The Internal Revenue Service (IRS) recently released proposed regulations (REG 119986-25) that would significantly expand and formalize racial nondiscrimination requirements applicable to tax-exempt private schools under IRC Section 501(c)(3). If finalized, the rules would apply to taxable years beginning after May 31, 2027, and could have meaningful implications for admissions, scholarships, financial aid and other school programs.
What Would Change?
Current IRS guidance generally requires private schools seeking or maintaining tax-exempt status to operate under a racially nondiscriminatory policy. Existing guidance (Rev Proc 75-50) also contains limited provisions allowing programs that favor racial minority groups when designed to promote a school's nondiscrimination objectives.
The proposed regulations would eliminate that flexibility. Under the proposal, a private school may not qualify for Section 501(c)(3) status if it adopts, maintains, or enforces any policy or practice that discriminates on the basis of race, color, or national or ethnic origin in:
- Admissions
- Scholarships and financial aid
- Educational programs
- Athletic programs
- Any other school-administered or school-supported program
Importantly, the IRS proposes that discrimination for any purpose, including diversity-related or remedial objectives, would violate the new standard.
Why the Change?
The proposed rules rely heavily on the Supreme Court's 2023 decision in Students for Fair Admissions v. Harvard, as well as earlier authorities including Brown v. Board of Education, Green v. Connally and Bob Jones University v. United States. The IRS states that racial discrimination in education, regardless of intent, is inconsistent with a fundamental public policy of the United States and therefore incompatible with tax-exempt status.
Key Implications for Private Schools
Private schools, colleges, universities, and other qualifying educational organizations should review their policies now to identify potential areas of risk. Particular attention should be given to:
- Race-based scholarship and financial aid programs
- Admissions practices that consider race, ethnicity or national origin
- Donor-restricted scholarship funds that contain race-based eligibility requirements
- School-sponsored programs that use race-based participation criteria
Schools may need to revise scholarship criteria and donor agreements to rely on alternative factors such as financial need, geography or first-generation student status. The IRS specifically notes that schools are expected to modify policies to maintain their tax-exempt status if the regulations are finalized.
What Is Not Affected?
The proposed regulations clarify that religious schools may continue to maintain a religious mission and may select students based on religious affiliation or membership, provided the criteria are based on religion rather than race, color, national origin or ethnicity. The rules also do not prevent schools from pursuing diversity, inclusion, or anti-discrimination objectives through race-neutral means.
Looking Ahead
Although these regulations are only proposed at this stage, they signal a significant shift in the IRS's approach to evaluating racial nondiscrimination in private schools. Educational organizations should consider reviewing admissions, scholarship, and financial aid policies well before the expected applicability date to assess compliance risks and identify any necessary changes.
Your Guide Forward
Cherry Bekaert's Not-for-Profit Tax professionals help tax-exempt organizations address compliance and regulatory matters. As private schools and other educational organizations review these proposed regulations, our team can help evaluate admissions, scholarship, and financial aid policies and assess potential implications for tax-exempt status.
