Treasury Releases Section 25F Scholarship Tax Credit Regulations: What Scholarship Granting Organizations Need to Know Before 2027

Takeaways

• States may include scholarship granting organizations with pending IRS tax-exempt applications on their 2027 SGO lists if specific federal requirements are satisfied.
• SGOs must register through the new IRS SGO portal and establish systems for donor designations, contribution tracking, acknowledgments, and IRS reporting.
• Organizations seeking to accept Section 25F credit-eligible contributions in 2027 should begin addressing federal qualification, state participation, governance, scholarship procedures, and administrative systems now.

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On October 1, 2026, the Department of the Treasury and the Internal Revenue Service released the long-awaited guidance implementing Section 25F of the Internal Revenue Code, the new federal tax credit for individual contributions to scholarship granting organizations (each, an “SGO”). The guidance has two parts. Temporary regulations (T.D. 10057, 91 FR 62655) govern how states elect to participate and submit their SGO lists, and set the contribution tracking framework. Proposed regulations (REG-117199-25, 91 FR 62818) address the credit and the requirements SGOs must meet. Both were published in the Federal Register on October 2, 2026. Comments on the proposed regulations are due December 1, 2026, and a public hearing is scheduled for December 15, 2026. Treasury has indicated that SGOs may rely on the proposed regulations for 2027.

For organizations racing to participate in 2027, the most significant development is that a state may include on its 2027 SGO list an organization whose application for recognition of exempt status is still pending with the IRS. A newly formed SGO, therefore, may not need its determination letter in hand to be listed for 2027, provided its state elects to use this rule and the conditions described below are met. The credit takes effect January 1, 2027, and organizations hoping to receive credit-eligible contributions next year have work to do now.

I. Getting on the 2027 State List

A contribution qualifies for the credit only if the recipient appears on the SGO list of a participating state. Under the temporary regulations, a state makes its 2027 advance election by January 1, 2027, and perfects that election by submitting its 2027 SGO list no later than February 15, 2027. A state may replace or supplement its list at any time before that deadline, but not afterward. For later years, the cycle moves earlier, with elections due by September 30 of the preceding year and lists submitted during the last three months of the preceding year or on January 1. Elections are made one year at a time.

Pending applications. Under Temp. Treas. Reg. §1.25F-5T(d)(5), a state may include organizations whose applications for recognition of exempt status are pending with the IRS, but only if the state includes all such organizations seeking inclusion on its list, the list identifies their status as pending, and the organization’s exempt status, once recognized, will be effective on or before January 1 of the year to which the list applies. An organization that does not obtain recognition is removed from the list. Because the rule is optional and all-or-nothing for each state, organizations relying on it should confirm early how their state intends to proceed.

Two further points deserve attention. First, a contribution is a qualified contribution only to the extent the donor designates it as such to the SGO at the time of the contribution, so gift forms and online giving pages must capture that designation. Second, the temporary regulations do not expressly address gifts made between January 1 and the date a state submits its list, although Treasury officials have indicated that SGOs that are registered and ready may begin accepting credit-eligible contributions on January 1. An SGO is treated as located in a state if it is authorized to do business there and complies with that state’s generally applicable charitable-organization requirements. No physical presence is required, and participating states may not impose requirements on SGOs that are more restrictive than federal law.

II. The 90 Percent Test and the Segregated Account Safe Harbor

Section 25F requires an SGO to spend at least 90 percent of its income on scholarships. The proposed regulations generally define income as the organization’s total gross receipts from all sources, unreduced by expenses, which would make the test difficult for any organization with substantial non-scholarship activity. The regulations offer a safe harbor. If at least 85 percent of an SGO’s activities consist of scholarship granting, the organization may apply the operational requirements to its Section 25F segregated account rather than to the organization as a whole, measuring income by the qualified contributions and earnings credited to that account. The requirement need not be satisfied until the last day of the taxable year following the year in which the income is received. For many sponsors, including school foundations and community organizations with broader missions, the practical answer will be a separate, single-purpose SGO whose operating costs are funded outside the segregated account.

