Tax-Exempt Organizations Under the New Administration
Executive orders, federal funding cuts, and suspended processing of tax-exempt status applications are among the changes affecting nonprofits.
Topics discussed:
Executive orders on DEI and related legal challenges
Reductions to federal funding to nonprofits
Delays in tax-exempt status applications
Challenges to the Johnson Amendment
An executive order that triggers review of IRS guidance documents
Executive Orders on DEI
Federal mandates targeting diversity programs and their implications for nonprofits
Overview
The new administration has issued several executive orders aimed at terminating DEI programs within the federal government and discouraging DEI initiatives in the private and nonprofit sectors. These orders are facing legal challenges with mixed court outcomes, while private plaintiffs are increasingly filing lawsuits against organizations with DEI programs.
The Three Major Executive Orders
Right out of the gate, the new administration issued several executive orders aimed at terminating DEI programs within the federal government and discouraging DEI initiatives in the private and nonprofit sectors. For example, these executive orders have included:
Executive Order 14151 — Rescinds previous DEI-related executive orders and mandates the termination of all DEI; diversity, equity, inclusion, and accessibility [DEIA]; and "environmental justice" offices and positions within the federal government
Executive Order 14173 — Prohibits private organizations from conducting DEIA employment programs for jobs created by federal contracts and directs federal departments not to issue contracts to private organizations (including nonprofits) that enforce DEIA frameworks
Executive Order 14168 — Mandates federal agencies to recognize sex as an immutable binary classification
Legal Challenges and Court Rulings
There are challenges to these orders winding through courts, and though some courts have issued preliminary injunctions blocking certain provisions, another court recently allowed the administration to enforce the orders while litigation continues. So nonprofits should stay informed about the outcomes of these legal battles because they could significantly affect the implementation of these orders and the regulatory environment.
Additionally, we have seen private plaintiffs continue to file suits against or complaints about a variety of organizations related to DEI-focused initiatives and programs. For example, one plaintiff recently brought suit against the American Bar Association because of the organization's provision of diversity scholarships for law students. That is a relatively recent development that we're following.
Key Takeaways for Nonprofits
Implications for Nonprofits
Nonprofits that partner with federal agencies or receive federal funding face the most immediate exposure. Organizations with established DEI programs may face pressure to terminate or modify these initiatives, particularly if they hold federal contracts. The mixed legal landscape creates uncertainty, as enforcement may vary by jurisdiction while cases proceed through the courts.
Beyond government enforcement, the rise in private litigation targeting DEI programs creates additional compliance risks. Organizations should be aware that visible DEI initiatives may attract legal challenges from private plaintiffs, as demonstrated by the recent lawsuit against the American Bar Association.
Federal contractors at risk — Nonprofits that partner with federal agencies or receive federal funding may face challenges in maintaining their DEI initiatives and could experience increased scrutiny
Legal uncertainty continues — Legal challenges are ongoing with mixed court outcomes; stay informed about developments as they could significantly affect implementation
Private litigation increasing — Private lawsuits targeting DEI programs are creating additional compliance risks beyond government enforcement
Review your programs — Organizations with federal contracts should review their DEI programs for potential conflicts with Executive Order 14173
Monitor court decisions — Track ongoing litigation as outcomes will shape the regulatory environment for DEI initiatives
What Nonprofits Should Do Now
Organizations should immediately assess their exposure by reviewing federal funding sources and contracts for DEI-related requirements or restrictions. Consult with legal counsel to evaluate your specific DEI programs and determine compliance strategies. Document your organization's rationale for any DEI initiatives to prepare for potential scrutiny. Stay informed about court decisions and be prepared to adapt programs if legal outcomes require changes.
Federal Funding Cuts and Budget Realignment
How executive orders are reshaping federal grant priorities and nonprofit revenue
Overview
Ongoing changes to federal funding and grants are being made pursuant to executive orders, with federal agencies reassessing and realigning where their funding goes to match the new administration's priorities. Nonprofits heavily reliant on federal grants face significant budget challenges, though major philanthropic organizations are stepping up to help fill funding gaps.
What's Driving the Cuts
Federal agencies are reassessing and realigning where their funding goes in order to match the new administration's priorities. This means cutting foreign aid, reducing certain federal agencies to their bare minimum or eliminating them altogether, and taking a hard look at funding for nonprofits.
