IRS Proposes Regulations Ending Tax-Exempt Status for Private Schools with Race-Based Policies

At a Glance

• On September 4, 2026, the IRS published proposed regulations providing that any private school maintaining a policy that discriminates on the basis of race, color, or national or ethnic origin, regardless of intent, is ineligible for tax-exempt status under section 501(c)(3).
• The proposed regulations would modify prior IRS guidance that had permitted certain race-conscious programs. If finalized, any race-based policy would be grounds for denial or revocation of tax-exempt status, with no de minimis threshold or lesser penalty available.
• The IRS has opened a public comment period, which will run through November 3, 2026. If finalized, the proposed regulations would apply to taxable years beginning after May 31, 2027.

On September 4, 2026, the Internal Revenue Service published proposed regulations on Racial Nondiscrimination in Private Schools (REG-119986-25), which would add a new section 1.501(c)(3)-2 to the Income Tax Regulations (26 CFR part 1). The proposed regulations provide that it is against a fundamental public policy of the United States for a tax-exempt private school to maintain any policy that discriminates on the basis of race, color, or national or ethnic origin. The proposed regulations would apply regardless of the motivation or intent underlying any particular race-based policy.

This is the IRS's first formal statement addressing the application of the Supreme Court's decision in Students for Fair Admissions, Inc. v. President and Fellows of Harvard College, 600 U.S. 181 (2023), to private schools exempt under section 501(c)(3) of the Internal Revenue Code (the Code). The proposed regulations would modify prior IRS guidance permitting certain policies, scholarships, and other financial assistance programs that favored racial minority groups on the basis of serving remedial objectives. The proposed regulations are consistent with recent federal executive branch efforts to scrutinize and restrict the use of race-based distinctions in higher education and federally funded grants and programs.

Impact on Educational Nonprofits

The proposed regulations apply to any "private school," defined as an organization described in section 501(c)(3) and classified as an educational organization described in section 170(b)(1)(A)(ii) of the Code, excluding any governmental unit or instrumentality or subsidiary of a governmental unit. Treasury and the IRS estimate that the proposed regulations would affect "18,000 private elementary, secondary, and post-secondary schools in the United States that currently qualify for tax exempt status and the 750,000 students attending these schools who may qualify for scholarships allocated on the basis of racial, ethnic, or national identity." The proposed regulations may also affect taxpayers who donate to scholarship funds administered by private schools that use racial criteria to determine eligibility.

Key aspects of the proposed regulations include the following:

Comprehensive Scope

The proposed regulations apply to "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."

No De Minimis Exception

The proposed regulations contain no de minimis exception or materiality threshold. Any racially discriminatory policy, regardless of its scope, would be grounds for the denial or revocation of tax-exempt status.

Religious Criteria

The IRS’s explanation of the proposed regulations states that the regulations would not prohibit private schools from maintaining a religious mission, curriculum, or program of observance. Religious schools could continue to select students on the basis of religious affiliation or membership, even where members of the relevant religious community may share ancestry or ethnic characteristics. Notably, while the IRS’s explanation indicates their intended reading, the proposed regulatory text does not expressly include a religious exemption, which may be subject to adjustment in the comment period.

Proposed Effective Date

The proposed regulations would apply to taxable years beginning after May 31, 2027. Affected organizations would need to amend any noncompliant policies before that date.

Broader Implications

The proposed regulations apply only to private schools. It is unclear whether the IRS will seek to extend the underlying legal reasoning of the proposed regulations, that racial discrimination violates a fundamental public policy and is incompatible with "charitable" status, to a broader range of tax-exempt organizations. This will be an area for tax-exempt organizations to monitor going forward.

Next Steps

The IRS has opened a public comment period for these proposed regulations, with comments due by November 3, 2026. Affected organizations may use the comment process to address the proposal before the regulations are finalized. Comments submitted during this period may influence the final regulations and could be relevant to any future legal challenge.

Educational institutions should review their admissions, scholarship, financial aid, and other policies for compliance with the proposed regulations. Nonprofit organizations outside the education sector should also monitor developments related to these proposed regulations, as the underlying legal reasoning could be interpreted broadly in enforcement.

For More Information

For more information regarding these proposed regulations or their implementation, you may contact the authors. Faegre Drinker's nonprofit organizations team will continue to monitor developments regarding these proposed regulations, the comment process, and any final rulemaking.