Does Tax-Exempt Status Even Matter Anymore?

Tax-exempt status has been treated as a given in higher education — foundational, but largely unchallenged. That’s starting to change. Two very different developments are putting renewed pressure on what it means to qualify for and maintain 501(c)(3) status:

• Continued IRS scrutiny of NIL activity in and around college athletics
• Increasing federal focus on DEI programs and how they align with broader public policy expectations

Individually, neither is entirely new. But together, they raise a more fundamental question for institutional leaders:

If tax exemption were challenged, how much would it actually matter, and where would it matter most?

Pressure Point #1: College Athletics, NIL and the Shift to Commercialization

The IRS’s focus on NIL collectives has been well documented. At its core, the issue is straightforward: whether organizations claiming charitable status are instead serving private interests (specifically, individual student-athletes). That conversation is still playing out. But it may already be evolving.

With the House settlement and the transition into a more formalized revenue share era, the center of gravity in college athletics is shifting. Direct payments to student-athletes are becoming institutionalized. Universities, not third-party collectives, are increasingly at the center of compensation models. And athletics programs are operating with a level of commercialization that looks materially different than even one or two years ago.

In that context, NIL collectives may become less central over time. But the underlying tax question doesn’t go away; it just moves. The IRS’s Tax-Exempt and Government Entities Program Letter continues to list NIL collectives as a priority. If the IRS’s concern is private benefit, it’s reasonable to ask whether that scrutiny could shift from affiliated collectives to the institutions themselves.

That doesn’t mean universities are at immediate risk of losing exemption. The legal and structural analysis is more complex, and college athletics has long been treated as part of an educational mission. But the trajectory is worth watching.

As athletics becomes more tied to revenue generation and athlete compensation, institutions may need to more clearly articulate:

• How these activities align with their charitable or educational purpose
• Where the line sits between that mission and commercial enterprise
• What governance and controls are in place to manage that balance

For finance and operations leaders, this is less about compliance in a narrow sense and more about how the business model of athletics fits within a tax-exempt framework that was not designed for this level of commercialization.

Pressure Point #2: DEI Programs and Public Policy Alignment

At the same time, a different kind of pressure is building — one that has less to do with commercialization and more to do with how institutions align with evolving interpretations of public policy.

Recent federal enforcement activity has focused on race-conscious programs in higher education, from scholarships and financial aid tied to specific groups to targeted programming and broader DEI strategies that may be interpreted as preferential treatment. While much of this is currently playing out through civil rights enforcement and funding considerations, it raises a parallel question on the tax side: What happens when expectations around public policy shift, and how does that affect tax-exempt status?

Historically, tax exemption in education has not been unlimited. The IRS and courts have long tied 501(c)(3) status to compliance with fundamental public policy principles. The IRS’s 2025-2026 Priority Guidance Plan includes a project on racial discrimination for 501(c)(3) institutions, indicating that this area may continue to evolve. That doesn’t mean every DEI program is a risk, but the direction of enforcement introduces uncertainty:

• Where is the line between mission-driven programming and impermissible discrimination?
• How quickly could that line move?
• And how would changes in interpretation translate into tax scrutiny, if at all?

For institutional leaders, this creates a different kind of challenge than the athletics conversation. It’s not about commercialization but rather alignment and (more specifically) whether policies, programs and institutional values remain aligned with regulatory expectations that may be shifting in real time.

So Does Tax-Exempt Status Really Matter?

With both of these pressure points at play, it’s natural to ask the bigger question:

If a university’s tax-exempt status were challenged, or even revoked, what would actually happen?

The instinctive answer is significant disruption. But the more practical answer is yes, but probably not in the way most people think.

The immediate assumption is often that losing 501(c)(3) status would create a major federal income tax burden. But for many institutions, that’s not where the biggest impact would show up. Most colleges and universities are not generating substantial taxable income. Margins are tight, reinvestment is constant and many operations already function close to break-even. So while income tax exposure would increase, it’s unlikely to be the defining issue.

The more meaningful impact of tax-exempt status sits in the broader financial ecosystem it supports. It influences:

• How institutions raise money (through tax-deductible charitable giving)
• How they finance growth (through access to tax-exempt debt)
• How they are treated locally (through property tax considerations and community positioning)

Remove or weaken that status, and the model doesn’t collapse overnight. But it does become more expensive, more complex and more dependent on alternative structures. And in many cases, those alternatives already exist.

Universities are increasingly using affiliated tax-exempt entities to receive charitable donations, alongside creative financing arrangements (such as P3s and private equity) and economic impact-driven incentives like grants and abatements. That flexibility matters, because it reinforces a key point:

Loss of tax-exempt status would be disruptive, but not necessarily fatal.

Navigating these changes requires more than compliance. It requires strategy. James Moore’s higher education and collegiate athletics CPAs and consultants help leaders evaluate risk, identify alternative structures that preserve flexibility and build financial models that hold up under pressure.