IRS proposes new racial nondiscrimination regulations for tax-exempt private schools

On September 4, 2026, the US Department of the Treasury (Treasury) and Internal Revenue Service (IRS) published proposed regulations addressing racial nondiscrimination requirements for tax-exempt private schools. Failure to comply with the regulations could result in the revocation of a private school’s tax-exempt status.

The proposed regulations provide that private schools (including primary and secondary schools, colleges, universities, professional schools, and trade schools) do not qualify as tax-exempt organizations as described in Section 501(c)(3) of the Internal Revenue Code (the Code) if they adopt, maintain, or enforce a policy or practice that discriminates on the basis of race, color, or national or ethnic origin in the administration of educational policies, admissions policies, scholarship or loan programs, athletic programs, or other school-administered or school-supported programs. The proposed regulations further provide that prohibited discrimination includes discrimination on these bases “for any purpose.”

The regulations are not yet final. If finalized as proposed, they would apply to taxable years beginning after May 31, 2027. Loss of tax-exempt status would have significant financial and other consequences for a private school. To get ahead of this existential threat, private schools are advised to take action to review all their policies and practices and make changes as needed. Further, to the extent any private schools are contemplating obtaining tax-exempt bonds, the positions set forth in the proposed regulations take on heightened significance.

What would change

Tax-exempt private schools have long been required to maintain racially nondiscriminatory policies. Revenue Procedure 75-50 (as well as other IRS guidance), however, currently permits certain policies favoring racial minority groups in admissions, facilities and programs, and financial assistance where their purpose and effect are to promote a school’s racially nondiscriminatory policy. It also permits certain scholarships and loans favoring racial minority groups.

The proposed regulations are intended to eliminate those exceptions. Treasury and the IRS state that discrimination based on race, color, or national or ethnic origin would be inconsistent with Section 501(c)(3) regardless of its purpose, including where intended to further remedial or diversity-related objectives.

The proposal follows the US Supreme Court’s 2023 decision in Students for Fair Admissions, Inc. v. President and Fellows of Harvard College (SFFA). Importantly, for private K-12 schools, Treasury acknowledges that private primary and secondary schools were not directly affected by SFFA, but states that it expects such schools to now adjust their admissions criteria as necessary to conform to the proposed regulations and retain their tax-exempt status.

Implications for private schools

If finalized as proposed, the regulations would create a direct federal tax-exemption consequence tied to private-school admissions and other student-facing, school-administered, or school-supported programs.

The proposal would not prevent schools from taking actions intended to “eliminate prejudice and discrimination,” provided those efforts are implemented through means that do not themselves discriminate on the basis of race, color, or national or ethnic origin.

The proposed regulations confirm that religious schools may continue to maintain a religious mission and may select students based on religious affiliation or membership, so long as the criterion is based on religion rather than shared ancestry or ethnic characteristics.

Timing and next steps

The proposed regulations do not impose a new operative requirement at this time. If finalized as proposed, they would apply to taxable years beginning after May 31, 2027. Treasury states that the delayed effective date is intended to give schools time to amend affected policies, including, without limitation, admission and scholarship policies. Comments on the proposed regulations and requests for a public hearing are due by November 3, 2026. The final regulations are expected to be published before May 31, 2027.

While the rulemaking process remains ongoing, tax-exempt private schools should work with counsel to begin to identify admissions policies, scholarship programs, student-facing programs, and donor restrictions that warrant further review and possible changes.

Private schools that have previously evaluated diversity, equity, and inclusion initiatives under SFFA, federal executive orders, or other previous guidance should revisit those assessments given the broad reach of the new proposed regulations.

Areas for review include, but are not limited to:

• Admissions policies or practices that use race, color, or national or ethnic origin in decision-making
• Scholarships or financial assistance containing eligibility criteria based on those characteristics
• Student programs, opportunities, or events that restrict eligibility or confer preferences based on those characteristics
• Donor-restricted or endowed scholarship funds containing race- or ethnicity-based eligibility requirements

Treasury also recognizes that donor-restricted scholarships, in particular, may raise additional issues. Its regulatory analysis notes that schools may need to work with donors or their heirs to develop alternative eligibility criteria such as income, geography, or first-generation status.

Our experienced McDermott Will & Schulte lawyers are available to assist in evaluating the proposed regulations, reviewing policies and programs, and advising on compliance planning.