Trump Administration Proposes Stripping Tax-Exempt Status from Schools with Race-Based Programs

The Trump administration on Thursday proposed new regulations that would strip federal tax-exempt status from private schools and colleges found to be offering targeted programs, financial assistance, or admissions preferences based on race. This move marks a significant escalation in the administration’s broader campaign to reshape higher education in the United States, specifically targeting diversity, equity, and inclusion (DEI) policies on campuses.

The proposed rule, announced by the U.S. Treasury Department and the Internal Revenue Service (IRS), aims to eliminate existing IRS regulations that permit schools to consider race in areas such as financial aid, admissions, and scholarships. Officials contend that these practices are inconsistent with recent U.S. Supreme Court case law, specifically citing the 2023 decision that ended race-based affirmative action in college admissions. Frank J. Bisignano, CEO of the IRS, stated that the proposed regulations serve as a notice, and institutions continuing to engage in racial discrimination should anticipate losing their tax-exempt status.

The scope of the proposal is extensive, covering admissions, educational policies, scholarships, loans, athletics, and “every other school-administered or school-supported program.” It would apply to any program that considers race “for any purpose,” even those designed to mitigate past racial discrimination. The Treasury Department estimates that this change could impact as many as 18,000 schools across all educational levels, potentially affecting 750,000 students who might otherwise qualify for race-based scholarships.

For small and mid-sized private schools, the implications of such a regulation could be particularly profound. The loss of tax-exempt status would mean a significant increase in operational costs due to new tax liabilities, potentially straining already tight budgets. These institutions often rely heavily on donations, which are frequently incentivized by the donor’s ability to claim tax deductions. Stripping a school’s tax-exempt status could severely curtail its fundraising capabilities, impacting everything from faculty salaries and facility maintenance to student support services and curriculum development.

Furthermore, compliance itself would present a considerable burden. Schools would need to meticulously review all their programs, policies, and financial aid structures to ensure they do not run afoul of the new regulations. This could necessitate legal counsel, administrative overhauls, and potentially the restructuring or elimination of programs that civil rights advocates argue are crucial for addressing historic inequities faced by marginalized ethnic minorities. While the proposal specifies that it would not prevent schools from assisting disadvantaged students using race-neutral criteria—such as income level, geographic location, or first-generation status—transitioning existing programs to fit these parameters would require substantial effort and resources.

The administration’s push is part of a sustained effort to dismantle DEI initiatives, which officials argue discriminate against white and Asian American students. Civil rights advocates, however, counter that these diversity practices are essential tools for addressing long-standing systemic inequalities and promoting inclusive educational environments. The proposal explicitly states that it would not prohibit private schools from maintaining a religious mission, curriculum, or program, nor would it prevent religious schools from selecting students based on religious affiliation.

This proposed regulation, if finalized, is set to kick in after May 2027, but it is currently subject to a public comment period. Given the significant legal and policy shifts it entails, it is widely expected to draw considerable legal challenges if it progresses toward implementation. Higher education leaders have already voiced criticism against the proposal, highlighting the potential disruption to established educational frameworks and the support systems for diverse student populations.

The potential for thousands of schools to lose their tax-exempt status introduces a complex layer of financial and operational risk that many small and mid-sized institutions may be ill-prepared to navigate. The immediate challenge for these schools will be understanding the precise scope of the proposed changes and assessing their current programs for compliance. In our experience, regulatory shifts of this magnitude demand a proactive and detailed review of an organization’s financial structure and operational policies. For institutions that have historically relied on race-based considerations for admissions or scholarships, the need to adapt quickly and strategically to avoid severe financial penalties, including the loss of tax-exempt status, is paramount. We believe that robust tax preparation and compliance planning will be critical for affected schools to manage this transition effectively and ensure their continued financial viability. Businesses and educational institutions facing these complex regulatory changes can contact C&S Finance Group LLC at csfinancegroup.com for guidance and support.

As the public comment period unfolds, stakeholders across the education sector will be closely monitoring developments. The eventual outcome of this proposal, including any modifications or legal challenges, will significantly shape the future landscape of private education and its approach to diversity and inclusion in the United States.