Treasury Releases Section 25F Regulations: What Prospective SGOs Need to Know

What was released—and what is final?

On October 1, 2026, Treasury and the IRS released a proposed Section 25F rule package and companion temporary regulations. The federal scholarship tax credit was already enacted in 2025; this release explains more of the machinery needed to operate it. Read the IRS announcement.

• Statute: Congress established the credit, its $1,700 individual limit and core SGO qualification requirements in Internal Revenue Code §25F.
• Temporary regulations—T.D. 10057: address state elections and SGO lists, IRS registration, donor acknowledgements and contribution reporting. The published temporary regulations specify a December 1, 2026 effective date and separate September 1, 2026 applicability provisions. Do not confuse those dates with the credit's 2027 start.
• Proposed regulations—REG-117199-25: detail credit calculations, student eligibility, spending, multistate operations and annual financial/programmatic reporting and audits. These provisions can change before finalization.

The proposed package permits reliance for qualifying contributions beginning January 1, 2027, before finalization, only if the applicable portions are followed in their entirety and consistently. It is not permission to select isolated favorable provisions. Portal instructions, forms and later guidance still need monitoring. Sources: T.D. 10057, effective/applicability dates; REG-117199-25, “Proposed Applicability Date.”

The 2027 credit and married taxpayers

Statutory baseline: eligible individual taxpayers can claim a nonrefundable federal credit of up to $1,700 annually for qualified cash contributions, beginning in 2027. Available tax liability and other limitations matter. A state tax credit for the same contribution reduces the federal credit; the same credited amount cannot also generate a federal charitable deduction. Unused credit has a statutory five-year carryforward limit.

Proposed clarification: spouses filing jointly are treated as separate taxpayers for the credit limit, allowing a combined maximum of $3,400 when requirements are met. This is not a credit for every household member or a guaranteed refund. The proposal also specifies how contributions interact with state credits and amounts above the federal ceiling. Donors should review their own circumstances.

The donor does not have to live in the state where the eligible SGO is listed. An SGO's fundraising is not capped at $1,700 per donor, but additional giving does not automatically create an additional federal credit. Sources: Public Law 119-21, §70411 / IRC §25F(a), (b), (e), (f); proposed §1.25F-2(a)–(f).

State participation, listing and IRS registration

Statute and temporary procedures: a state must elect to participate and submit its SGO list. A state's participation does not approve every nonprofit in that state. Your organization needs the relevant state certification/listing and must meet the federal SGO requirements, including 501(c)(3) tax-exempt status and not being a private foundation.

The temporary rules establish electronic state procedures, SGO-list certifications, additions/removals and startup transition rules. For 2027, a state's advance election is due on or before January 1, 2027; the temporary transition rule allows its initial list through February 15, 2027. These are state submission rules, not a universal application deadline for individual SGOs. Confirm your state's process directly. Source discrepancy checked October 23: the IRS State Portal page currently instructs states to submit the 2027 list by January 1, including advance-election states, while temporary §1.25F-5T(c)(3)(ii)(B) permits perfection by February 15. State officials should confirm the applicable instruction with the IRS; applicants should meet their own state’s deadlines rather than assume the later date applies to them.

An organization planning to solicit qualified contributions must register electronically through the IRS SGO portal under its instructions. Prepare the organization's EIN, contact information, formation year, taxable year and authorized representative. Registration supports donor-number instructions, disclosure on the IRS list and contribution reporting; it is separate from nonprofit formation and state approval. Do not assume portal registration alone establishes eligibility.

There is a conditional transition procedure for organizations awaiting an IRS exemption determination. It is not automatic tax exemption or blanket permission to promise credits while an application is pending. Sources: temporary §§1.25F-4T(b), 1.25F-5T(c)–(d); IRS participation information. Start with the SGO state hub and formation checklist.

Donor acknowledgements and contribution reporting

Temporary regulations: this is now more specific than a general promise to issue donation receipts. Plan for a written acknowledgement by January 31 after the contribution year. It includes the SGO's EIN, the donor's annual total designated as qualified contributions, the unique donor number created under IRS instructions, and the required goods-or-services statement and valuation where applicable. Electronic delivery requires the donor's consent.

By February 28 after the contribution year, the organization must report donor-level qualified-contribution information to the IRS, generally through the SGO portal. This includes donor name, address and aggregate qualified contributions associated with the unique donor number. The first contribution year is 2027, so plan for the first annual acknowledgement and reporting cycle in 2028.

October 21 reporting notice: the IRS requests comments by December 21, 2026 on extending the existing information collection (OMB 1545-2335), with no change to the approved collection. This does not finalize proposed operating rules or replace the December 1 proposed-regulation comment deadline. Read the Federal Register notice.

Build records around consistent donor identity, annual totals, delivery consent and correction controls. The new donor-number process is intended to avoid collecting donors' Social Security numbers; follow IRS instructions rather than inventing a substitute identifier. Source: temporary §1.25F-4T(b)–(c).

Separate accounts, the 85% test and multistate SGOs

Statute and temporary definition: qualified contributions must be kept separate from other funds. The temporary rules define a Section 25F segregated account for qualified contributions and their earnings. A general donation and a designated Section 25F contribution should not be treated as interchangeable.

