IRS and Treasury Release 2025-2026 Guidance Plan: What Tax-Exempt Organizations Need to Know

The Plan highlights three main areas of focus for tax-exempt organizations: deregulation and burden reduction, issues specific to Section 501(c)(3), and implementation of the One Big Beautiful Bill Act (OBBBA).

Deregulation and Burden Reduction

The Plan sets forth several deregulatory items, such as eliminating “unnecessary tax regulations” and removing “unnecessary Internal Revenue Bulletin guidance.” Notable deregulatory items relevant to tax-exempt organizations include the following:

• Regulations under Section 4945 (Taxes on Taxable Expenditures) regarding expenditure responsibility requirements for private foundations: Section 4945 of the Internal Revenue Code requires private foundations to exercise “expenditure responsibility” when making grants to organizations other than 501(c)(3) public charities, ensuring that grant funds are used for charitable purposes. Treasury regulations under Section 4945 currently detail these requirements, including pre-grant inquiries, reporting, and recordkeeping. This topic was not included in the 2024-2025 Priority Guidance Plan (2024-2025 Plan).

• Final regulations under Section 4966 (Taxes on Taxable Distributions) regarding donor advised funds, including excise taxes on sponsoring organizations and fund management: Section 4966 regulates donor-advised funds and imposes excise taxes to mitigate abuse. In November 2023, the IRS and Treasury issued proposed regulations under Section 4966 to provide additional guidance on several issues related to creating and administering a donor-advised fund. This item was included in the 2024-2025 Plan.

• Guidance concerning the reporting of charitable contributions of trusts under Section 6034 (Returns by Certain Trusts): Section 6034 sets forth annual filing requirements for certain trusts with charitable interests, particularly split-interest trusts and those claiming charitable deductions under Section 642(c). This item was not included in the 2024-2025 Plan.

• Regulations under Section 6104 (Publicity of information required from certain exempt organizations and certain trusts): The regulations under Section 6104 govern the public disclosure of information from tax-exempt organizations, such as exemption applications and annual returns, and outlines the additional disclosure requirements to state officials. The Plan specifically references regulations “regarding the place for public inspection of materials relating to tax-exempt organizations, pensions, and other plans.” This item was not included in the 2024-2025 Plan.

The IRS and Treasury have indicated that additional deregulatory items may be added to the Plan.

501(c)(3) Issues

The Plan includes two items expressly for “Section 501(c)(3) issues”:

1. Guidance on the fundamental public policy against racial discrimination: The Plan prioritizes “guidance on the application of the fundamental public policy against racial discrimination, including consideration of recent caselaw,” in determining whether private schools are eligible for recognition under Section 501(c)(3). Private schools are currently required to have and operate in accordance with a racially nondiscriminatory policy as to students to qualify for 501(c)(3) tax-exempt status under guidance published by the IRS in the 1970s.[1]

2. Guidance on the Johnson Amendment: The Plan includes guidance on the statutory prohibition in Section 501(c)(3) against participation or intervention in political campaigns, commonly known as the Johnson Amendment. This provision prohibits 501(c)(3) organizations from directly or indirectly participating in, or intervening in, any political campaign on behalf of or in opposition to any candidate for public office.

Neither of these items were included in the 2024-2025 Plan.

OBBBA Implementation

The Plan sets forth several items related to the implementation of the OBBBA, including the following items relevant to tax-exempt organizations:

• Regulations under Section 4968 regarding excise tax based on investment income of certain private colleges and universities: Section 4968 of the Code currently imposes a flat 1.4% excise tax on the net investment income of certain private colleges and universities that have at least 500 tuition-paying students and at least $500,000 per student in assets. The OBBBA replaces the flat 1.4% excise tax rate in Section 4968 with a three-tiered structure based on the institution’s student adjusted endowment.

• Guidance under Section 4960 regarding excess compensation paid by applicable tax-exempt organizations, including the expanded definition of “covered employee”: Section 4960 currently imposes an excise tax on exempt organizations that pay more than $1 million in remuneration or that make an excess parachute payment to any “covered employee.” The OBBBA expands the definition of a “covered employee” by removing the requirement that the employee is (or was) one of the five highest compensated employees.

Items Not Included

The Plan omits several items from the 2024-2025 Plan that are relevant to tax-exempt organizations, including the following:

• Guidance under Section 4941 regarding a private foundation’s investment in a partnership in which disqualified persons are also partners.

• Regulations under Section 4967 regarding prohibited benefits, including excise taxes on donors, donor advisors, related persons, and fund management.

• Regulations under Section 4958 regarding donor-advised funds and supporting organizations.

• Guidance regarding the public-support computation with respect to distributions from donor-advised funds.

• Guidance revising Rev. Proc. 80-27 regarding group exemption letters.

• Guidance illustrating the application of the regulations under Section 501(r).

• Regulations under Section 512 regarding the allocation of expenses in computing unrelated business taxable income and addressing how changes made to Section 172 net operating losses by Section 2303(b) of the CARES Act apply for purposes of Section 512(a)(6).

ArentFox Schiff’s Nonprofits and Associations practice is closely monitoring developments under the Plan and will provide further updates as new guidance affecting tax-exempt organizations is released. Please contact your AFS attorney or the authors of this alert for additional information.