501(c)(3) Status Under Siege: Examining Legal Complexities, Trump Era Policies and Nonprofit Survival Strategies
Disclaimer: The information provided on this page is for informational purposes only and should not be construed as legal advice. It has been compiled using AI tools, along with supporting citations from authoritative sources, and is not authored by attorneys. We recommend consulting a legal professional for advice tailored to your specific circumstances. Readers are encouraged to review the linked citations for additional context.
Introduction
The nonprofit sector has always been a beacon of resilience, and in 2025, that resilience is being put to the test. With the Trump administration's policies, heightened IRS enforcement, and ambiguous legal provisions, the legal landscape for nonprofits has become increasingly complex and challenging.
We used AI to support our research with colleagues at Sutro Li and Withum to provide knowledge and strategies needed to navigate these complexities, protect your organization's tax-exempt status, and continue advancing your mission. You are part of a resilient community dedicated to making a positive impact in the world.
Our full guide, 501(c)(3) Status Under Siege: A Guide for Nonprofits, examines the legal complexities, Trump-era policies, and nonprofit survival strategies to help you navigate this difficult situation. The guide includes dozens of citations from authoritative sources to support further research.
We also recommend our recent webinar, Nonprofit Resilience: A Roadmap for Nonprofit Success in Uncertain Times, which details our Resilience Roadmap.
Statutory Risks to 501(c)(3) Status
Nonprofit organizations face several risks that could jeopardize their tax-exempt status under Section 501(c)(3) of the Internal Revenue Code:
Automatic revocation for failing to file Form 990: Under Section 6033(j), organizations that fail to file Form 990 for three consecutive years automatically lose their tax-exempt status.
Engaging in substantial lobbying or political campaign activities: 501(c)(3) organizations are prohibited from participating in political campaigns and face limits on lobbying activities.
Operating for non-exempt purposes or private benefit: Organizations must primarily operate for charitable, educational, or other exempt purposes and avoid benefiting private interests.
Go Deeper in our Guide for Nonprofits
Financial Implications of Losing 501(c)(3) Status
Losing 501(c)(3) status carries severe financial consequences, including:
Federal income tax liability
Revocation of state tax exemptions
Loss of grant eligibility.
Donors may no longer be able to deduct contributions
Go Deeper in our Guide for Nonprofits
Trump-Era Policies and Their Impact on Nonprofits
Under the Trump Administration, the nonprofit sector is grappling with unparalleled regulatory challenges and heightened scrutiny. A wave of executive actions and legislative proposals introduced in 2025 has created a complex compliance landscape for organizations. Recent trends indicate a targeted focus on nonprofits involved in policy advocacy, environmental justice, and diversity, equity, and inclusion (DEI) efforts. Simultaneously, the Internal Revenue Service (IRS) has expanded its enforcement capabilities, further contributing to the mounting pressures faced by the sector.
Several policies from the Trump Administration have significantly impacted the nonprofit sector:
Executive Order 13928 (2020): This order aimed to combat perceived anti-Semitism in colleges and universities, but critics argue that it could chill free speech and academic freedom.
Increased scrutiny of "controversial" causes: Organizations engaged in racial justice, environmental advocacy, and other issues deemed controversial by the administration have faced heightened scrutiny and threats of investigation.
Efforts to repeal the Johnson Amendment: The administration has sought to repeal this provision, which prohibits 501(c)(3) organizations from endorsing or opposing political candidates, blurring the line between charitable and political activities.
These policies have created a climate of fear and uncertainty for many nonprofits, particularly those engaged in advocacy or operating in politically sensitive areas.
Read more about Trump-era policies and their impact on nonprofits in our guide
Navigating Anti-Terrorism Laws
Alongside the challenges posed by the Trump administration, nonprofits must also navigate the complex landscape of anti-terrorism laws. Section 2339B of the USA PATRIOT Act prohibits providing "material support" to designated foreign terrorist organizations, even if the support is intended for humanitarian purposes. However, concerns have been raised about the potential misapplication of these laws to target nonprofits that are critical of the administration's policies.
