Private Schools and Colleges Should Begin Preparing for Proposed Changes to Tax-Exempt Status Rules

Tax-exempt status is woven into nearly every aspect of a private school’s financial model, from annual fundraising and scholarship support to long-term capital planning. A newly proposed rule issued by the U.S. Department of the Treasury and Internal Revenue Service (IRS) could introduce additional scrutiny for certain institutional policies and practices, making now an appropriate time for schools and colleges to evaluate areas that may warrant further review.

On September 3, 2026, Treasury and the IRS released proposed regulations that would deny or revoke federal tax-exempt status for private educational institutions that maintain policies or practices the government determines are discriminatory based on race, color, or national or ethnic origin. While the proposal is not yet final, Treasury estimates that up to 18,000 educational institutions could be affected if adopted.

Proposed Tax-Exempt Rules

The proposed regulations would establish that a private school cannot qualify for tax-exempt status if its policies or practices discriminate on the basis of race, color, or national or ethnic origin.

The proposal applies broadly across institutional operations, including:

• Admissions
• Scholarships and financial aid
• Educational programs
• Athletics
• Other services

Treasury officials have stated that the proposal is intended to align tax-exemption requirements with Supreme Court decisions addressing racial discrimination and race-conscious admissions practices, including Bob Jones University v. United States and Students for Fair Admissions v. Harvard.

Impact on Private Schools and Colleges

For private educational institutions, the implications extend well beyond income tax compliance. Tax-exempt status influences donor behavior, access to certain financing structures, and the overall perception of institutional governance. As a result, even schools that believe their current policies align with applicable requirements may benefit from understanding how regulators could view existing programs under a new framework.

If an institution were to lose its tax-exempt status, the consequences could include:

• Donors may no longer receive charitable contribution deductions.
• Fundraising efforts could become substantially more challenging.
• Bond financing and other tax-advantaged arrangements could be affected.
• Regulatory scrutiny from federal and state agencies could increase.

For many schools and colleges, the fundraising implications may be among the most significant. Changes that affect donor deductibility can influence giving behavior, annual campaigns, capital projects, and long-term philanthropic strategies.

What Should Institutions Do Now?

Although the proposed regulations remain in the rulemaking process and, if adopted, would not take effect until May 31, 2027, affecting institutions with tax years beginning after that date, educational leaders may want to use this period to assess potential areas of exposure and begin discussions with key stakeholders.

Scholarship and Financial Aid Programs

Programs that explicitly limit eligibility based on race or ethnicity may face heightened scrutiny under the proposed rules. Schools should review their current scholarship and financial aid programs to determine if the current criteria is in line with these proposed regulations. Treasury has indicated that race-neutral approaches designed to expand educational opportunities may still be permissible.

Endowed Scholarships

Schools with endowed scholarships should review the specific criteria for each scholarship to ensure the donor specific criteria does not violate the proposed rules. An inventory of scholarships that violate these criteria should be maintained and an action plan should be developed. Schools may decide to wait and see if the proposed regulations are adopted. In which case, this may not provide ample time to react and may cause the school not to award a scholar from the endowed fund for fiscal year 2028. Other schools may decide to be proactive and reach out to the donor or heirs to rewrite the criteria of the scholarship to comply with the proposed regulations.

Admissions Practices

Institutions should review admissions criteria, policies, and procedures to ensure they align with current legal requirements and evolving federal guidance. This includes reviewing any preference given to individuals based on race, color, or origin. Again, geographical region, income level, and other non-race-based criteria may be allowed while still meeting the schools overall diversity goals.

Governance and Documentation

Boards, finance committees, and senior leadership should ensure policies are appropriately documented and supported by legal analysis. Strong governance practices will be critical if regulators inquire about institutional compliance.

Looking Ahead

The September 3 proposal represents one of the most significant federal tax developments affecting private educational institutions in recent years. Whether or not the regulations are finalized in their current form, they signal continued federal scrutiny of race-conscious policies in education and a willingness to tie tax-exempt status to compliance with evolving nondiscrimination standards. Written or electronic comments and requests for a public hearing must be received by November 3, 2026.

Educational institutions should use this period to evaluate policies, strengthen governance practices, and prepare for potential changes that could affect both compliance obligations and long-term fundraising strategies.

Putting This Into Practice: Education Leadership

AAFCPAs’ Education Practice serves a diverse range of academic and education clients including independent schools, colleges and universities, special education schools, charter schools, and charter management organizations (CMOs). Our experience across the sector gives us a deep understanding of the financial, operational, and regulatory challenges educational institutions face, including evolving compliance requirements, governance considerations, funding complexity, and donor-related matters. We help education leaders navigate change with confidence through integrated audit, tax, outsourced accounting, and advisory services designed to support sound decision-making, strong financial stewardship, and long-term institutional success.

These insights were contributed by John Buckley, CPA, CGMA, Partner and David Kelleher, CPA, CGMA, Partner.

Questions? Reach out to our authors directly or your AAFCPAs partner.

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