California Assembly Bill 1318 was signed into law by the Governor on October 7, 2025 and immediately made effective. AB 1318 was designed to protect state funding of charitable nonprofits from potentially unfair and unlawful revocation of such nonprofits’ federal tax-exempt status by a federal government hostile to their missions and activities. It accomplishes this by expanding state law qualifications for funding eligibility to reference California tax law as an alternative to federal tax law.
The following is the key provision of the bill codified as Government Code Section 7230:
Notwithstanding any other law, and unless the context clearly requires otherwise, whenever any reference to Section 501(c)(3) of the Internal Revenue Code [IRC] appears in any statute, regulation, or contract, or in any other code, with respect to determining eligibility for any state grant or service contract, or the disbursement of state or local funds, it shall also be deemed to refer to Section 23701d of the Revenue and Taxation Code.
Background
Typically, a domestic charitable nonprofit organization obtains recognition by the Internal Revenue Service (IRS) of its tax-exempt status under IRC Section 501(c)(3). This status generally provides it with the privilege of not paying income tax and being an eligible recipient of tax-deductible charitable contributions and private foundation grants not requiring expenditure responsibility. 501(c)(3) status is also an eligibility factor for all types of funding and contracts, including from and with governmental entities (governmental funding represents nearly one-third of overall public charity revenues – see, e.g., Nonprofit Trends and Impacts 2021-2023, Urban Institute).
States vary on their taxing policies, and for those that impose a state entity-level income tax, many (including California) affirm state tax-exempt status principally based on an organization’s federal tax-exempt status. In such context, it made sense for state funding requirements to refer to 501(c)(3) instead of the state law’s counterpart.
However, under the current federal administration, there have been multiple and repeated threats of the federal government going after 501(c)(3) organizations that operated in opposition to the federal government’s priorities. Most recently, several news sources have described the current efforts to weaponize the IRS to target such nonprofits and their leaders with criminal violations that might subsequently lead to revocation of these organizations’ 501(c)(3) status. See, e.g., Trump Team Plans IRS Overhaul to Enable Pursuit of Left-Leaning Groups (Wall Street Journal); It Sure Looks Like Trump Is About to Weaponize the IRS (Mother Jones); Trump Brings Back Nixon’s Dirtiest Trick: Weaponizing the IRS (Intelligencer); Wyden Blasts Trump Weaponization of IRS Against Progressive Speech (Senate Finance Committee Ranking Member Ron Wyden, D-Ore.). Earlier and still ongoing threats to nonprofits included Trump’s attacks on the Soros foundations and colleges and universities, HR 9495, and implications that nonprofits exercising their First Amendment rights were supporting terrorism and criminal activities.
These threats are intended to chill dissent against the federal government’s priorities (and more accurately, the priorities of the wealthy and powerful supporters of the current administration). And they have been effective, though resistance is building. However, it seems likely that the federal government will carry out their threats at least against some nonprofits to propagate more fear. Smaller nonprofits without major support, may lack the resources to fight back. Others may be able to fight back but at great cost, and even if they ultimately win in a court, the damage may have already been done and the federal government’s goals achieved.
AB 1318 anticipates the potential harm that can result from revocations of 501(c)(3) status and delayed processing of 501(c)(3) applications based on political ideologies rather than on just enforcement of applicable laws. By decoupling eligibility of state funding from federal tax-exempt status, it mitigates at least some of the damage threatened by a hostile federal government.
Important Limitations
A critically important limitation to AB 1318 is its lack of applicability to nonprofits that applied for state tax-exempt status using Franchise Tax Board (FTB) Form 3500A. California acknowledges federally tax-exempt IRC Sections 501(c)(3), 501(c)(4), 501(c)(5), 501(c)(6), 501(c)(7), or 501(c)(19), organizations as tax-exempt from state income tax if the organization submits form FTB 3500A and a copy of its valid federal determination letter to the FTB.
Because this acknowledgement of state tax-exempt status relies on federal tax-exemption, if an organization’s 501(c)(3) status is revoked, an organization whose state tax-exempt status is based on the filing of Form 3500A will concurrently lose its state tax-exempt status. Accordingly, for an organization that (1) had previously filed for state tax-exemption using Form 3500A, (2) relies on state funding, and (3) is reasonably at some significant risk of revocation of its 501(c)(3) status, it may make sense to file Form 3500 with the FTB for independent recognition of state tax exempt status under Section 23701d. At this time, I think this would apply to very few charities, particularly if they have not been specifically named by the President or other federal official or some hostile organization that currently has the ear of the federal government. For nonprofits that do want to file a Form 3500, it appears that the FTB may be taking close to one year to process the application.
For an organization that obtained state tax-exempt status using FTB Form 3500 (the long-form application), its state tax-exempt status is not dependent on any federal tax-exempt status. It’s therefore possible for a taxable nonprofit corporation under federal law to be tax-exempt under California law and to qualify for state funding. For nonprofits formed before 2008, the only way to obtain California exemption under Section 23701d was by filing Form 3500 with the FTB. See FTB Notice 2008-3.
Legislative Counsel’s Digest
AB 1318, Bonta. Public social services: tax-exempt nonprofit organizations.
The Corporation Tax Law, in modified conformity with federal tax law, provides an exemption from the taxes imposed by that law for specified organizations. Existing law references federal tax law to give priority to tax-exempt organizations, or to require tax-exempt status, for the purpose of certain grants and service contracts.
This bill would provide that where specified federal tax law is referenced to determine eligibility for any state grant or service contract, or for the disbursement of state or local funds, it is deemed to also refer to the relevant provision of the Corporation Tax Law.
Existing law designates the State Department of Social Services as the single agency with full power to supervise every phase of the administration of public social services, including services for refugees, immigrants, and asylees, except as specified.
Existing law requires the department to allocate federal funds for refugee social services programs to eligible counties and, in certain circumstances, to qualified nonprofit organizations. Existing law requires the department, subject to an appropriation, to provide grants to qualified nonprofit organizations through contracts to provide certain immigration-related legal services to persons residing in, or formerly residing in, the state. Existing law requires the department to administer a rapid response program to award grants or contracts to entities, including nonprofit organizations, that provide critical assistance to immigrants during times of need. Existing law, subject to an appropriation, establishes the Enhanced Services for Asylees and Vulnerable Noncitizens program to provide resettlement services for persons granted asylum by the United States Attorney General or the United States Secretary of Homeland Security or who are eligible to receive refugee cash assistance and services as victims of crime. Existing law requires a grant or contract awarded pursuant to that program to be executed only with a qualified nonprofit organization. Existing law defines “qualified nonprofit organization” or “nonprofit organization” for purposes of these provisions to include a nonprofit organization that, among other things, is exempt from federal income taxation, as specified.
This bill would revise the definition of “qualified nonprofit organization” or “nonprofit organization” under the above-described provisions to additionally include a nonprofit organization that meets specified requirements to qualify for state tax-exempt status.
This bill would declare that it is to take effect immediately as an urgency statute.
Other Resources
New Law Protects California Nonprofits From Political Targeting (Varidda Voraakom, CVNL)
New CA Law Safeguards Access to State Grants if IRS Revokes Exemption (Linda Rosenthal, For Purpose Law Group)