January 2027 is closer than it looks. With no formal guidance for the new Scholarship Granting Organization (SGO) tax credits enacted in the One Big Beautiful Bill Act yet in place, Deputy Assistant Secretary for Tax Policy Kevin Salinger hosted a roundtable to preview the forthcoming guidance—outlining how Treasury and the IRS would interpret the statute and guide stakeholders through credit implementation.
The Section 25F credit allows every taxpayer to claim up to $1,700 for cash contributions to SGOs, nonprofits that collect donations to fund K–12 scholarships.
Here’s what SGOs, states, and taxpayers need to know.
Safe Harbor for the 90% Spending Requirement
Under Section 25F(d)(1)(B), eligible SGOs must spend at least 90% of their income on scholarships. Many SGOs assumed that meant total organizational receipts, before expenses; Salinger’s remarks reframed that. For organizations focused primarily on scholarship-granting, a safe harbor would allow the 90% threshold to be measured only against what sits in a Section 25F segregated account — qualified contributions and earnings, not total receipts. For most dedicated SGOs, that’s a significantly more manageable bar.
Separate SGO Account Per State — A Structural Requirement Many Didn’t See Coming
An SGO may appear on multiple state SGO lists, as long as it meets the location requirement and maintains a separate Section 25F account for each state in which it operates. Operational requirements, such as the 90% spending rule, are assessed independently per state account, not on a consolidated basis. Certain organization-wide rules apply to the SGO as a whole across all states. For SGOs planning to scale nationally, this is a meaningful structural requirement that wasn’t widely anticipated
Cross-State Contributions: Donors Can Give Anywhere
Taxpayers can contribute to an SGO located in a state other than their own and still claim the credit; since the credit is federal, the statute doesn’t require that the donor and SGO share a state. That opens the door for national giving campaigns that SGOs had not been certain were permitted.
Section 530 Guidance
Guidance on which expenses qualify for this will follow as a separate workstream under Section 530, after the Section 25F proposed regulations are issued. That guidance will clarify the full scope of eligible expenses, including additional academic tutoring and special needs services, both of which are intended to be covered under the statute.
SGO Location Requirements and Multistate Eligibility
Deputy Assistant Secretary Salinger commented on the proposal’s definition of “located in the state.” Under this framework, an SGO would be considered as located in a participating state if it is authorized to do business there and is in compliance with generally applicable state charitable-organization rules, including those governing transparency, accountability, and fraud prevention.
This raises a question: could states impose their own, stricter requirements on SGOs beyond what federal law requires? Salinger’s answer was a clear no. States retain the ability to enforce standard charitable-organization rules but cannot go further by imposing SGO-specific requirements stricter than those under Section 25F. That’s a significant protection for organizations that worry about a patchwork of 50 different compliance regimes.
Definition of “School” and Student Eligibility Verification
The proposed rules also weigh in on which institutions count as a “school” for purposes of the program. Public, private, religious, and tribal K–12 institutions would qualify, as determined by state law, as would home schools recognized as schools under state law.
Before Salinger’s remarks, it was unclear how rigorously SGOs would be required to vet applicant families’ income. The proposed rules answer that with a flexible safe harbor: SGOs can accept pay stubs, tax returns, W-2s, or IRS transcripts, but they can also rely on enrollment in a qualifying federal, state, or tribal needs-based program with income limits at or below the specified threshold. Foster children satisfy the requirement automatically, with no additional documentation needed. That’s meaningfully more flexible than many in the SGO community had anticipated.
Low-Income Area Safe Harbor: The Surprise Provision
Perhaps the most welcome surprise for urban and rural SGOs alike: Treasury is actively considering a geographic safe harbor for schools located in low-income areas. If adopted, SGOs serving those communities may not need to verify individual family income at all. That would dramatically reduce administrative burden for organizations working in the highest-need communities, which are exactly the population this program is designed to reach. This was not anticipated from a plain reading of the statute.
Preventing Fraud and Abuse
States have raised real concerns about fraud and abuse, and the proposed rules take those concerns into account. As a safeguard, each SGO would be required to obtain an annual financial and programmatic audit by a qualified independent third party, provided to every participating state on whose list it appears. This goes beyond standard nonprofit financial oversight and directly reviews whether the SGO is meeting Section 25F requirements.
The audit is designed to make state oversight more manageable. Rather than conducting independent compliance reviews, states could use the audit to verify SGO eligibility under Section 25F, identify deficiencies, and determine whether further action or removal from the state list is warranted.
Participating states would still be expected to take reasonable efforts to prevent fraud and abuse, such as preventing duplicate awards for the same student and expense. One approach under consideration would require a formal scholarship acceptance certifying no other award has been received for the same expense.
A Startup-Year Concession: Streamlined Audit for Small SGOs
Recognizing that a full third-party programmatic audit would be prohibitive for small SGOs, Treasury proposed a streamlined alternative: an internal committee review by individuals unrelated to management, signed under penalties of perjury. Salinger indicated this would be available as a substitute, at least in the startup year, for smaller organizations. Whether it becomes a permanent option or only a transitional measure is still being worked out, but its inclusion signals that Treasury heard the concerns of smaller, faith-based, and rural organizations.
Donor Reporting and IRS Portal
Alongside those safeguards, the proposed rules aim to keep donor reporting straightforward and minimally invasive. Each donor would receive a written acknowledgment of their annual contributions, including the total amount of qualified contributions and a unique donor number generated through an IRS-provided method. SGOs would report donor and contribution information to the IRS using that number, and taxpayers claiming the credit would generally include it on their federal return. This allows the IRS to verify that a claimed credit corresponds to a real donor, a legitimate SGO, and reported qualified contributions, without requiring donors to share their Social Security Number with the SGO.
IRS Portal: Not for 2027, but Coming Eventually
The proposed rules also introduce a plan to create a dedicated IRS portal, developed in phases, to streamline SGO administration and reporting. The goal is a user-friendly interface for all SGO-IRS interactions. Salinger was candid, however, that the portal would not be ready for the 2027 launch year.
The Takeaway
The Education Freedom Tax Credit has been broadly welcomed as a landmark expansion of K–12 scholarship access, but the proposed regulations implementing it have drawn a more mixed reaction. The education and nonprofit communities appreciate the proposed concessions, like the streamlined audit option, the income-verification safe harbors, and the no-SSN approach to donor reporting.
Critics have argued that Treasury’s interpretations go beyond what the statute requires and add procedural hurdles, particularly around state verification of SGO compliance and how financial thresholds are calculated. Small, rural, and faith-based organizations have echoed those concerns, warning that compliance complexity could shut out the very organizations best positioned to serve eligible students.
Several important issues remain unresolved: how the $1,700 cap applies to joint filers, how this interacts with the Alternative Minimum Tax, and how states will be added to the program in time for the 2027 launch.
Treasury’s preview is subject to ongoing legal review, and Treasury has said the proposed regulations are meant to align with the guidance, but none of it is official until the final rule is published. When formal regulations are published this fall, the key question will be whether Treasury can strike the right balance between preventing fraud without making compliance so burdensome that smaller organizations can’t afford to participate.
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
