California AB 1318 to Protect State Funding of Charitable Nonprofits
California Governor Gavin Newsom signed California Assembly Bill 1318 (AB 1318) into law on October 7, 2025. AB 1318 is a direct response to anticipated federal government efforts to revoke some charitable organizations’ federal tax-exempt status based on their missions and activities. To avoid ineligibility for state funding if a loss of federal tax-exempt status would occur, AB 1318 expands eligibility requirements to reference tax-exempt status under state tax law as an alternative to federal tax law. The law takes effect immediately.
AB 1318 is codified as Government Code Section 7230, which provides, in part, that unless clearly required otherwise, “any reference to Section 501(c)(3) of the Internal Revenue Code (IRC)” that appears in any “statute, regulation, or contract, or in any other code” to determine eligibility for any “state grant or service contract, or the disbursement of state or local funds,” also shall refer to Section 23701d of the Revenue and Taxation Code.
Understanding the Background of AB 1318
Traditionally, a U.S. charitable organization can seek tax-exempt status under IRC Section 501(c)(3) through application to the Internal Revenue Service (IRS). Federal tax-exempt status protects the charity from having to pay federal income tax, allows it to be a recipient of tax-deductible charitable contributions and private foundation grants. However, Section 501(c)(3) status is an eligibility factor for many types of funding and contracts, including those from governmental entities.
Many states, including California, offer state-level tax-exempt status primarily based on a charitable organization’s Section 501(c)(3) tax-exempt status. However, recent news stories have detailed plans for the IRS to target some nonprofits with criminal violations that could lead to revocation of their federal tax-exempt status. Additionally, the current federal administration has also increased pressure on colleges, universities, and nonprofit organizations that it accuses of failing to support its priorities, despite exercising their First Amendment rights to do so. The overarching fear is that smaller nonprofit organizations will not have the resources to fight back or survive without access to major funding sources.
California passed AB 1318 to avoid the anticipated harm to certain charitable organizations that may result from the revocation of 501(c)(3) status and the delayed processing of applications for 501(c)(3) status. By tying eligibility for state funding to state rather than federal tax-exempt status, the state hopes to mitigate some of the potential damages.
Limitations of AB 1318
AB 1318 is not without limitations. More specifically, AP 1318 does not apply to charitable organizations applying for state tax-exempt status using Franchise Tax Board (FTB) Form 3500A. California recognizes state tax-exempt status upon submission of FTB Form 3500A and a copy of the federal tax-exempt status determination letter. Since this form of recognition of state tax-exempt status for a charitable organization is directly based on its federal tax-exempt status, revocation of federal tax-exempt status would also result in revocation of state tax-exempt status.
As a result, charitable organizations that previously relied on FTB Form 3500A to establish state tax-exempt status might consider filing FTB Form 3500 (the long-form application) for independent recognition of state tax-exempt status under Section 23701d in some cases. An organization that has filed FTB Form 3500 is not reliant on its federal tax-exempt status to maintain its state tax-exempt status. Therefore, a charitable organization can be taxable under federal law but tax-exempt under state law and still qualify for state funding. However, this step is likely necessary only if the organization relies on state funding and faces a significant risk of revocation of its 501(c)(3) status.
Frequently Asked Questions (FAQ)
What types of organizations might benefit most from AB 1318?
Organizations that are heavily reliant on California state grants or service contracts—and that may be at risk of losing their federal 501(c)(3) status—stand to benefit most from AB 1318. These organizations include smaller nonprofits, advocacy groups, and mission-driven organizations that could face scrutiny or delays at the federal level but still meet California’s criteria for tax-exempt status.
Does AB 1318 change how donors can claim tax deductions?
No, AB 1318 does not affect federal tax deductibility for donors. Contributions are only tax-deductible at the federal level if the recipient organization maintains its 501(c)(3) status with the IRS. AB 1318 strictly addresses eligibility for California state funding and does not alter federal tax rules for charitable giving.
Should all charitable organizations in California consider using FTB Form 3500 to establish their state tax-exempt status?
Not necessarily. Filing FTB Form 3500 is advisable only for organizations concerned about potential federal revocation and that rely on state funding. Many charitable organizations can continue using Form 3500A if their federal status is secure. However, those in politically sensitive sectors or facing compliance challenges may want to consult legal counsel to assess whether a switch would offer greater protection.
Partner with the California Center for Nonprofit Law
At the California Center for Nonprofit Law, we provide tailored guidance to help your organization navigate these challenges with confidence. Whether you’re reviewing internal policies or responding to a legal concern, our experienced team is ready to assist. Reach out today by calling 949-892-1221, emailing info@NPOlawyers.com, or connecting with us online to explore how we can support your mission.