The Impact of Presidential Action on the Nonprofit Sector

Since taking office on January 20, 2025, President Donald J. Trump has signed a series of Executive Orders (EOs)¹ and Memoranda² that begin to implement his agenda of redefining federal policy in several areas, including diversity, equity, and inclusion (DEI) initiatives, reproductive healthcare access, and immigration. These sweeping changes affect the compliance and operational environments for many tax-exempt organizations. As a result, those organizations must now monitor and navigate regulatory and funding changes that could have profound implications for their work and their future.

Executive Orders and Memoranda

So far, there are a number of the key presidential actions that may impact tax-exempt organizations:

1. Rescission of Government DEI Programs

Ending Radical and Wasteful Government DEI Programs and Preferencing (Executive Order, January 20, 2025): The administration has deemed government programs and initiatives related to DEI wasteful and discriminatory. As a result, the executive branch is now focused on eliminating these programs, including equity action plans, DEI performance reviews, and environmental justice initiatives, within federal agencies. Indeed, the Executive Order had directed the Office of Management and Budget (OMB) and other federal entities to assess and remove DEI positions, grants, and policies. Federal agencies are also directed to compile lists of federal contractors who have provided DEI training or DEI training materials to agency or department employees and federal grantees who received federal funding to provide or advance DEI; diversity, equity, inclusion, and accessibility; or environmental justice programs, services, or activities.

Ending Illegal Discrimination and Restoring Merit-Based Opportunity (Executive Order, January 21, 2025): The new administration aims to end what it views as discriminatory and “illegal” DEI practices in federal agencies and by its federal contractors and grantees. To that end, the Executive Order revokes a series of executive orders and policies in place since the 1990s that promote DEI and terminates “all discriminatory and illegal preferences, mandates, policies, programs, activities, guidance, regulations, enforcement actions, consent orders, and requirements.” The president also orders all agencies to enforce “longstanding civil-rights laws and to combat illegal private-sector DEI preferences, mandates, policies, programs, and activities.” To deter DEI programming, federal agencies have been directed to “identify up to nine potential civil compliance investigations of publicly traded corporations, large non-profit corporations or associations, foundations with assets of 500 million dollars or more, State and local bar and medical associations, and institutions of higher education with endowments over 1 billion dollars.”

Implications for Tax-Exempt Organizations: Because the EOs redefine the requirements for and prohibitions against DEI programs, nonprofits should be on the alert for how the government defines “illegal” DEI efforts. Although many nonprofits operating federally funded programs in the DEI space have already received stop-work orders, and even though federal funds previously allocated to DEI programs have been frozen, it remains unclear which government grants ultimately will be terminated. For example, will a job training program focused on training women in STEM be deemed a discriminatory DEI program? That uncertainty makes it imperative that organizations review their grant awards to understand the government’s termination rights (for example, can the government terminate the award without cause) and how the loss of federal funds will impact their work.

For some organizations focused solely or primarily on DEI programming, any shift in the definition of what is “illegal” in this context could have even more profound consequences. To qualify for federal income tax exemption under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, a nonprofit entity must be organized and operated exclusively for one or more tax-exempt purposes (for example, charitable, educational, or scientific). Under the “illegality doctrine,” an organization will not qualify for tax-exempt status if it (1) has purposes that are illegal or that violate public policy (i.e., it fails to be “organized” for tax-exempt purposes), or (2) engages in substantial activities that are illegal or in violation of public policy (i.e., it fails to be “operated” for tax-exempt purposes). This doctrine is designed to ensure that tax-exempt organizations operate within legal frameworks and do not indirectly or directly violate established public policy. And, for that reason, it was widely used by the U.S. Internal Revenue Service (IRS) to deny or revoke the tax-exempt status of segregated private schools following desegregation and the Brown v. Board of Education decision. It is unclear to what extent the IRS will try to apply this doctrine to nonprofits engaging in what it deems to be illegal DEI activities.

Given the potential implications of conducting what may now be considered illegal DEI programs, many nonprofits are reviewing their programs, conducting a risk assessment in light of the added government scrutiny on their programs, and determining if any adjustments should be made to the structure or content of their work.

2. Defining Gender Identity Through Biological Sex

Defending Women From Gender Ideology Extremism and Restoring Biological Truth to the Federal Government (Executive Order, January 20, 2025): This new Executive Order establishes strict binary definitions of sex in federal policies, and requires that all federal agencies adhere to that distinction in all programs and operations. The EO rescinds all prior policies supporting gender diversity and instead imposes prohibitions against using federal funds for any programs that have inconsistent criteria or objectives.

