Updates: The Implications of Presidential Action on the Nonprofit Sector

Since our January 29, 2025 Advisory, President Donald J. Trump has expanded his agenda to redefine federal policy by executing additional executive orders (EOs) and memoranda that affect the funding, compliance, and operational environments for tax-exempt organizations. Collectively, the actions of the president and his administration demonstrate a zeal to significantly reduce the federal government’s financial support of nonprofits, as well as to impose limitations on their programs and operations, even for those that do not receive federal funds. These actions are clearly designed to remake the nonprofit sector and its role in America and around the world. The administration has also been clear — organizations whose agenda aligns ideologically with the president's will have less to fear than those whose missions do not. But regardless of their focus, all nonprofit organizations must vigilantly monitor and navigate regulatory and funding changes that will have profound implications for their work and their future.

In the last two weeks, there have been an array of key presidential actions and responses from federal agencies and the courts:

1. Heads of All Executive Departments and Agencies (Agencies) Must Review All Funding They Provide to Nongovernmental Organizations (NGOs)

Memorandum for the Heads of Executive Departments and Agencies — Advancing United States Interests When Funding (Memorandum, February 6, 2025). President Trump has directed all federal Agencies to review all existing NGO funding and ensure that future grants align with the administration’s priorities, which include eliminating diversity, equity, and inclusion (DEI) and environmental justice initiatives; stopping assistance to undocumented immigrants; and cutting foreign assistance. Although it does not identify particular organizations, the Memorandum requires scrutiny of all forms of federal assistance and it gives Agencies broad discretion to withhold funds. And while the Memorandum does not say so, the administration’s efforts could unleash the Internal Revenue Service (IRS) to use audits and other methods for restricting which entities qualify for exempt status.

Implications for Tax-Exempt Organizations: From a purely financial perspective, this review process could have a substantial impact on the operations and programming of tax-exempt organizations that rely on federal grants. Moreover, organizations engaged in international work, humanitarian aid, and targeted areas of policy advocacy (including climate, immigration, and equity initiatives) may feel a particularly strong pinch; those organizations should prepare for potential shifts in funding availability, increased scrutiny by the IRS or other enforcement authorities, and new compliance requirements. Organizations at risk of losing their federal funding should begin to explore alternative revenue streams; contemplate clarifying their focus to align more closely with the administration’s interests; and educate policymakers, members of Congress, and the press and public about the impact that their programs have on the ground and the significance of a loss of funding.

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

Memorandum for Heads of Executive Departments and Agencies (Memorandum, January 27, 2025). A recent Memorandum from the Office of Management and Budget (OMB) paused the disbursement of all federal financial assistance. The directive subsequently faced swift criticism and legal challenges, and two federal judges have since issued temporary restraining orders to halt the enforcement of the OMB’s directive. In response to claims made by 22 states and the District of Columbia that the federal government has continued “to improperly freeze federal funds and [has] refused to resume disbursement of appropriated federal funds,” a district court judge in Rhode Island ruled on February 10, 2025 that the administration “must immediately restore frozen funding,” “must immediately end any federal funding pause,” and “must immediately … clear[] any administrative, operational, or technical hurdles” to resuming such flow of funds.

Implications for Tax-Exempt Organizations: OMB’s directive, and the fact that government funding has not returned to normal, have led to continued financial strain, uncertainty, and operational difficulties for many nonprofits. Some organizations have already been forced to significantly scale back programs, delay hiring or furlough employees, and consider ceasing operations altogether.

3. Exclusion of Transgender Athletes From Girls’ and Women’s Sports

Keeping Men Out of Women’s Sports (Executive Order, February 5, 2025). This executive order establishes a federal policy that only those identified as women at birth may compete in women’s sports. To enforce that requirement, the EO directs the U.S. Department of Education to enforce Title IX protections; take action against schools and athletic associations that allow male participation in women’s sports; and rescind federal funding from noncompliant programs. The U.S. Department of Justice (DOJ) is tasked with supporting enforcement efforts, while the Assistant to the President for Domestic Policy must engage with athletic organizations and state attorneys general to promote policies that prioritize “preserving fairness and safety in women’s sports.” The EO further instructs the Secretary of State to withdraw support from international sports programs that base female categories on gender identity rather than biological sex at birth, and to advocate that international sports bodies, including the International Olympic Committee, uphold similar rules.

Implications for Tax-Exempt Organizations: The federal government will investigate and revoke funding of nonprofit organizations, such as primary and secondary schools, colleges and universities, and athletic associations, that continue to permit transgender athletes to participate or compete based on their identities. There are already multiple lawsuits to test the constitutionality of this EO.

4. Ending Support for United Nations Organizations and Further Reduction in Foreign Funding

Withdrawing the United States from and Ending Funding to Certain United Nations Organizations and Reviewing United States Support to All International Organizations (Executive Order, February 4, 2025). The executive order calls for a review of the United States’ commitment to three United Nations (UN) organizations: the UN Human Rights Council (UNHRC); the UN Educational, Scientific, and Cultural Organization (UNESCO); and the UN Relief and Works Agency for Palestine Refugees in the Near East (UNRWA). In particular, the U.S. will no longer participate in the UNHRC, and federal agencies may not contribute financially in any way (contributions, grants, or other payments) to UNRWA. Moreover, the Secretary of State and the Representative to the UN have 180 days to review all international intergovernmental organizations of which the United States is a member and all conventions and treaties to which the United States is a party. The mission is to determine “which organizations, conventions, and treaties are contrary to the interests of the United States and whether such organizations, conventions, or treaties can be reformed.”

