Exactly what to do
- Under Treasury’s proposed regulations (October 2026), at least 90% of each year’s income must be paid out as scholarships for eligible students in your state by the last day of the following taxable year, so your first year’s income isn’t tested until the end of your second year (the two-year window). Which “income” depends on one choice:
Default: all income. Every dollar the organization receives from any source (cash method, before expenses) counts. Budget backwards from the 10%: everything that isn’t a scholarship, salaries, software, accounting, the annual audit, must fit inside one dollar in ten of total receipts.
The 85% safe harbor. If you’re on one state’s list and at least 85% of your activities are scholarship granting (administration, fundraising, governance, and compliance count when they support it), you may run the operational tests, the 90% test included, on your §25F account alone, where income is its qualified contributions plus earnings. Overhead can then come from separately raised, undesignated money that never touches that account (how the safe harbor works; whether you clear 85% is step 4). Treasury asked for comments on how activities should be measured, so write down how you measure. On more than one state’s list, the 85% level is mandatory and the test runs separately on each state’s account.
Either way, spent means paid: a multi-year award counts in each year a payment goes out, payments come out of the oldest year’s income first, a refund from a school or vendor is new income with its own following-year deadline, and no dollar counts twice. Track it live with the 90/10 calculator rather than discovering it at year end (deep dive). - Scholarships fund the Coverdell (§530(b)(3)(A)) list and any guidance under it. Treasury’s own examples (fact sheet, press release): private-school tuition, academic tutoring, special-needs services, books, supplies, computers and other equipment, and extended-day programs (the full list, explained). Treasury has promised separate §530 guidance on the details, and it isn’t out yet. The proposed regulations do fix how the money moves, and your award terms should say so (the four ways to pay):
1. Tuition, fees, room and board, and similar school charges go directly to the school.
2. Other vendors are paid directly only if you’ve verified them as appropriate providers and they aren’t related to the student.
3. Families receive money only as a qualified reimbursement: a receipt proving payment and a qualified expense, paid after you check that no other source covered it.
4. A qualified digital wallet (a third-party platform with purchase requests, approved-vendor controls, and receipt tracking) is an approved channel.
Schools and vendors must return overpayments and payments made in error, and you need a system that catches two awards paying for the same expense; setting all of that up is step 6.
Questions people actually ask
So can we keep 10% of every §25F gift for overhead?
That’s the common shorthand, and it isn’t quite the rule. The test is 90% of a year’s income paid out as scholarships by the end of the next year. Without the safe harbor, income is everything you receive, so the 10% has to cover all overhead across all revenue. With the 85% safe harbor, the test runs on the §25F account’s contributions plus earnings, and overhead can be funded by separate, undesignated gifts. The proposed rule doesn’t say whether the account’s remaining 10% may pay overhead; until final rules or your counsel say otherwise, the cleaner practice is to fund overhead from the operating account.
Primary sources: Treasury proposed regulations, October 2026 (our summary) · Treasury fact sheet, October 2026 · Section 530(b)(3) Coverdell expenses
