Federal Funding: The OMB Rule Proposal That’s Got Nonprofits Talking
On May 29, the Office of Budget and Management (OMB) proposed revisions to the Uniform Guidance that could reshape the compliance landscape for federally funded nonprofits. For detailed information on the proposed rule, click here.
If these federal proposals have your nonprofit spiraling, remember 501(c)(3) organizations can advocate. Whether you’re working on immigrant rights, reproductive justice, LGBTQ+ issues, voting access, or any number of public policy concerns, nonprofits have plenty of tools at their disposal, including administrative advocacy, which generally does not fall under the Internal Revenue Code’s (IRC) definition of lobbying.
In a moment when public discourse is increasingly polarized, and government policies are shifting quickly, nonprofits remain uniquely positioned to educate, convene, and intervene on behalf of their communities.
Proposed Changes
The Assault on Diversity, Equity, & Inclusion (DEI)
The proposed rule restricts federal funds from supporting DEI-related activities that agencies determine conflict with federal anti-discrimination laws. This includes a prohibition on adopting “DEI initiatives or practices that include providing benefits or opportunities based on race or sex; imposing race-conscious quotas or objectives … or conducting training sessions that endorse and encourage racial stereotyping and scapegoating, promote unlawful discrimination, or contribute to a hostile environment.”
The Prohibition on Issue & Election Season Advocacy
The proposed rule explicitly states federal awards cannot be used to influence the policymaking, rulemaking, or administrative actions of the Executive Branch of any State. Additionally, federal grants would be prohibited from funding voter registration and from “supporting issue advocacy or other public messaging” intended to support or oppose a specific social, political, or public policy stance unrelated to grant performance. This requirement, if formally adopted, could create a damaging chilling effect on nonprofit speech, particularly amongst organizations seeking or utilizing federal grant funds.
The Barring of Services for Immigrant Communities
Section 200.205 of the proposed rule prohibits using federal funds to provide services for people without legal immigration status. For nonprofits working with immigrant families or asylum seekers, unaccompanied immigrant children, and newcomers, that could mean increased documentation requirements, heightened oversight, and endless requests for receipts.
The Ban on Abortions
The proposal explicitly classifies “costs associated with elective abortions as unallowable under federal awards” unless otherwise authorized by Federal Law. While many reproductive justice organizations have grown accustomed to having the government come for them, the difference is that these restrictions would become more directly embedded within the federal grants framework.
The War on Gender Identity
The proposal states that, “the Executive Branch no longer wished to endorse the ideological doctrine that sex and self-assessed gender identity are interchangeable,” so spending federal awards to promote “gender ideology” will be considered a material breach of the award. This includes advocating for or acknowledging that gender identity may be different than sex assigned at birth, or allowing that children under the age of 19 to transition from one sex to another. It also imposes additional restrictions related to gender affirming care services for minors, stating that federal awards cannot be used to cover gender affirming care for a child under the age of 19.
The Elimination of Disparate-Impact Liability
The proposed rule would prohibit the use of federal funds to support disparate-impact research, disparate-impact litigation, or other related activities. Disparate-impact discrimination happens when a neutral policy, even without intent to discriminate, disproportionately harms a protected group.
The First Amendment (Yes, It Still Exists!)
The proposed rule emphasizes that public entities that receive federal funding must not discriminate based on what someone says or believes when providing services for events, meetings, or other expressive activities. This includes political, ideological, or religious views.
The Impact on Paying Membership Costs
The proposed rule states that federal funds cannot be used to pay membership dues for organizations whose primary purpose is lobbying or issue advocacy.
How Nonprofits Can Get Involved
Even as organizations assess the potential impact on their programs, funding, and communities, one thing remains true: nonprofits continue to have a wide range of effective advocacy options available to them. 501(c)(3)s can engage in administrative advocacy, publish research findings, mobilize voters, and financially support other advocacy organizations all without it being considered lobbying under federal tax law.
Because administrative advocacy focuses on influencing how government agencies interpret, implement, and enforce laws that already exist, and does not involve advocating for or against specific legislation, it does not count as lobbying under IRC lobbying definitions. For example, the IRC considers commenting on a proposed rule change administrative advocacy and not lobbying because it involves a federal agency rule, not pending or suggested legislation.
Note: 501(c)(3) private foundations are subject to a prohibitive tax on any lobbying expenditures, but they can engage in administrative advocacy related to rulemaking.
Public Comment Period
The 45-day public comment period ends on July 13, 2026. If passed, the final rule is planned to take effect on October 1, 2026 and will govern new grants issued after October 1, 2026. To post a public comment click here.
Important to Note
This proposal is not yet final. But if adopted, it could have a significant impact on nonprofits across the country, particularly organizations working on DEI, immigrant rights, reproductive justice, LGBTQ+ equality advocacy, and coalition-building. For now, the smartest move is to stay informed, review your federally funded activities, consider diversifying your funding, and decide whether your organization wants to weigh in during the public comment period.
Additional Resources
See the National Council of Nonprofits’ statement on the proposed rule here and Nonprofit Vote’s analysis of the proposed rule here.