Trump's IRS Rule on School Tax Breaks

The story so far

As of September 3, 2026

The Trump administration has proposed regulations that would let the Treasury Department and the Internal Revenue Service revoke federal tax-exempt status from private schools that use race in admissions, financial aid, athletics, or other school-run programs. The reach is wide, covering private elementary and secondary schools, colleges and universities, professional schools, and trade schools. Treasury and the IRS estimate as many as 18,000 institutions could be affected. If finalized, the rules would apply to taxable years beginning on or after May 31, 2027, and would erase older IRS allowances for certain race-conscious practices.

The proposal rests on Supreme Court decisions that set the legal frame for race in education and tax law, including Brown v. Board of Education, Bob Jones University v. United States, and the 2023 Students for Fair Admissions case against Harvard. Bob Jones established that a school can lose nonprofit status when it violates a basic public policy against racial discrimination. The new rule extends that logic by treating any race-based preference as discrimination even if intended to remedy past bias, while saying schools may still use race-neutral criteria such as family income, where a student lives, first-generation status, individual hardship, military family status, or academic record. Religious schools would still be able to select students based on sincere religious affiliation consistent with existing law.

What gives this rule its bite is money and who decides. Nonprofit status underpins fundraising because it lets donors deduct gifts, so losing it threatens a core revenue stream even if a school’s income taxes remain limited. The proposal would place the IRS at the center of enforcement through audits and examinations to decide whether a school’s policies are racially discriminatory, with revocations subject to court challenges. It lands as federal civil rights investigators scrutinize admissions at institutions including Harvard and Yale, giving the administration a new lever alongside funding pressures to push schools away from any use of race.

This is still a proposal. It now enters the public comment process, and education groups are preparing to contest it, with legal challenges likely if it is finalized. The live question is whether the federal tax code will be used to police any policy that singles out students by race, including scholarships and outreach intended to expand access, and whether courts accept that definition of fundamental public policy. For schools, the immediate calculation is how to redesign aid and programs around race-neutral factors to avoid putting their nonprofit status at risk.