The Treasury Department and the IRS have proposed rules that would threaten the federal tax-exempt status of private schools that use race-based preferences in admissions, scholarships, or school-run programs. The proposal, described by Education Week on Sept. 3 and discussed in a Sept. 12 Washington Examiner opinion piece, could affect as many as 18,000 educational institutions, from K-12 schools to colleges and trade schools.
For affluent families, school donors, and trustees, the tax issue is larger than campus policy. Section 501(c)(3) status supports deductible charitable gifts, can help support tax-exempt bond financing, and generally keeps investment income inside a nonprofit school outside the corporate tax system. If that status is lost, the after-tax cost of giving and of running the institution can rise quickly.
What changed
The proposal would bar private schools from taking race into account in “educational policy, admissions policy, scholarship or loan program, athletic program, or other school-administered or supported program,” according to Education Week’s account of the rule. Treasury Secretary Scott Bessent said schools cannot avoid the rule by relabeling racial preferences as diversity or inclusion efforts.
The legal framework itself is not new. The Washington Examiner article points to the Supreme Court’s 1983 decision in Bob Jones University v. United States, which held that an organization seeking Section 501(c)(3) status must serve the public interest and not violate fundamental public policy. The current proposal would apply that principle to modern race-conscious policies.
The rule is still proposed, not final. Education Week reported that educators and advocates have 60 days to comment or request a public hearing. It also reported that the proposal would take effect after May 31 of next year, while the Washington Examiner article said the regulations would not take effect until taxable years beginning on or after May 31, 2027. That timing should be treated as unsettled until Treasury publishes final rules.
Who is affected
The immediate targets are private schools, including K-12 institutions, colleges, and trade schools. But the economic impact could spread well beyond school administrators.
- Donors: If a school loses Section 501(c)(3) status, charitable deductions for gifts to that school could disappear.
- Families relying on aid: Schools that use race-specific scholarships or targeted supports may need to redesign those programs around race-neutral criteria.
- Boards and finance offices: Schools may need to review admissions, scholarship, athletics, governance, and annual IRS certifications.
- Bondholders and lenders: The Washington Examiner article said tax-exempt bond financing may be jeopardized if exempt status is revoked.
Education Week also noted that the proposal arrives as a separate federal school-choice initiative is set to begin early next year. Under that law, taxpayers can claim dollar-for-dollar federal tax credits of up to $1,700 for donations to scholarship-granting organizations in participating states. Those organizations may then fund private-school tuition and other educational expenses. That makes the tax treatment of schools and related organizations more financially significant.
The after-tax math
The proposal does not publish a universal dollar cost because schools vary widely in donations, investment income, and financing structures. But the tax mechanics are straightforward: losing exempt status can reduce the tax value of gifts and potentially expose school income to tax.
Example: A household considering a $100,000 gift to a private school may value the charitable deduction as part of the gift decision. If the school keeps Section 501(c)(3) status, the donation may remain deductible under the usual charitable-giving rules. If the school loses that status, that deduction may disappear. The after-tax cost of making the same gift could therefore rise materially, depending on the donor’s tax situation.
Example: A school that depends on an annual fund and also earns investment income inside its endowment could face two pressures at once if exempt status is revoked: fundraising may become harder because donors lose deductions, and some investment income that had been sheltered by nonprofit status may become taxable.
| Tax item | If school keeps 501(c)(3) | If school loses 501(c)(3) |
|---|---|---|
| Donor gifts | May be deductible, subject to normal tax rules | Deduction may no longer be available |
| Endowment investment income | Generally tied to nonprofit tax treatment | Could become taxable |
| Tax-exempt bond financing | May remain available | May be jeopardized |
For high-income families, that means the issue is not only ideological or educational. It may directly affect the net cost of philanthropy and the financial position of schools they support.
What schools may still do
Both sources say the proposal allows schools to pursue race-neutral alternatives. Education Week reported that schools may still consider family income, geography, individual hardship, military-family status, academic achievement, and whether a student would be first in the family to attend college, private school, or trade school. Religious schools may also continue selecting students based on religious affiliation.
The Washington Examiner article similarly said schools may continue helping disadvantaged students using race-neutral criteria and may maintain genuine religious missions consistent with federal law.
Education Week also reported that schools could still create policies intended to eliminate prejudice and discrimination so long as those actions do not privilege one race over another.
What to watch next
Three points matter from here.
- The final effective date: The two accounts differ on timing, so schools, donors, and families may want to watch Treasury’s final text closely.
- The final scope: Because the rule is still proposed, definitions, examples, and enforcement standards may change after the comment period.
- School responses: Some institutions may begin rewriting admissions, scholarship, and programming policies before any final rule takes effect, especially where fundraising depends heavily on deductible giving.
For households that give significantly to private schools, and for trustees or board members, this may be worth discussing with a CPA or tax counsel once Treasury releases more detail. The core tax question is simple: whether a school’s policies could put at risk the federal tax status that underpins deductible gifts and other financial benefits.
Sources
- First reported IRS, Treasury use 501(c)(3) rules against private school DEI policies — Washington Examiner
- Trump Extends Anti-DEI Push to Private Schools, Eyeing Their Tax-Exempt Status — Education Week
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