• Home
  • Insights
  • Access to the tax-exempt market: importance of maintaining tax-exempt status for nonprofits
Article

Access to the tax-exempt market: importance of maintaining tax-exempt status for nonprofits

Published 02/12/2026
With the federal government’s increased scrutiny of nonprofit organizations and their tax-exempt status, the impact of losing tax-exempt status must be considered when these organizations are interested in issuing tax-exempt bonds. Access to the tax-exempt market is crucial for nonprofit organizations, including colleges, universities, hospitals, and health care systems, to fund necessary capital projects. The purpose of this article is to highlight areas in which nonprofit organizations are facing heightened scrutiny and how these organizations must ensure compliance with IRS rules and regulations to continue issuing tax-exempt bonds.

Background

As background, certain nonprofit organizations may issue tax-exempt bonds for capital projects through a conduit issuer under Section 141 of the Internal Revenue Code. The publication “Tax-Exempt Bonds for 501(c)(3) Charitable Organizations” (Publication 4077, Rev. 9-2019) from the IRS provides an outline of critical compliance requirements for nonprofit organizations to not only issue tax-exempt bonds but also to maintain those tax-exempt bonds. Once the tax-exempt bonds are issued, the nonprofit organization must file Schedule K with the IRS Form 990 on an annual basis while the bonds are outstanding.

Disclosures in Official Statements

In general, tax-exempt bonds are described in an official statement, a public document that provides an overview of the borrower, the capital projects to be financed with tax-exempt bond proceeds, and relevant risks relating to the repayment of such tax-exempt bonds. There is typically a qualification found in the Official Statement which states that the failure of the nonprofit organization to maintain its tax-exempt status as a “501(c)(3) organization” and to conduct its activities (especially the activities relating to the capital projects financed with tax-exempt bond proceeds) in a substantially related manner to the nonprofit organization’s charitable purposes could result in the bond interest (which a bondholder will receive) being taxable. In certain situations, this taxable interest may be retroactive to the date on which the bondholder purchased the bond.
The conversion of a tax-exempt bond to a taxable bond may also affect the nonprofit organization’s ability to continue paying the bonds as they become due. For example, if a nonprofit organization included a budget for debt service and relied on being able to make the debt payments at a 5% interest rate, and the interest rate suddenly changes to 8%, the increased interest payments might render the nonprofit unable to pay.
A nonprofit organization may risk losing its tax-exempt status by failing to comply with the IRS rules and regulations governing its day-to-day operations. Any operations that are not related to the nonprofit organization’s charitable purposes and any operations that may result in the private benefit of individuals could impact the nonprofit organization’s tax-exempt status. In addition, the IRS has publicly stated that it will closely scrutinize any transactions between nonprofit organizations and for-profit organizations.
In addition to the standard disclosure provisions in official statements, there has been an increase in disclosures on this topic to inform bondholders about the additional proposed legislation and considerations facing nonprofit organizations. For example, some additional disclosures include language informing prospective bondholders that the activities of nonprofit organizations have been subject to increased scrutiny by federal, state, and local agencies, including the IRS and various local taxing authorities.
These agencies are reviewing the charitable activities of nonprofit organizations and determining whether they are sufficient to continue granting the organizations tax-exempt status (from federal, state, and local taxes, including real estate taxes). Some of the proposed legislation would restrict the definition of charitable activities and impose taxes on activities previously considered charitable. The potential conversion of some of these activities from charitable to taxable status may also affect whether nonprofit organizations can meet certain debt service requirements.

Heightened compliance concerns and responses

As nonprofit organizations face increased scrutiny, ensuring good governance and continued compliance is essential to maintaining tax-exempt status. The IRS has provided guidance on compliance with 501(c)(3) requirements in “Tax-Exempt Status for Your Nonprofit Organization” (Publication 557, Rev. January 2025). This publication outlines various ways nonprofit organizations must ensure compliance with IRS rules and regulations, including their charitable activities, governance, and reporting requirements. This is a great resource for senior staff, organizational leadership, and board members to review.
To maintain this tax-exempt status, it is important for nonprofit organizations to conduct regular governance reviews and policy updates, and to obtain early legal consultation on a routine basis. Organizational leaders need to remain current with changing rules and regulations.

Conclusion

As public and federal government scrutiny increases, nonprofit organizations and their advisors must rethink how they structure, maintain, and defend their tax‑exempt classifications before governance or regulatory issues limit access to critical tax-exempt funding options.

Related insights

Explore additional insights and updates that provide more context on this topic and the issues surrounding it.
See all insights
Firm news

Erica Wible named chair of McNees’ Public Finance Group

Erica Wible has been appointed as chair of McNees’ Public Finance Group, effective July 1. She succeeds Frannie Reilly, who has led the Public Finance Group since 2022, and we thank Frannie for her dedicated leadership over the past four years. This change recognizes Erica’s contributions to the firm and positions the Public Finance Group […]

Firm news

Frannie Reilly ranked in Chambers USA 2026 guide for public finance in Pennsylvania

McNees Wallace & Nurick announces that Martha “Frannie” Reilly has once again been ranked Band 3 in Public Finance (Pennsylvania) in the Chambers USA 2026 guide. Chambers and Partners is a nationally and internationally respected legal ranking organization that evaluates leading attorneys through client feedback, peer evaluations, and independent research. A Chambers ranking is widely […]

Firm news

McNees Pennsylvania attorneys recognized in 2026 Super Lawyers

The 2026 Super Lawyers rankings recognize nine attorneys in their Super Lawyers® and Rising Stars® lists for Pennsylvania. The attorneys span across four of the firm’s Pennsylvania offices and six practice areas. Since 1991, Super Lawyers has recognized attorneys nationwide across areas of practice, basing their Super Lawyers® and Rising Stars® lists on peer recognition […]

Speaking engagement

2026 Not-for-Profit Industry Breakfast Seminar

Public finance and nonprofit attorney Frannie Reilly spoke at Kreischer Miller’s 2026 Not-for-Profit Industry Breakfast Seminar on April 29 at the Sheraton Valley Forge Hotel in King of Prussia. The seminar brought together nonprofit leaders for fellowship and conversation, focused on key issues affecting not-for-profit organizations. Frannie works closely with nonprofit organizations to provide guidance […]
See all insights

Stay close to what matters

Receive legal perspectives, blog posts and invitations to upcoming events from McNees. Follow the topics that interest you and the developments affecting your business and industry.

Sign up for updates