscious initiatives.
Practical Steps for Nonprofits to Consider Now
- Inventory affected programs. Identify admissions, scholarships, fellowships, athletics, internships, grants, and other educational programs that use protected characteristics in eligibility, selection, matching, or award criteria.
- Review written and operational practices. Compare board-approved policies, application materials, public statements, award restrictions, and actual program administration.
- Document the governance process. Ensure management and the board understand the relevant criteria, legal rationale, approval process, and monitoring responsibilities.
- Monitor the rulemaking. The proposal is not final. Organizations should follow or participate in the comment process. In addition, organizations should follow any revisions to the regulatory text, and related IRS guidance before making conclusions about final requirements.
Bottom Line: Preparing for the 2027 Effective Date
The proposed regulations would codify the administration’s position that any racial discrimination in private school operations, including admissions and scholarship programs, is incompatible with tax-exempt status under Code Sec. 501(c)(3). Schools and funders should begin evaluating affected policies well in advance of the proposed 2027 effective date.
Clark Nuber will continue monitoring developments and provide updates as additional guidance becomes available. Contact Clark Nuber today if you have questions about how these proposed regulations may affect your organization.
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