The Trump administration proposed rules that would let the IRS strip tax-exempt status from private schools and colleges if the government determines that they have racial preferences or discrimination in admissions, scholarships, policies and other programs.

The rules from the Treasury Department and Internal Revenue Service would declare racial discrimination contrary to fundamental public policy in the U.S., continuing the Trump administration's push against affirmative action and diversity, equity and inclusion policies.

"Schools rebranding race-based preferences as equitable, inclusive, or diversity-enhancing does not change their discriminatory nature," Treasury Secretary Scott Bessent said Thursday. "The institutions that continue to use discriminatory practices will no longer receive the benefits of federal tax-exempt status."

Tax exemptions are extraordinarily valuable to schools, and losing that charitable status could wreck their business models. Typically, private schools, colleges and universities can receive tax-deductible donations from supporters. And they don't generally have to pay corporate taxes on their annual income, though there are some exceptions for affiliated businesses and investment income.

The administration is now seeking public comment, and it could take months or years before the new rules are finalized and formally enforced.

For most schools with fiscal years starting in July, the rules wouldn't formally apply until the 2027-28 school year. To enforce the prohibitions, the IRS would need to open and conduct an audit and propose the revocation of tax-exempt status. Schools could then challenge those actions in federal court, both on the facts and on whether the administration's new rules exceed its authority.

However, even the proposed rules could have an immediate economic effect, said Alexander Reid, a partner at law firm BakerHostetler in Washington whose clients include universities. Colleges' bond issuances, private-equity investments and intellectual property agreements all hinge on maintaining tax-exempt status, so sudden doubt about whether schools will comply with the law can be problematic.

"Every decision that they make is structured based on that so it really pulls the rug out," he said. "The knock-on effects are probably immediate."

Trump administration officials have pursued many fronts in their efforts to crack down on universities and nonprofits they see as left-leaning, and Thursday's rules mark a particularly concrete action. Last year, President Trump threatened to take away Harvard University's tax exemption, a step that the administration hasn't actually taken.

The administration has also disrupted research funding and launched civil-rights probes of major universities for alleged discrimination. It has reached settlements with some, including Brown and Cornell universities.

The administration's new rules extend a principle that the Supreme Court established in 1983, when it endorsed the IRS's challenge to the tax-exempt status of Bob Jones University on the grounds that the school's ban on interracial dating violated fundamental public policy.

The proposed rules cite the 2023 Supreme Court decision that prevents universities from considering race in admissions, and they effectively declare that decision's holding to be fundamental public policy. That case was based on equal-protection arguments, not tax law.

By going beyond admissions, the administration exceeded the Supreme Court's holding in declaring what is fundamental policy, Reid said. For decades, schools have relied on IRS guidance that said scholarships and loans favoring members of a racial group wouldn't affect a school's tax-exempt status.

After the Supreme Court's 2023 ruling, colleges moved away from explicit racial preferences for historically underrepresented groups. The proposed tax rules would allow schools to continue to use nonracial criteria, including family income, geography or first-generation college status. The rules also allow schools to continue using religious criteria for admissions and scholarships, as long as they don't base those decisions on ancestry or ethnicity.