Executive orders, federal funding cuts, and suspended processing of tax-exempt status applications are among the changes affecting nonprofits.
Topics discussed:
- Executive orders on DEI and related legal challenges
- Reductions to federal funding to nonprofits
- Delays in tax-exempt status applications
- Challenges to the Johnson Amendment
- An executive order that triggers review of IRS guidance documents
listen to audio here.
Transcript
The following transcript of this discussion was edited for clarity.
Carrie Garber Siegrist: Hi everyone, I’m Carrie Garber Siegrist, a senior associate in Goodwin’s Tax-Exempt Organizations group. Our group advises a full range of nonprofit, tax-exempt mission-driven clients on tax, corporate, transactional, and regulatory matters.
This is New Directions, a series of discussions about the impact and trajectory of the second Trump administration as we approach the 100-day mark.
In this episode, I’ll be talking about three significant developments affecting tax-exempt organizations since the new administration took office and two things to keep an eye on in the coming months.
Let’s get started with executive orders on diversity, equity, and inclusion [DEI].
Right out of the gate, the new administration issued several executive orders aimed at terminating DEI programs within the federal government and discouraging DEI initiatives in the private and nonprofit sectors. For example, these executive orders have included:
- Executive Order 14151, which rescinds previous DEI-related executive orders and mandates the termination of all DEI; diversity, equity, inclusion, and accessibility [DEIA]; and “environmental justice” offices and positions within the federal government
- Executive Order 14173, which prohibits private organizations from conducting DEIA employment programs for jobs created by federal contracts and directs federal departments not to issue contracts to private organizations (including nonprofits) that enforce DEIA frameworks
- Executive Order 14168, which mandates federal agencies to recognize sex as an immutable binary classification
There are challenges to these orders winding through courts, and though some courts have issued preliminary injunctions blocking certain provisions, another court recently allowed the administration to enforce the orders while litigation continues. So nonprofits should stay informed about the outcomes of these legal battles because they could significantly affect the implementation of these orders and the regulatory environment. And nonprofits that partner with federal agencies or receive federal funding may face challenges in maintaining their DEI initiatives and could experience increased scrutiny.
Additionally, we have seen private plaintiffs continue to file suits against or complaints about a variety of organizations related to DEI-focused initiatives and programs. For example, one plaintiff recently brought suit against the American Bar Association because of the organization’s provision of diversity scholarships for law students. That is a relatively recent development that we’re following.
Another area we’ve seen changes in is federal funding and grants to nonprofits. Ongoing changes to federal funding and grants are made pursuant to executive orders, and federal agencies are therefore reassessing and realigning where their funding goes in order to match the new administration’s priorities. This means cutting foreign aid, reducing certain federal agencies to their bare minimum or eliminating them altogether, and taking a hard look at funding for nonprofits.
A recent survey shows that local nonprofits will likely take quite a hit from these federal funding cuts, and nonprofits are scrambling to adapt their strategies and budgets to address these changes — primarily seeking alternative funding sources and modifying programs. Those relying heavily on federal grants will likely continue to rethink their fundraising game plan and brace themselves for possible financial hiccups. Interestingly, some large philanthropic organizations have stepped up, expressing their intent to cover the shortfall for nonprofits anticipating a loss of federal funds and/or a need to adapt their programs.
Another area to keep in mind is the processing of tax-exempt status applications. Since the IRS issues determination letters about tax-exempt status for those organizations that submit applications, we’ve been closely monitoring developments related to IRS staffing and the agency’s processing of exemption applications, including Forms 1023, 1024, 1024a, etc.
It appears that the IRS’s internal operating system for exemption applications has been down since mid-March, resulting in a pause in issuing determinations for approved applications. This outage has potentially significant implications for nonprofit organizations seeking tax-exempt status. Without these determinations, organizations may face delays in receiving the benefits associated with tax-exempt status, such as eligibility for tax-deductible contributions and, of course, exemption from federal corporate income tax.
During this period, while the IRS works to resolve these system issues, applicants may stay informed by regularly checking the IRS website, which shares the date of submission of the applications it is currently assigning to reviewers. Additionally, new nonprofits should be prepared for longer wait times to receive IRS determinations of tax-exempt status and anticipate potential disruptions in their operations as they navigate these delays.
Looking ahead, we anticipate continued challenges and discussions about the “Johnson Amendment” in section 501(c)(3). As a reminder, this is the portion of the Internal Revenue Code that prohibits 501(c)(3) organizations from supporting or opposing candidates for public office. Since its adoption, it has faced challenges and allegations that it infringes on free speech and religious freedom, among other criticisms. Supporters of the text argue that it protects the integrity of the tax system and prevents the use of tax-deductible contributions from being used for political campaigns.
Recently, two lawsuits were filed that seek to have the amendment declared unconstitutional. (For the record, the amendment is a portion of section 501(c)(3) of the Internal Revenue Code.)
In addition to those two lawsuits, a bill — the Free Speech Fairness Act — was recently introduced by representatives in Congress seeking to allow churches and other 501(c)(3) organizations to make statements related to political campaigns in the “ordinary course of carrying out their tax-exempt purposes” by creating a carve-out to the amendment, or that provision of section 501(c)(3). In short, it is worth keeping an eye on these developments.
For our final topic, let’s discuss a significant development related to IRS guidance and the impact of recent executive orders. This is crucial for nonprofit tax-exempt organizations to understand and navigate effectively.
On April 9, 2025, an executive order initiated a comprehensive review of IRS guidance documents. This review, conducted by the Department of Government Efficiency [DOGE], aims to identify and eliminate outdated or unlawful regulations, particularly in light of recent Supreme Court decisions. The executive order allows agency heads to finalize rules without notice and comment when doing so is consistent with the “good cause” exception in the Administrative Procedure Act, allowing for the bypass of the notice-and-comment rulemaking when it would be impracticable, unnecessary, or contrary to the public interest.
To accomplish these goals, the executive order includes the following action steps:
- Agencies must immediately repeal any regulation that clearly exceeds statutory authority or is otherwise unlawful, prioritizing those in conflict with Supreme Court decisions. Each repeal must be accompanied by a brief statement explaining why the “good cause” exception applies.
- Within 30 days of the review period’s conclusion, agencies must submit a summary to the Office of Information and Regulatory Affairs explaining why certain identified regulations were not targeted for repeal.
In sum, the recent executive orders will likely drive significant changes in IRS guidance and regulations, which may affect tax-exempt organizations relying on such guidance. Nonprofit tax-exempt organizations should stay informed about these developments and be prepared for potential impacts on their operations and compliance requirements. Also, there may be more to come from the administration involving tax-exempt organizations and tax-exempt status, so stay tuned.
That’s it for today. Be sure to check out the other discussions in our New Directions series for more insights on the Trump administration’s evolving policies. Thanks for listening.
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