An SGO listed in more than one state must maintain a separate segregated account for each state and must allow donors to designate how a contribution is allocated among those states. A multistate SGO may use the safe harbor, but it must meet the 85 percent activities threshold and then satisfy the operational requirements separately for each state’s account.

III. A Broader Disqualified Person Rule

An SGO may not award a scholarship to a disqualified person. The proposed definition is broader than many anticipated. It covers officers, directors, and trustees; any individual participating in the selection of scholarship recipients, including as a member of a committee; certain substantial contributors; and the family members of each. Family includes spouses, ancestors, and descendants of the individual or the individual’s spouse, siblings of the individual or the individual’s spouse, the descendants of siblings, and the spouse of any of these individuals. A substantial contributor is any person who contributes more than $5,000 to a segregated account during the taxable year, if that amount is more than 2 percent of the account’s total contributions. The proposed regulations also provide a safe harbor for an award to a recipient who would not have been a disqualified person based on contributions received through the award date, if the SGO had no reason to expect the recipient would become one.

Because the rule reaches the families of everyone who helps select recipients, including staff, SGOs should review their selection procedures as well as their boards, and should build a disqualified-person list, applicant certification, and pre-award screening into their operations before the first award.

IV. Registration, Donor Acknowledgment, and Reporting

Each SGO must register electronically through a new IRS SGO portal, preferably before appearing on any state list, which is how it obtains instructions for creating a unique donor number in the uniform format all SGOs will use. By January 31 following each calendar year, an SGO must give each donor a written acknowledgment stating the SGO’s employer identification number, the donor’s total qualified contributions for the year, the donor’s unique donor number, and whether any goods or services were provided in exchange. The SGO must report contribution information to the IRS through the portal by February 28. Donors will claim the credit on Form 8525 by reporting their unique donor number. SGOs should have registration, donor designation, tracking, and acknowledgment systems in place before January 1, 2027.

V. Other Notable Provisions

Treasury applies the $1,700 credit limit per individual, so married couples filing jointly may claim up to $3,400 if each spouse makes qualified contributions. Eligible students remain those in households with income at or below 300 percent of area median gross income who are eligible to enroll in a public elementary or secondary school, and scholarships generally must benefit students residing in the state where the SGO is listed. SGOs may verify income directly through pay stubs, tax returns, or IRS transcripts, or categorically through a recent award letter for SNAP, TANF, WIC, Section 8 housing assistance, or SSI, and foster children are treated as meeting the income requirement. Scholarships for tutoring and special-needs services may be prioritized by need rather than by prior-recipient status. Each SGO must also obtain an annual financial and programmatic audit and furnish it to every state that lists it. An SGO whose total receipts for its most recent taxable year, counting all receipts and not only those deposited in the segregated account, are $500,000 or less may instead use a committee of independent persons unrelated to management, whose report must be signed under penalties of perjury. Larger SGOs must engage an independent outside professional. Separately, each SGO must certify annually to the IRS as to its exempt status, segregated account, operational requirements, disqualified-person compliance, and audit. Treasury has indicated that separate guidance on the scope of qualified education expenses under Section 530 is a high priority.

VI. What to Do Now

Organizations seeking credit-eligible contributions in 2027 should confirm that each target state has elected to participate and ask whether it will list organizations with pending exemption applications; determine whether an existing charity can satisfy the 85 percent safe harbor or whether a new single-purpose SGO is needed; file for recognition of exempt status promptly; register through the IRS SGO portal; complete state charitable registrations; adopt disqualified-person, income-verification, and award procedures consistent with the proposed rules; and establish donor designation, acknowledgment, and reporting systems that will be operating on January 1. Organizations and sponsors with concerns about the proposed rules, including the expanded disqualified-person definition, should consider submitting comments before the December 1, 2026, deadline.

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For more information about the Section 25F regulations or the formation and qualification of a scholarship granting organization, please contact Richard L. Lieberman (RLieberman@dykema.com or 312-627-2250) or your Dykema relationship attorney.