What was once considered an “existential threat” to US colleges and other nonprofits is inching closer to reality as the Trump administration moves to withdraw the tax-exempt status of Harvard University.
President Donald Trump’s Harvard fight—escalated this week when the administration froze more than $2.2 billion of multiyear grants and Trump suggested the IRS should tax the university as a “political entity”—could be the tip of the iceberg as other nonprofits brace for potential targeting for ideological differences.
Tax-exempt status allows for what’s called 501(c)(3) status, an exemption from federal tax on earnings from income-producing assets and activities. Donations to 501(c)(3) groups are tax-deductible.
Here’s what you should know about tax-exempt status for US organizations.
1. How do groups get the status and how does it benefit them?
In 2023, about 1.85 million tax-exempt groups were registered with the IRS, according to the Tax Policy Center. The IRS breaks them down into 10 categories, including arts and culture, religion, international and foreign affairs, and health. Many are required to fill out Form 990, 990-EZ, or 990-PF detailing how much in income they have each year, which of their activities count as community service, and other ways they have “charitable purposes.”
Groups must apply and get IRS approval to become tax-exempt.
Longtime IRS executive Robert Choi is acting chief of the Tax-Exempt & Government Entities Division. He took over from Edward Killen, who was pulled up in March to be chief tax compliance officer.
2. How do groups lose their tax-exempt status?
Organizations that fail to file a required annual information return or notice for three consecutive years automatically lose their tax-exempt status.
The IRS warns that they also could lose their status for violating rules in six areas: failing to direct activities toward some exempt purpose, conducting too much lobbying, violating political campaign activity rules, earning too much income from unrelated activities, failing to submit the correct reporting forms, or deviating from original purposes.
There is precedent for removing the tax-exempt status of a school for illegal, discriminatory activity. In Bob Jones University v. United States, the Supreme Court ruled in 1983 that the IRS could revoke the tax-exempt status of a religious university that discriminated based on race.
3. How has tax-exempt status become politicized?
The IRS is typically considered an apolitical agency.
A scandal in 2012 about IRS employees in the tax-exempt division targeting conservative groups in nonprofit applications caused a massive uproar. In the 1970s, when former President Richard Nixon tried to use the agency against his political enemies, Congress passed a law making it a crime.
Trump’s threat to Harvard breaks from this apolitical standard. And massive workforce cuts at the IRS will likely make it easier for the administration to change the way the agency evaluates tax-exempt status, tax observers said.
The sector also is watching to see if a bill introduced last year that gives the Treasury secretary power to take away tax-exempt status of “terrorist-supporting organizations” resurfaces. That bill sparked pushback from groups like the National Council of Nonprofits and the United Philanthropy Forum.
Trump’s Harvard campaign comes at the same time Congress is looking at the nonprofit sector as a possible way to pay for extending the GOP’s 2017 tax law—including eliminating nonprofit status of hospitals and expanding the endowment tax on private universities.
It isn’t just Republicans, though, who are reconsidering tax-exempts: Democrats also worry about the cost of higher education, and lawmakers from both parties made another call last fall for the IRS to heighten its oversight of tax-exempt hospitals.
4. Can a president seek to remove the status from a nonprofit?
Trump has issued executive orders related to groups’ use of “illegal DEI,” so it isn’t out of the realm of possibility he would issue an order directed at a specific school or other group. A White House spokesman said Thursday that the IRS was investigating Harvard’s tax status before Trump called for the school to pay taxes, adding that “any forthcoming actions by the IRS will be conducted independently of the president.”
Punishing organizations for ideological differences beyond programs that illegally discriminate against certain races would violate the First Amendment, said Philip Hackney, a professor in tax-exempt law at the University of Pittsburgh.
Nonprofits are still concerned that any diversity, equity, and inclusion references could lead to targeting from the administration. Generally, programs that explicitly exclude another race are illegal, but those that focus on a person’s experiences as an individual rather than their race aren’t a problem.
And now, the American Alliance for Equal Rights wants the IRS to investigate the Gates Foundation, the Creative Capital Foundation, and The Lagrant Foundation because of their scholarship and grant programs that are only open to people of color. The group in part bases its complaints on the Bob Jones high court case.
Read More:
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- Environment Groups Prep for Possible Attack on Nonprofit Status
- Nonprofits Feel the Heat as GOP Tax Writers Scrounge for Offsets
- Tax Exemption for Terrorist-Linked Groups Targeted by House
- Harvard, MIT Tax Status Probed by Congress Over Antisemitism
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