Implications for Tax-Exempt Organizations: The Executive Order regarding the recognition of only two sexes defines gender as the sex of a person “at conception.” Although the obvious intent of the EO is to eliminate the federal government’s accommodation or acceptance of transgender individuals, the EO also strongly implies that a fetus will have legal rights and/or personhood status. That notion, if adopted more broadly, could have profound implications on any organization working in public health and reproductive rights. Moreover, nonprofit organizations serving LGBTQ+ communities and/or providing gender-affirming healthcare services are likely to lose federal funding.

3. Reinstating the Mexico City Policy and Enforcing the Hyde Amendment

Memorandum for the Secretary of State, the Secretary of Defense, the Secretary of Health and Human Services, the Administrator of the United States Agency for International Development (Memorandum, January 24, 2025): The Mexico City Policy, which prohibits U.S. funding of foreign non-governmental organizations that provide or promote abortions, was first instituted in 1984 by President Reagan. Ever since then, the policy in one form or another has been reinstated and revoked by subsequent Democratic and Republican administrations. On January 24, 2025, President Trump issued a Memorandum that reinstates the Mexico City Policy, and also is designed to prevent U.S. taxpayer dollars from funding programs related to coercive abortion or involuntary sterilization. The Memorandum also directs relevant agencies to implement this directive globally.

Enforcing the Hyde Amendment (Executive Order, January 24, 2025): The Hyde Amendment, which prohibits the use of federal funds to pay for abortions, will now be enforced, reaffirming the prohibition of federal funding for elective abortions. President Trump’s Executive Order negates two of President Biden’s Executive Orders (Executive Order 14076, Protecting Access to Reproductive Healthcare Services and Executive Order 14079, Securing Access to Reproductive and Other Healthcare Services) that allowed taxpayer dollars to support such procedures.

Implications for Tax-Exempt Organizations: Nonprofits that provide or promote abortion services will have limited or no access to federal funding. Organizations involved in global health or family planning initiatives may also face restrictions on federal funding if they offer or advocate for abortion services. As a result, organizations that focus on women’s reproductive health should review their grant awards to understand how this may affect partnerships and funding; they should also consider adjustments to organizational policies and programs.

4. Implementation of Federal Hiring and Other Freezes

Hiring Freeze (Executive Order, January 20, 2025): A hiring freeze is now in effect throughout the federal government No executive departments or agencies can fill vacant positions, nor can they create new positions without permission for exemptions. In addition, President Trump’s Executive Order directs OMB to submit a plan to reduce the federal workforce in 90 days.

Separately, the administration has prohibited certain federal agencies from engaging in public communications and certain other public-facing activities until at least February 1, 2025. For example, the U.S. Department of Health and Human Services (HHS) imposed a pause on external HHS communications, including prohibitions on regular communications about scientific reports and updates to websites and health advisories. In addition, the National Institutes of Health has frozen sponsored travel (e.g., to conferences) for their personnel.

Implications for Tax-Exempt Organizations: The government hiring freeze will impact the IRS and may result in even slower processing of tax-exempt status applications, delayed responses to inquiries, and extended timelines for audits or compliance checks. Organizations should anticipate longer wait times for IRS services and consider proactive measures to ensure compliance with tax regulations. In addition, organizations should be aware that communications from, and collaborations with, federal agencies may be reduced or limited.

5. Strict Enforcement of Immigration Laws

Protecting the American People Against Invasion (Executive Order, January 20, 2025): Nor surprisingly, President Trump has emphasized strict enforcement of immigration laws, has prioritized the removal of inadmissible or unauthorized aliens and dismantling trafficking networks, and has rescinded all previous guidance. In addition, the administration has established new federal-state task forces to support enforcement and has given U.S. Immigration and Customs Enforcement (ICE) agents permission to conduct arrests in sensitive locations such as schools, churches, and hospitals.

Implications for Tax-Exempt Organizations: Nonprofit organizations who are aiding immigrants now face additional challenges, including limited funding and exposure to penalties (including exemption revocation) if the administration perceives the organizations as facilitating unauthorized immigration. Organizations that provide services in schools, churches, or hospitals may now face increased risks of immigration enforcement activities within their premises. This could lead to disruptions in their operations, potential legal liabilities, and concerns about the safety and well-being of their staff and the communities they serve. Accordingly, organizations should assess their security protocols and communicate with stakeholders about the potential impact of immigration enforcement (e.g., “what to do if an ICE raid occurs at one of our facilities”). Additionally, tax-exempt employers, including medical research organizations, and their employees should be aware that increased vetting processes for visa applicants may lead to delays or complications in the immigration process for green card holders.

