Tax exempt status for private schools could face new federal requirements under proposed IRS regulations targeting racial discrimination in admissions, scholarships, athletics and other school policies.
The Treasury Department and Internal Revenue Service published the proposal in Internal Revenue Bulletin 2026-39 on September 21, 2026.
The proposed regulations would state that a private school is not eligible for tax exempt status under Section 501(c)(3) if it adopts, maintains or enforces policies that discriminate based on race, color, or national or ethnic origin.
The proposal is not final, and it does not immediately change the tax treatment of private schools or charitable donations.
Written comments and requests for a public hearing are due November 3, 2026.
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What the IRS proposal would change
The proposed rule would update existing regulations governing educational organizations that seek federal income tax exemption under Section 501(c)(3).
Under the proposal, a private school would have to operate without racial discrimination in its educational, admissions, scholarship, athletic and other school-administered or school-supported policies.
The rule would apply to private primary schools, secondary schools, preparatory schools, high schools, colleges, universities, professional schools and trade schools.
The IRS said racial discrimination would be incompatible with charitable tax exempt status regardless of the purpose behind the policy.
That language would include race-based actions intended to address the effects of past discrimination, according to the proposed regulations.
The agency said the proposal is intended to establish a uniform nondiscrimination standard for private educational institutions.
Proposal would affect more than admissions
Although admissions policies are likely to receive the most attention, the proposed rules would reach beyond how schools select students.
Private schools could also need to review scholarship and loan programs, financial aid policies, athletic programs, educational programs and other benefits made available to students.
The IRS specifically identified policies involving race, color and national or ethnic origin as potentially affecting tax exempt status.
Schools that use racial or ethnic criteria in scholarship eligibility could therefore face compliance questions if the regulations are finalized substantially as proposed.
The proposal would also remove or revise older regulatory language that the Treasury Department and IRS say does not reflect a uniform nondiscrimination standard.
Existing IRS guidance already requires private schools seeking exemption to maintain a racially nondiscriminatory policy toward students and to avoid discrimination in admissions, educational programs, scholarships, loans and athletics.
The new proposal would place those principles into updated regulations and clarify that race-based preferences or restrictions are not compatible with Section 501(c)(3) status.
How tax exempt status could be affected
A private school that fails the proposed standard could be denied recognition as an organization exempt from federal income tax.
For a school that already has tax exempt status, failure to comply could create a risk of revocation under the rules that apply to Section 501(c)(3) organizations.
The proposal would not automatically revoke every school’s status when the rules become effective.
Instead, the IRS would evaluate whether an organization meets the requirements for exemption under the applicable facts and circumstances.
The federal tax consequences could extend beyond the school itself.
Section 170 generally allows deductions for qualifying charitable contributions, including certain gifts to educational organizations that meet the applicable requirements.
If a school loses its tax exempt status, contributions made after the effective date could raise questions about whether donors are entitled to charitable deductions.
The proposal does not state that donations made to every school would immediately become nondeductible, because the rule remains subject to the notice-and-comment process and has not been finalized.
When the proposed rules would apply
The Treasury Department and IRS propose applying the regulations to taxable years of private schools beginning after May 31, 2027.
The agencies said they expect to finalize the regulations, with any changes based on public comments, before that date.
The delayed applicability date is intended to give schools time to review and revise policies before the rules take effect.
For schools with calendar-year tax periods, the first taxable year affected could generally be the year beginning January 1, 2028, assuming the final regulations retain the proposed applicability date.
Schools with different taxable years could face an earlier or later compliance date depending on when their tax year begins.
The exact effect will depend on the final regulations and the circumstances of each organization.
Scholarships and financial aid could see the biggest changes
The proposed rules could be especially important for scholarship and loan programs that use race, color or national origin as an eligibility factor.
The Treasury Department and IRS estimate that approximately 750,000 students may be affected by scholarship programs allocated partly on the basis of racial, ethnic or national identity.
The agencies also estimate that the proposal could affect as many as 18,000 private elementary, secondary and postsecondary schools that currently qualify for tax exempt status.
Those estimates are not a determination that every affected school currently violates the proposed standard.
Many schools could revise eligibility rules while continuing to support students who face financial or educational disadvantages.
The proposal identifies race-neutral factors such as family income, geographic location, first-generation student status, individual hardship, military family status and academic achievement as possible alternatives.
Changing a scholarship’s criteria could still require legal, administrative or donor approval, particularly where an endowment agreement limits who may receive the funds.
The IRS said schools may need to work with donors or their heirs when an existing gift instrument expressly restricts eligibility based on race or ethnicity.
The proposed regulations do not require schools to abandon financial aid programs altogether.
Instead, they would require schools seeking to preserve tax exempt status to structure those programs without prohibited racial or ethnic classifications.
Religious schools and other exemptions
The proposal would not prevent a private school from maintaining a religious mission, religious curriculum or religious observance program.
The IRS has said religious schools may continue to select students based on genuine religious affiliation or membership where permitted by existing federal law.
That does not create a general exemption for race-based policies.
Schools with religious identities would still need to evaluate whether their admissions, scholarship and other policies comply with the proposed racial nondiscrimination standard.
The application of the regulations could depend on the wording of a school’s policies, the way those policies operate and the final version adopted by Treasury and the IRS.
Public comments are due November 3
School administrators, donors, families, tax professionals and other interested parties may submit comments on the proposal.
Comments may address the proposed definitions, the scope of covered school policies, the applicability date, scholarship administration and the potential effect on charitable contributions.
Requests for a public hearing must also be submitted by November 3, 2026, under the procedures described by the IRS.
Written comments submitted through the federal rulemaking process generally become available for public inspection.
Until the comment period closes and final regulations are issued, private schools remain subject to the tax rules currently in effect.
Schools and donors considering changes to admissions, financial aid or charitable arrangements should distinguish the proposed rules from a final legal requirement.
What private schools and donors should watch
- Whether the final regulations retain the proposed May 31, 2027, applicability date.
- Whether Treasury and the IRS modify the treatment of scholarships, loans or donor-restricted funds.
- How the final rule defines discrimination in school-administered and school-supported programs.
- Whether additional IRS guidance explains compliance, documentation and enforcement procedures.
- How the final rules affect the deductibility of contributions to schools that fail to qualify under Section 501(c)(3).
The proposal marks a significant potential change in how the federal government describes racial nondiscrimination as a condition of private-school tax exempt status.
However, the proposal is not yet a final regulation, and the obligations of private schools may change after the IRS reviews public comments.
Frequently Asked Questions
Are the IRS private-school tax rules final?
No. The IRS and Treasury proposal is a notice of proposed rulemaking. The agencies are accepting public comments and requests for a hearing through November 3, 2026.
Which schools could be affected by the proposed regulations?
The proposal could affect tax-exempt private primary, secondary, preparatory and high schools, as well as colleges, universities, professional schools and trade schools.
When would the proposed rules apply?
The proposed regulations would apply to taxable years beginning after May 31, 2027, if finalized with that applicability date.
Could the proposal affect charitable donations to private schools?
Potentially. Section 170 deductions generally depend on contributions being made to qualifying organizations. A school that loses Section 501(c)(3) status could create questions about the deductibility of contributions made after the applicable change.
Fact-Checked: Key dates, affected organizations, proposed requirements and applicability details were verified against IRS Internal Revenue Bulletin 2026-39 and current IRS guidance on private-school tax exemption as of September 23, 2026.
Disclaimer: This article describes proposed federal tax regulations, not final law. Schools and donors should consult a qualified tax professional about their specific circumstances.
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