On September 3, 2026, The Department of Treasury and the IRS released proposed regulations that could strip federal tax-exempt status from private schools engaging in what the government considers racial discrimination. [REG-119986-25] Schools with DEI programming, race-conscious admissions policies, affinity groups, or targeted scholarship programs, should be aware that this announcement could directly impact you.
Under the proposed regulations, a private school loses its tax-exempt status if it “adopts, maintains, or enforces a policy or practice that discriminates on the basis of race, color, or national or ethnic origin.” “Discriminates” isn’t limited to admissions; it covers scholarships, loans, athletics, and “every other school-administered or school-supported program.”
The proposed regulations also eliminate longstanding IRS guidance that permitted certain racial preferences in admissions, facilities, programs, and financial assistance. Treasury and the IRS now dub those provisions “inconsistent with a uniform nondiscrimination standard” and “incompatible with the Supreme Court’s case law.”
Schools can still use race-neutral criteria such as family income, geographic location, first-generation status, and military family status to expand opportunity. Also, religious schools can still select students based on genuine religious affiliation. But race-conscious criteria? That’s the target.
Final regulations would apply to taxable years beginning on or after May 31, 2027.
Losing 501(c)(3) status isn’t just a paperwork problem. It’s an existential threat. It impacts the following:
- Donations. Contributions to the school are no longer tax-deductible.
- Income becomes taxable. The school will be liable for federal income tax, possibly retroactively.
- State consequences cascade. Most state tax exemptions piggyback on federal status.
- Reputational damage. An exemption revocation is public on the IRS website.
Schools potentially impacted by these proposed regulations can take action now. Those actions may include: updating policies, submitting comments in response to the proposed regulations, or preparing a compliance map. These proposed regulations aren’t final yet — but the time to prepare is now. If you have questions about how these changes could affect your institution, or need help evaluating your policies and compliance posture, please contact our team.