Addressing Egregious Actions of The Republic of South Africa (Executive Order, February 7, 2025). All executive departments and agencies, including the United States Agency for International Development (USAID), must end financial aid and assistance to South Africa. As the justification for this directive, the EO specifically cites the administration’s disapproval of South Africa’s land expropriation policy and its genocide case against Israel at the International Court of Justice. The EO also includes provisions to prioritize the resettlement of white South African farmers and their families as refugees in the United States.

Updates Regarding United States Agency for International Development Shutdown. On February 7, 2025, U.S. District Judge Carl Nichols, a Trump appointee, issued a limited temporary restraining order (TRO) in response to a lawsuit filed by two unions attempting to save USAID. The TRO blocked the administration’s decision to place 2,200 USAID workers on paid leave and to require thousands of overseas USAID employees to return to the United States within 30 days. The restraining order is in effect through February 14, 2025 and the court has scheduled a hearing for February 12, 2025.

Implications for Tax-Exempt Organizations: Nonprofits engaged in international development that are reliant on UN funding or that work on U.S. government-funded programs in South Africa are likely to experience suspensions, stop-work orders, or terminations. Cutting off funding to certain UN agencies may also have a significant impact on UN programs in general. These EOs signal a long-term shift in the government’s funding priorities, and nonprofits engaged in providing support to or conducting activities in politically sensitive regions may need to reassess their programmatic focus or their reliance on governments grants.

5. Engaging in School Funding Cuts in an Effort to End “Radical Indoctrination”

Ending Radical Indoctrination in K-12 Schooling (Executive Order, January 29, 2025). This EO mandates that administration officials develop plans (1) to eliminate federal funds for schools that “indoctrinate” kids based on “gender ideology” and “discriminatory equity ideology” and (2) to protect parental rights. Additionally, all relevant agencies shall monitor compliance with section 111(b) of title I of Division J of Public Law 108-447, which provides that “[e]ach educational institution that receives Federal funds for a fiscal year shall hold an educational program on the United States Constitution on September 17 of such year for the students served by the educational institution.” Agencies must also verify compliance with each educational institution that receives federal funds.

Implications for Tax-Exempt Organizations: Schools that provide services and counseling for transgender and gender nonconforming students should consider reviewing school policies on parental notification, restroom and locker room access, school sports, identity-based clubs, and extracurricular activities.

6. Criminal Investigation of DEI Activities and Programs

Ending Illegal DEI and Discrimination and Preferences (Memorandum, February 5, 2025). U.S. Attorney General Pam Bondi issued a memorandum that directs the DOJ’s Civil Rights Division to “investigate, eliminate, and penalize” DEI and diversity, equity, inclusion, and accessibility (DEIA) activities, within both the private sector and educational institutions receiving federal funds. A report must be submitted to the Associate Attorney General by March 1, 2025 that includes identification of key sectors of concern within the DOJ’s jurisdiction, a list of the most egregious and discriminatory DEI and DEIA practitioners in each sector, and a plan detailing steps to deter the use of these DEI and DEIA programs or principles, including potential litigation and regulatory actions.

Implications for Tax-Exempt Organizations: While not directed exclusively at nonprofits, these criminal investigations could have a fundamental impact on nonprofits working on racial and gender equity issues. If the DOJ defines “illegal DEI” activities, very broadly, it could result in audits of nonprofits by the IRS and revocation of tax-exempt status for many operating in this space.

7. Cutting Indirect Cost Rates for Federally Funded Research

Supplemental Guidance to the 2024 NIH Grants Policy Statement: Indirect Cost Rates (Notice Number NOT-OD-25-068, February 7, 2025). The National Institutes of Health (NIH) is limiting indirect cost reimbursement to 15% for all federal grants to institutions of higher education, including universities, medical schools, and other research facilities. This flat rate replaces the previous system of individually negotiated amounts specific to each such institution. This revised standard applies to both new grants and existing grants to academic research universities, but it will not be applied retroactively to existing grant expenses.

On February 10, 2025, a coalition of 22 states filed a lawsuit in U.S. District Court for the District of Massachusetts challenging the NIH indirect cost rate cap. U.S. District Judge Angel Kelley, a Biden appointee, granted a TRO blocking the NIH from taking any steps to implement, apply, or enforce the new policy. The 22 state Attorneys General who filed the lawsuit sought relief only for their own blue states, and the TRO therefore does not protect institutions in the 28 other states.

Implications for Tax-Exempt Organizations: According to the NIH, this revised policy will affect grants to over 2,500 U.S. academic research institutions and could significantly diminish the ability of those institutions to carry the overhead and administrative infrastructure that enables their research. Institutions in the 28 states where NIH is currently permitted to implement the changes may see the impact first. An upcoming Advisory will discuss this topic in greater detail.

How Can Arnold & Porter Help?

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:

• Plan and help execute a privileged self-audit directed by outside counsel of your organization’s current policies and programming. Document that the purpose is to obtain legal advice for compliance with all applicable laws, executive orders, and directives. Work with counsel to assess the risk that the administration could perceive or attack your activities as illegal activities, under its newly formulated policies.
• Work with counsel to identify vulnerabilities and seek counsel’s advice on how to mitigate compliance risk to your organization, including its tax-exempt status, documenting that the organization is doing so under the protected umbrella of privilege and attorney-client work product.
• Advise on compliance 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 deeply experienced 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 to determine applicable legal requirements in a specific fact situation.