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The Treasury Department and IRS proposed regulations last week that could end the tax-exempt status of thousands of private educational institutions that the Trump administration deems to engage in racially discriminatory practices through diversity, equity and inclusion (DEI) programs.
The proposed rules are subject to a 60-day comment period, during which they could continue to change, though the IRS told reporters that it plans to finalize the rules for taxable years beginning after May 31, 2027.
The proposed change could affect up to 18,000 educational institutions ranging from primary schools to universities and trade schools. It would apply across school-administered or school-supported programs, including admissions, educational policies, scholarships and loans, and athletics. The proposal follows other moves by the administration to force the elimination of DEI programs at various types of organizations, including for-profit entities such as federal contractors.
The administration says the proposal would not prevent a private school from maintaining a religious mission, and that schools “may continue to select students based on genuine religious affiliation or membership.” Schools may also use “race-neutral criteria” including household income, geography, hardship status, military family status and academic achievement to provide admission or financial assistance.
Grant Thornton insight:
Given the politically controversial nature of the changes and the frequency with which major administrative actions are being challenged in the courts, the proposal is likely to undergo substantial review, public comment and litigation before a final outcome is reached. For now, potentially impacted institutions should remain informed, evaluate programs that include race-based eligibility or selection criteria, and avoid making hasty changes based solely on the Sept. 3 announcement.
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