The realignment reflects a fundamental shift in federal priorities, with agencies directed at focusing resources on areas aligned with the new administration's policy goals. This has resulted in reduced funding for certain program areas, including international development, environmental initiatives, and some social services programs.
Impact on Nonprofits
A recent survey shows that local nonprofits will likely take quite a hit from these federal funding cuts, and nonprofits are scrambling to adapt their strategies and budgets to address these changes — primarily seeking alternative funding sources and modifying programs. Those relying heavily on federal grants will likely continue to rethink their fundraising game plan and brace themselves for possible financial hiccups.
Philanthropic Response
Organizations are responding by diversifying revenue streams, scaling back programs, reducing staff, and seeking bridge funding from foundations and individual donors. The impact varies by sector, with organizations focused on environmental issues, international aid, and certain social services experiencing the most significant reductions.
Interestingly, some large philanthropic organizations have stepped up, expressing their intent to cover the shortfall for nonprofits anticipating a loss of federal funds and/or a need to adapt their programs. Major foundations are offering grants to help organizations transition away from federal funding dependency and develop sustainable alternative revenue models.
Key Takeaways for Nonprofits
Significant impact ahead — Federal funding cuts will significantly impact nonprofits, especially those heavily reliant on federal grants
Diversification essential — Organizations should diversify funding sources and develop contingency plans to reduce dependency on federal revenue
Philanthropic support available — Major philanthropic organizations are stepping up to help fill funding gaps; explore foundation grant opportunities
Ongoing changes expected — Budget realignment is ongoing; expect continued changes to federal funding priorities over the coming months
Strategic reassessment needed — Nonprofits should proactively reassess their fundraising strategies and program sustainability
Act quickly — Organizations should immediately calculate their federal funding dependency and identify vulnerable programs
What Nonprofits Should Do Now
Calculate your organization's federal funding as a percentage of total revenue to assess vulnerability. Identify which specific programs and positions rely on federal grants. Begin conversations with foundation funders and major individual donors about potential support. Develop a diversified funding strategy that includes individual giving, corporate sponsorships, and foundation grants. Consider strategic partnerships with other nonprofits to consolidate services and reduce costs. Communicate transparently with your board and staff about funding challenges and adaptation strategies.
IRS Processing Delays for Tax-Exempt Applications
System outage creates backlog for organizations seeking tax-exempt status
Overview
Since mid-March 2025, the IRS's internal operating system for exemption applications has been down, creating significant delays for organizations seeking tax-exempt status. The system outage has resulted in a pause in issuing determination letters for approved applications, creating operational and financial challenges for new nonprofits.
The System Outage
It appears that the IRS's internal operating system for exemption applications has been down since mid-March, resulting in a pause in issuing determinations for approved applications. We've been closely monitoring developments related to IRS staffing and the agency's processing of exemption applications, including Forms 1023, 1024, 1024a, etc.
The outage affects all types of tax-exempt status applications, and while the IRS continues to accept and review applications, it cannot issue the official determination letters that confirm an organization's tax-exempt status. The IRS has not announced a timeline for when the system will be restored.
Implications for Organizations Seeking Tax-Exempt Status
This outage has potentially significant implications for nonprofit organizations seeking tax-exempt status. Without these determinations, organizations may face delays in receiving the benefits associated with tax-exempt status, such as eligibility for tax-deductible contributions and, of course, exemption from federal corporate income tax.
Organizations that have been approved but are waiting for determination letters cannot offer donors tax-deductible contributions, cannot benefit from federal tax exemption, and may be ineligible for certain grants and loans that require proof of tax-exempt status. This creates serious operational challenges for new organizations trying to launch programs and build donor bases.
Guidance for Applicants
During this period, while the IRS works to resolve these system issues, applicants may stay informed by regularly checking the IRS website, which shares the date of submission of the applications it is currently assigning to reviewers. Additionally, new nonprofits should be prepared for longer wait times to receive IRS determinations of tax-exempt status and anticipate potential disruptions in their operations as they navigate these delays.
Key Takeaways for Nonprofits
Organizations should consider alternative structures during the delay, such as operating as a fiscally sponsored project under an established 501(c)(3) organization, which would allow them to accept tax-deductible donations while waiting for their own determination letter.
