New Legislation Could Threaten Nonprofit Tax-Exempt Status

In January 2025, there’s a bill making its way through the Senate that has nonprofit leaders concerned – and for good reason. The Stop Terror-Financing and Tax Penalties on American Hostages Act seems straightforward and easy to support, right? The main goal is supposed to be to protect Americans who are detained abroad. But, squirreled away in the bill are provisions that could allow Treasury to revoke a nonprofit's status for supporting terrorism. But who defines what terrorism is anymore? In this political landscape, one starts to wonder whether certain missions will come under fire.

Understanding the Legislation

The bill's surface-level purpose seems harmless to nonprofits: helping Americans "who are unlawfully or wrongfully detained abroad or held hostage abroad." But towards the end of the bill, there’s language that grants the U.S. Treasury Department new powers over nonprofit organizations, and specifically their tax-exempt status.

It appears that Treasury would be able to directly label nonprofits as "terrorist supporting organizations" and immediately revoke their tax-exempt status – without requiring much due process. I say “appears” because the bill’s language is circular and seems to refer to paragraphs that don’t exist or refers to itself in a circular way – it’s legal writing at its worst. The only due process seems to be a 90 day “cure period” in which the nonprofit can try to prove they haven’t supported a terrorist organization. Failing that, you remain revoked.

The practice of stopping nonprofits from supporting terrorism is not new. Current regulations allow Treasury to suspend a nonprofit. And as of the date of this writing there are 9 nonprofits under suspension now (the list is published online).

This is a subtle but important change from suspending to revoking may be important. A suspension can be lifted whereas revocation requires (generally) a reapplication. However, current IRS technical guidance states that organizations who are suspended are prevented from re-applying. Which puts them in a forever holding pattern of suspension. We don’t yet know whether a revoked organization would be eligible to reapply, but one assumes not.

The problem could arise if the current administration issues an executive order declaring certain missions ‘terrorism.'

If abortion, trans health care or climate change missions are deemed terrorism to be routed out of America to make things great again, then no 90 day cure period will help these nonprofits. That’s the big fear and why some outfits are calling this bill the “nonprofit killer bill.”

The big fear is that the Trump administration could use this new power to target nonprofits with missions they just don’t like under the guise of ‘terrorism.’ Organizations working in certain areas may face heightened risk, particularly those focused on:

• Reproductive rights
• LGBTQ+ rights and advocacy
• Immigration support
• Climate action
• International Aid
• Islamic mosques or groups

Protecting Your Organization

First of all, don’t panic. We don’t know that this bill will pass the Senate and be written into law. But no matter what happens, nonprofits should focus on strengthening their financial documentation and compliance procedures. If this bill, or something similar, ever comes to pass, we need to be organized and prepared to appeal the designation.

1. Contact Your Senator

As of the date of this writing this bill has passed the US House and will be considered by the Senate. If this matters to you, contact your Senator and let them know why you don’t support the language in this bill.

2. International Funds Compliance

Organizations that send funds overseas already have a long-standing obligation to comply with U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) compliance when sending any funding overseas. Your risk as an organization is already determined under a matrix available for download from OFAC. So, if you send money to a foreign country, now is the time to be triple sure you have the financial controls in place that make your organization a “low risk” organization.

3. Work With Financial Professionals

Regardless of your mission, if you keep your books on Excel spreadsheets, now is the time to invest in professional bookkeeping services and find a qualified CPA with nonprofit experience for tax preparation. Not only is this just the best practice, but if you need to prove the nonprofit isn’t supporting terrorism, the only way you’ll be able to do that is with clean, well-documented and professionally organized books and records. If you can clearly show where every dollar goes, you’ll be better off. That’s just good advice regardless.

4. Do a General Health Check

I recommend that you contact an attorney to conduct a general health check of your organization from a legal perspective. On the finance side groups like Propel Nonprofits offer financial systems reviews or referrals to providers that can help identify potential vulnerabilities. It’s always better to catch and resolve potential problems now, before they become a big problem down the road. Again, that’s just solid advice for any nonprofit at any time.

What’s Next?

The future of this bill is uncertain, and we just don’t know whether it’s going to be passed or not. And even if it is, we don’t yet have specific guidance about implementation. This is just one piece of the puzzle. There will be a lot of potential changes and challenges for nonprofits during the second Trump administration, especially for those in hot-button mission areas.

No matter what kind of nonprofit you’re with, the answer is the same. The best protection is preparation: keeping clear records, practicing strong financial controls, and always getting professional support. These steps can help all nonprofits whether or not this bill becomes law.

Jess Birken is the owner of Birken Law Office, a firm designed to help nonprofits. Ideal Client Engagements are nonprofits looking for a strategic partner who will give pragmatic advice and keep business operations on track so the mission work stays a priority.

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