Proposed single-state safe harbor: an SGO with at least 85% of its activities devoted to scholarship granting could apply specified operational requirements to its Section 25F segregated account instead of the whole organization. The activity test includes support work to the extent it supports scholarship granting. It is separate from the 90% scholarship-spending test; administrative work does not become a scholarship payment.

Proposed multistate framework: an SGO would need at least 85% scholarship-granting activities, a separate Section 25F segregated account and books for each covered state where it is listed, and separate operational testing for each account. Donors must be allowed to designate covered-state allocations. A designation to a state is different from prohibited earmarking for a particular student.

Multistate operation therefore requires more than adding states to a website. Plan for each state's listing, donor allocations, restricted balances, resident-student eligibility and reporting. Sources: temporary §1.25F-1T(a)(18); proposed §1.25F-3(c)(2)–(3).

What the 90% spending requirement means

Statute: an SGO must spend at least 90% of its income on scholarships for eligible students. This is not simply an instruction to transfer 90 cents of every donation immediately, and a 90/10 sample budget does not prove compliance.

Proposed measurement: the general denominator is gross receipts from all sources on a cash basis, before expenses. For a qualifying single-state safe-harbor SGO, the denominator would instead use qualified contributions and earnings credited to its segregated account; a multistate SGO would measure each covered-state account separately.

The proposal would allow spending through the end of the taxable year following the year income is received. It counts amounts when paid, uses oldest income first and prohibits double counting. Returned excess or erroneous payments would be income in the year returned, with a new spending window. Awards promised or funds reserved are not the same as paid scholarships.

Track income by year and account, actual scholarship payments and returns now. Ask your accountant to assess which measurement scope applies. Source: proposed §1.25F-3(c)(4). Our sample SGO budgets remain planning illustrations, not regulatory calculations.

Students, expenses and scholarship decisions

Statutory baseline: students must be eligible to enroll in public elementary or secondary school and meet the household-income standard of no more than 300% of applicable area median gross income. SGOs verify eligibility, serve at least ten students who do not all attend the same school, apply required scholarship priorities and avoid scholarships to disqualified persons. Donors cannot earmark qualified contributions for an individual student.

Proposed details: the package explains household-income verification and certain eligibility safe harbors. It addresses qualifying public, private and religious schools, and homeschools where state law treats them as schools. Eligible expenses can extend beyond tuition to qualifying tutoring, special-needs services, books, supplies and technology, subject to the applicable conditions—not every educational purchase qualifies.

The proposal also clarifies residency, prior-recipient and sibling priority, relationships and payment verification. The temporary state-administration rules restrict additional state conditions for the federal pathway; that does not erase separate state-funded scholarship programs or generally applicable law. Sources: proposed §§1.25F-1(a), 1.25F-3(c)–(d); temporary §1.25F-5T(e).

Annual reporting and audits

Proposed annual requirements: beyond contribution reporting under the temporary rules, SGOs would provide operational certifications and information about applications, awards, schools, expense categories, income and scholarship spending. The proposal coordinates this with annual IRS reporting and copies to the covered states; final forms and instructions still matter.

The proposal calls for an annual financial and programmatic audit by a qualified independent third party. Organizations with annual receipts above $500,000 would use an external independent professional or accredited body; those with receipts of $500,000 or less could use an independent committee unrelated to management. The smaller-organization provision is not an audit exemption.

Review would reach eligibility, selection, expenses, payments, finances and controls. Keep a traceable record of who reviewed each decision, which evidence supported it and how funds moved. SGOone's audit trail can support preparation; it is not an independent audit or an automated regulatory filing. Source: proposed §1.25F-4(d)–(e).

What prospective SGOs should do now

1. Confirm the path: nonprofit status, state participation, state listing and IRS registration are separate steps. Assign an owner to each.
2. Review the full rule package: decide with advisers how the proposed-rule reliance conditions affect your plans.
3. Design the accounts: separate qualified contributions, other gifts and covered-state balances; map income years and payment records.
4. Prepare donor operations: contribution designation, donor-number procedures, annual totals, acknowledgements and reporting deadlines.
5. Document scholarship decisions: eligibility evidence, priority, conflicts, qualified expenses, approval history and payment checks.
6. Budget for oversight: professional advice, independent review, reporting and continuing updates.

For a practical next step, use How to Start an SGO, explore the SGO FAQ, or begin the SGOone Prep Survey and Formation Journey with a free account. SGOone helps organize preparation and operating records; your board, advisers and the relevant authorities retain their responsibilities.

Primary sources and further reading

• IRS IR-2026-117, October 1, 2026 announcement
• Treasury Decision 10057: temporary Section 25F regulations
• REG-117199-25: proposed Section 25F regulations
• Public Law 119-21, §70411: enacted IRC §25F
• IRS Federal Scholarship Tax Credit program information

The original October 1 rule package was reviewed October 2, 2026. Portal access, participation, procedural deadlines and the October 21 reporting notice were rechecked and this page revised October 23, 2026. Links to the regulatory texts use the official Federal Register public-inspection documents. Check the published rules, current IRS instructions and your state's procedures before acting. No statement here establishes SGO qualification or any donor's tax entitlement.