System down since mid-March — IRS system for processing tax-exempt applications has been down since mid-March 2025
Determination letters paused — Determination letters for approved applications are paused, creating a significant backlog
Benefits delayed — Organizations will face delays in receiving tax-deductible contribution eligibility and tax exemption benefits
Monitor IRS updates — Check the IRS website regularly for updates on application processing timelines
Plan for disruptions — New nonprofits should plan for extended wait times and potential operational disruptions
Consider alternatives — Explore fiscal sponsorship or other interim structures while waiting for determination letters
What Nonprofits Should Do Now
Check your application status regularly on the IRS website to estimate when your application might be reviewed. Prepare contingency plans for operations during the period without a determination letter. Consider fiscal sponsorship under an established 501(c)(3) to accept tax-deductible donations in the interim. Communicate transparently with potential donors about your status and when donations will become tax-deductible. If you haven't yet applied, consider timing your submission strategically and ensure all documentation is complete to avoid additional delays. Consult with a tax attorney or nonprofit advisor about optimal strategies for your specific situation.
The Johnson Amendment: Legal Challenges and Legislative Changes
Constitutional challenges and Congressional action targeting political activity restrictions
Overview
The Johnson Amendment, which prohibits 501(c)(3) organizations from supporting or opposing political candidates, is facing unprecedented legal and legislative challenges. Two constitutional lawsuits seek to have the amendment declared unconstitutional, while Congress is considering legislation to create a carve-out allowing political statements by churches and nonprofits.
Background on the Johnson Amendment
As a reminder, this is the portion of the Internal Revenue Code that prohibits 501(c)(3) organizations from supporting or opposing candidates for public office. Since its adoption, it has faced challenges and allegations that it infringes on free speech and religious freedom, among other criticisms. Supporters of the text argue that it protects the integrity of the tax system and prevents the use of tax-deductible contributions from being used for political campaigns.
The amendment has been in place since 1954 and represents a longstanding policy consensus that tax-exempt status should not subsidize political campaign activity. However, opponents argue it creates an unconstitutional restriction on free speech, particularly for religious organizations that wish to address moral issues with political dimensions.
Recent Constitutional Challenges
Recently, two lawsuits were filed that seek to have the amendment declared unconstitutional. (For the record, the amendment is a portion of section 501(c)(3) of the Internal Revenue Code.)
These cases are in early stages of federal litigation and could take years to resolve. If they reach the Supreme Court, the Court's current composition suggests potential sympathy for constitutional challenges based on free speech and religious freedom grounds. Recent Supreme Court decisions have been more favorable to religious liberty arguments, which could influence how the Court views the Johnson Amendment.
Legislative Efforts: The Free Speech Fairness Act
In addition to those two lawsuits, a bill — the Free Speech Fairness Act — was recently introduced by representatives in Congress seeking to allow churches and other 501(c)(3) organizations to make statements related to political campaigns in the "ordinary course of carrying out their tax-exempt purposes" by creating a carve-out to the amendment, or that provision of section 501(c)(3).
Key Takeaways for Nonprofits
The bill faces significant opposition from good government organizations and some tax policy experts who argue it would politicize nonprofits and undermine the integrity of the tax-exempt system. However, it has strong support from religious organizations and free speech advocates. The legislative outlook remains uncertain, particularly regarding Senate passage.
Implications for Nonprofits
Changes to the Johnson Amendment could fundamentally reshape the landscape for political activity by tax-exempt organizations. If the amendment is struck down or modified, nonprofits would gain more flexibility to engage in political speech and potentially endorse candidates. However, this could also create pressure on organizations to take political positions, potentially leading to mission drift and donor concerns about politicization.
Churches and religious organizations are most directly affected by these challenges, as they have been the primary advocates for changes to the amendment. Other nonprofits should consider how expanded political speech rights would affect their missions, donor relationships, and community standing.
Two constitutional challenges filed — Two constitutional lawsuits are challenging the Johnson Amendment's validity on free speech and religious freedom grounds
Legislative carve-out proposed — The Free Speech Fairness Act would create a carve-out allowing political statements in the ordinary course of tax-exempt purposes
Fundamental changes possible — Changes to the Johnson Amendment could fundamentally alter the political activity landscape for 501(c)(3) organizations
Religious organizations most affected — Churches and religious organizations are particularly focused on these developments and driving the challenges
Monitor closely — Nonprofits should monitor both legal and legislative developments closely; outcomes could significantly impact permissible activities
Long timeline expected — Court cases could take 1-3 years to resolve; legislative action timeline is uncertain
What Nonprofits Should Do Now
Review your organization's current policies on political activity to ensure compliance with existing Johnson Amendment restrictions. Educate your board and leadership about the amendment and potential changes. Consider how your organization would handle expanded political speech rights if changes occur. Clarify your organization's values regarding political engagement and whether you would choose to engage in campaign activity if permitted. Monitor developments in the pending lawsuits and Congressional action on the Free Speech Fairness Act. Prepare stakeholders for potential changes and develop contingency plans for different scenarios.