This provision has created legal complexities for nonprofits operating in conflict zones or engaging with at-risk populations. Organizations must conduct thorough due diligence on partner organizations and beneficiaries to avoid inadvertently supporting terrorist activities or being wrongfully accused of doing so. The Trump administration's aggressive stance toward nonprofits, combined with the broad interpretation of anti-terrorism laws, has raised fears of politically motivated enforcement actions. Failure to comply with these laws, or even the perception of non-compliance, can result in criminal penalties, reputational damage, and the chilling of legitimate charitable activities.
Key Strategies for Nonprofits
To protect your nonprofit organization from the risks of losing 501(c)(3) status and navigate the complex legal landscape, consider these strategies:
Prioritize ongoing compliance monitoring: Regularly review your organization's activities and financial practices to ensure compliance with IRS regulations. Establish systems for timely filing of required forms, such as Form 990. Contact us if you have any questions about staying in compliance with financial compliance requirements.
Maintain detailed records: Keep comprehensive records of your organization's activities, expenditures, and decision-making processes. This documentation can help demonstrate compliance and provide a defense in case of an audit or investigation.
Establish a contingency fund: Set aside financial resources to cover potential legal expenses, such as hiring counsel or responding to an IRS audit. This fund can provide a buffer in case of unexpected legal challenges. Managing cash flow is key.
Review your advocacy strategies: Ensure that your organization's advocacy activities align with your charitable purposes and do not cross the line into political campaign intervention. Consider implementing policies to mitigate the risks of politicization.
Conduct thorough due diligence: When operating in regions with terrorist activity or partnering with other organizations, conduct extensive due diligence to avoid inadvertently supporting any work that could be construed as being in support of terrorist groups. Document your vetting processes and decision-making.
Seek legal guidance: Identify pro bono or low-cost legal resources specializing in nonprofit law. Consult with these experts to ensure compliance with anti-terrorism laws, IRS regulations, and other relevant legal requirements.
Foster transparency and accountability: Maintain open communication with stakeholders, including donors, staff, and the public. Regularly share information about your organization's activities, financials, and governance to build trust and credibility.
Build coalitions and partnerships: Collaborate with other nonprofits, advocacy groups, and community organizations to share resources, knowledge, and support. Strengthening ties within the nonprofit sector can help organizations navigate legal challenges collectively.
We recommend joining Compasspoint’s Finance Professionals Network, where there is regular discussion on the developments in this area of concern. Learn more at https://www.compasspoint.org/peer-networksInvest in staff training and development: Provide your staff with training on compliance issues, advocacy best practices, and risk management. Empowering your team with knowledge can help them make informed decisions and mitigate legal risks.
Stay informed and engage in advocacy: Keep abreast of legislative and regulatory developments affecting the nonprofit sector. Engage in advocacy efforts to protect the rights and interests of nonprofits, such as opposing measures that threaten free speech or charitable giving incentives. The National Council of Nonprofits has excellent resources about the executive orders and other current developments that threaten c3 status. We recommend following them.
Final Thoughts
Navigating the nonprofit legal landscape in 2025 is a daunting challenge for nonprofit directors, but by staying informed, implementing strategic risk management practices, and leveraging available resources, you can protect your organization's tax-exempt status and continue advancing your mission.
Remember, you are not alone in this struggle. The nonprofit sector is a strong and vibrant community, and by working together, sharing knowledge, and advocating for our collective interests, we can weather these difficult times and emerge stronger.
For more detailed information and a list of related articles on the legal landscape facing nonprofits, read our guide: 501(c)(3) Status Under Siege: A Guide for Nonprofits or contact us directly.
As you lead your organization through these challenges, remain committed to your core values, maintain transparency, and prioritize the well-being of your staff and the communities you serve. Together, we can continue to drive positive change and build a more just and equitable society.