How Trump’s proposal to strip tax-exempt status affects California private schools

A proposal by the Trump administration to revoke the tax-exempt status of private schools with diversity, equity and inclusion programs could make it harder for independent schools to raise money and maintain programs intended to broaden access for minority students.

Nonprofit and tax law experts say the proposal, announced by the Internal Revenue Service Thursday morning, could have a chilling effect on private schools and universities, even if the policy never goes into effect.

“The intent, clearly, is to starve these organizations of funding, or at least use that as the threat to keep them from doing things that the administration is opposed to,” said Geoff Green, the CEO of the advocacy group CalNonprofits. 

If enacted, the proposed regulation would allow the IRS to strip institutions of federal tax-exemption status if the Trump administration determines the school has racially discriminatory policies. The U.S. Department of the Treasury said the rule could affect up to 18,000 independent schools, universities and trade schools across the country. The rule does not apply to public schools.

According to the California Department of Education, there were nearly 3,000 private K-12 schools with more than five students enrolled in the 2025-26 school year. There are roughly 150 private nonprofit colleges in the state, according to the Public Policy Institute of California. 

“Schools rebranding race-based preferences as equitable, inclusive, or diversity-enhancing does not change their discriminatory nature,” Treasury Secretary Scott Bessent said in a statement announcing the rule. 

The federal agency’s proposed regulation is part of the Trump administration’s ongoing effort to reshape the nation’s higher education systems and stamp out DEI programs on college campuses.  

Legal challenges likely coming

Like many of the Trump administration’s contentious policies, the proposal will almost certainly face legal challenges.

The administration cited the 2023 Supreme Court decision that ended race-based affirmative action to support the IRS’ rule change. But this proposed regulation’s impact would have a much wider scope than the Supreme Court decision, said Lloyd Hitoshi Mayer, a Notre Dame Law School professor.

“It reaches a much broader range of activities, not just admissions,” Mayer said of the proposal. “It reaches K-12 schools, not just colleges and universities, and that includes K-12 schools that aren’t subject either to the federal Constitution, because they’re not government entities, or Title VI, because they don’t receive federal financial assistance.”

Mayer questioned the Treasury Department’s argument that private schools are discriminating based on race, color, nationality or ethnicity, and therefore should lose their tax-exempt status. He said the agency’s interpretation of tax law is arguably unreasonable. 

The proposed rule will be subject to public comments, which the federal government will then need to respond to, before it is finalized. 

Schools may pull back on programming, scholarships

If enacted, the rule would prevent donors from deducting charitable contributions from their federal income taxes if the school receiving the donation loses its tax-exempt status. Mayer noted that some state tax exemptions are based, in part, on approval of federal tax-exempt status, which could further impact nonprofits’ finances. 

Last year, in response to President Donald Trump’s efforts to target organizations that conduct DEI work, California passed a law to ensure nonprofits in the state can continue to qualify for public funding, even if their federal tax-exempt status is revoked. 

Green said the Trump administration has not been successful in its attempts to eliminate DEI programs through executive orders, litigation and federal rulemaking. But the proposal could result in independent schools pulling back from access programs and scholarships intended to diversify their student bodies.

At private schools, which have a history of catering to wealthier students, there have been efforts to make these institutions more accessible to minority and lower-income students, Green said. Those efforts could be rolled back, he noted. 

“The strategy of the administration is to intimidate as many institutions and organizations as possible, rather than having to have to do the work and go after institutions one by one, which they would have taken a lot more time and energy to do if they can simply intimidate entities to self-police or self-censor,” Green said. 

This story was originally published by EdSource.