The Growing Threat to Tax-Exempt Status

Yesterday, I blogged about a particular type of nonprofit that finds itself in the political crosshairs: universities. As it turns out, they’re not alone. The proposed funding cuts and potential threats to nonprofit tax exemptions is just the latest indication that all nonprofits have targets on their back.

The tax-exempt status that nonprofits have has historically enjoyed bipartisan support, and it has been justified on the basis of the public benefit nonprofits generate. But as we are now seeing, the perception of nonprofits as ideologically-driven entities has opened them up to targeted policy changes that threaten their financial stability and long-term viability.

The fiscal pressure on nonprofits is coming from multiple angles. Proposed funding cuts threaten to undermine the viability of nonprofit organizations that rely on government grants and contracts. There is mounting scrutiny of tax-exempt status—with some lawmakers openly questioning whether certain nonprofits should continue to enjoy tax benefits. And there are now regulatory efforts to redefine what qualifies as “charitable” activity, potentially limiting eligibility for tax-exempt treatment.

This shift has profound implications, not only for the nonprofit sector but also for tax law itself. If tax exemption becomes subject to political discretion, then one of the fundamental principles underpinning nonprofit tax policy—the idea that these organizations exist outside the partisan fray—may be permanently eroded.

Nonprofits as Political Targets

Many nonprofits are warning that they may be forced to close if current proposals for funding reductions and tax changes advance. This threat is not limited to a single type of nonprofit but extends across the sector, affecting social service organizations, education-focused nonprofits, and even hospitals.

Some of the most striking developments include:

• Legislative proposals to reduce or eliminate certain nonprofit funding streams—with arguments framed around reducing government dependency on tax-exempt organizations.
• Heightened scrutiny of nonprofit lobbying and political activity, raising concerns that certain tax-exempt organizations could be targeted for revocation of their status.
• Renewed efforts to impose additional taxes on nonprofit revenue-generating activities, even when those activities directly support the organization’s mission.

These efforts reflect a broader trend in which nonprofits are no longer shielded from the same political attacks that have increasingly targeted universities, foundations, and other such institutions.

The Erosion of Nonprofit Tax Exemption

From a tax law perspective, what makes this moment particularly notable is the potential shift in how we define the boundaries of tax-exempt status.

Historically, nonprofit tax exemption has been justified by the public goods theory—the idea that these organizations provide services that the government either cannot or will not fully provide. But recent legislative proposals suggest a reassessment of what constitutes “charitable” activity, with some policymakers pushing to narrow the scope of exempt organizations.

For tax scholars, several pressing questions arise. Will we see a statutory narrowing of Section 501(c)(3) eligibility criteria? Could we see a push to impose UBIT (Unrelated Business Income Tax) on a broader range of nonprofit revenue streams? Will lawmakers use tax-exempt status as leverage to shape nonprofit governance, funding allocations, or political activity?

These are not hypothetical concerns. Some nonprofits are already preparing for the possibility of losing their exempt status altogether, particularly those engaged in politically charged areas like immigration, environmental advocacy, and social justice.

Where Does This Lead?

For tax scholars, this moment presents an opportunity—and an obligation—to engage in a broader discussion about the role of tax exemption in a polarized political landscape.

If nonprofits are no longer seen as politically neutral, then tax law will inevitably become a battleground for determining which entities are deemed sufficiently “public serving” to justify their tax benefits. That is a dangerous precedent, one that could lead to selective enforcement of tax-exempt status based on ideological considerations rather than legal and economic principles.

At a minimum, this trend suggests that nonprofit organizations should be prepared for heightened scrutiny, increased compliance burdens, and potentially even taxation of income streams that were previously considered exempt. The larger question is whether the nonprofit sector can withstand this level of politicization—or whether we are witnessing the beginning of a fundamental rethinking of tax exemption itself. One thing is clear: the privileged tax treatment of nonprofits can no longer be taken for granted.