IRS Guidance Review Executive Order
Comprehensive review of IRS regulations could reshape tax-exempt compliance landscape
Overview
On April 9, 2025, an executive order initiated a comprehensive review of IRS guidance documents that could significantly reshape the regulatory landscape for tax-exempt organizations. This review, conducted by the Department of Government Efficiency [DOGE], aims to identify and eliminate outdated or unlawful regulations, particularly in light of recent Supreme Court decisions.
The Executive Order and Its Scope
This executive order initiated a comprehensive review of IRS guidance documents. This review, conducted by the Department of Government Efficiency [DOGE], aims to identify and eliminate outdated or unlawful regulations, particularly in light of recent Supreme Court decisions.
The review encompasses all IRS guidance documents, revenue rulings, notices, and regulations. The stated goal is to identify regulations that exceed statutory authority, conflict with Supreme Court precedent, or are outdated and no longer applicable to modern circumstances. The scope is comprehensive and could affect virtually any area of tax-exempt organization regulation.
Key Mechanisms: The "Good Cause" Exception
The executive order allows agency heads to finalize rules without notice and comment when doing so is consistent with the "good cause" exception in the Administrative Procedure Act, allowing for the bypass of the notice-and-comment rulemaking when it would be impracticable, unnecessary, or contrary to the public interest.
This mechanism is significant because it allows the IRS to repeal or modify regulations quickly, without the normal public comment period that would give nonprofits and other stakeholders an opportunity to provide input. This means changes could be implemented rapidly, potentially catching organizations off guard.
Action Steps Required
To accomplish these goals, the executive order includes the following action steps:
Immediate repeal — Agencies must immediately repeal any regulation that clearly exceeds statutory authority or is otherwise unlawful, prioritizing those in conflict with Supreme Court decisions. Each repeal must be accompanied by a brief statement explaining why the "good cause" exception applies.
30-day analysis — Within 30 days of the review period's conclusion, agencies must submit a summary to the Office of Information and Regulatory Affairs explaining why certain identified regulations were not targeted for repeal.
These timelines suggest that significant regulatory changes could occur quickly, potentially within the next few months.
Implications for Tax-Exempt Organizations
In sum, the recent executive orders will likely drive significant changes in IRS guidance and regulations, which may affect tax-exempt organizations relying on such guidance. Nonprofit tax-exempt organizations should stay informed about these developments and be prepared for potential impacts on their operations and compliance requirements.
Key Takeaways for Nonprofits
Organizations that have relied on specific IRS guidance for compliance decisions may find that guidance repealed or modified, creating uncertainty about permissible activities. Areas particularly at risk include DEI-related guidance, environmental justice guidance, and guidance on political activity boundaries. Organizations should prepare for a potentially significant shift in the regulatory landscape.
Comprehensive review underway — The Department of Government Efficiency (DOGE) is conducting a comprehensive review of all IRS guidance documents
Supreme Court conflicts targeted — Regulations conflicting with recent Supreme Court decisions are priority targets for repeal
Fast-track process — The "good cause" exception allows agencies to bypass traditional notice-and-comment rulemaking
Significant changes likely — Significant changes to IRS guidance affecting nonprofits are likely in the coming months
Prepare for impacts — Organizations should prepare for potential impacts on operations, compliance requirements, and long-standing regulatory interpretations
Stay informed — More developments from the administration involving tax-exempt status may be forthcoming
What Nonprofits Should Do Now
Inventory which IRS guidance documents your organization relies on for compliance decisions. Identify areas of potential vulnerability, particularly guidance related to DEI, political activity, or environmental issues. Monitor announcements from DOGE and the IRS about specific guidance changes. Consult with tax counsel about implications of likely changes. Develop contingency compliance policies for different scenarios. Prepare to adapt quickly as guidance is repealed or modified. Join industry coalitions or professional associations monitoring the review process to stay informed about developments affecting your sector.
Looking Ahead
Also, there may be more to come from the administration involving tax-exempt organizations and tax-exempt status, so stay tuned.
That's it for today. Be sure to check out the other discussions in our New Directions series for more insights on the Trump administration's evolving policies. Thanks for listening.