6. Pausing Foreign Aid and Federal Financial Assistance

Reevaluating and Realigning United States Foreign Aid (Executive Order, January 20, 2025): This EO pauses U.S. foreign assistance for 90 days to evaluate efficiency and alignment with U.S. foreign policy. The administration will then determine whether to continue, modify, or cease each program based on those reviews. The scope of “foreign assistance” subject to the order is unclear, and may include various types of humanitarian, medical, and other emergency aid. Per a notice from United States Agency for International Development (USAID) on January 24, 2025, limited waivers are available for certain emergency food aid, administrative expenses associated with implementation of the order, as well as expenses incurred prior to the date of notice.

Implications for Tax-Exempt Organizations: Nonprofits engaged in international development that are reliant on U.S. government funding are likely to experience suspensions, stop-work orders, or terminations. Many impacted nonprofit organizations have already received such notices from USAID, and it will be important for these organizations to take immediate steps to comply with, and attempt to clarify the scope of, these notices.

7. Temporary Pause of Agency Grant, Loan, and Other Financial Assistance Programs

Memorandum for Heads of Executive Departments and Agencies (Memorandum, January 27, 2025): The Acting Director of OMB issued a directive on January 27, 2025 ordering that, “to the extent permissible under applicable law, Federal agencies … temporarily pause all activities related to obligation or disbursement of all Federal financial assistance, and other relevant agency activities that may be implicated by the executive orders [issued by President Trump], including, but not limited to, financial assistance for foreign aid, nongovernmental organizations, DEI, woke gender ideology, and the green new deal.” As noted in the Memorandum, “2 CFR 200.1 defines Federal financial assistance to mean ‘[a]ssistance that recipients or subrecipients receive or administer’ in various forms, but this term does not include assistance provided directly to individuals.” Many government agencies appear to have paused the distribution of funds after this Memorandum was issued.

In addition, no later than February 10, 2025, federal agencies must submit to OMB detailed information on any programs, projects, or activities subject to this pause. Finally, the Memorandum instructs agencies to ensure that all financial assistance programs address the administration’s priorities and to cancel any awards that are in conflict with such priorities.

On January 28, 2025, OMB issued additional guidance. First, it released instructions to agencies on how to comply with the federal funding freeze. The guidance lists a set of freewheeling questions that the agencies should use to ensure each federal program under review complies with President Trump’s Executive Orders and policy goals, including whether the program under review provides funding or support to activities overseas, provides support for migrants, imposes an undue burden on the identification, development, or use of domestic energy resources, funds discriminatory DEI programming, or promotes or supports abortions or related activities.

Significantly, OMB clarified that “the [funding] pause does not apply across-the-board. It is expressly limited to programs, projects, and activities implicated by the President Trump’s Executive Orders, such as ending DEI, the green new deal, and funding nongovernmental organizations that undermine the national interest.”

Late on January 28, 2025, a federal judge in the District of Columbia blocked the funding freeze in response to a lawsuit filed by Democracy Forward, which argues that the freeze violated the First Amendment and the Administrative Procedures Act.

How We Can Help

Despite the uncertainty, and the upending of a host of ways in which the federal government has acted for years, it is important not to panic. Rather, it is critical that every organization potentially affected by these EOs and other directives take a breath and consult with counsel about how to identify, prepare for, and respond to the evolving legal and regulatory landscape. To assist in these efforts, we are prepared to:

• Work with you to conduct a self-audit of your organization’s policies and programming, and assess the risk that the administration could perceive your activities as illegal discrimination, under a newly formulated definition of that term.
• Assist in the identification of vulnerabilities and the mitigation of risk to your organization, including to its tax-exempt status.
• Advise on complying with notices regarding federal funding that your organization receives, including implementation of and responses to suspensions and stop-work orders.
• Assess reliance on federal funding, particularly if your organization is involved in international health, family planning, or other programs that may be affected by changes in federal policy. If necessary, we can help to explore and identify alternative funding avenues to safeguard your operations in case of any disruption to federal funding streams.
• Be mindful of potential delays in IRS services and plan accordingly. Extended timelines for applications, compliance processes, or other IRS-related matters could affect your organization’s operations.
• Consider corporate restructuring options to protect your assets.
• Keep you informed on the latest developments in this fast-moving environment.

By staying informed and working with a trusted legal team, you can minimize uncertainty and ensure that your organization remains on track despite these policy shifts. In particular, if you receive a notice from a government agency regarding any of these issues, we have a cross-disciplinary team dedicated to ensuring compliance and preparing for any developments that may follow. We are here to help you navigate these complex changes effectively and efficiently.

© Arnold & Porter Kaye Scholer LLP 2025 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel