Treasury Proposed Regulations under §25F, REG-117199-25 (Federal Scholarship Tax Credit, October 2026)

“An organization is located in a State if the organization is authorized to do business in the State and is in compliance with the generally applicable State laws and requirements for charitable organizations in the State, including provisions for transparency, accountability, and fraud prevention.”

No headquarters or in-state staff is required. The preamble says Treasury chose this reading as consistent with the legislative purpose of §25F “to increase access to scholarship funds.”

A charitable contribution of cash by an individual to an SGO, to the extent the donor designates it as a qualified contribution at the time of the gift. “Such designation, once made, is irrevocable.” The value of any goods or services the SGO provides in return is subtracted. “Cash” means currency, check, money order, electronic transfer (including credit and debit cards), after-tax payroll deduction, or a similar method, all in U.S. dollars, and does not include any digital asset.

“School” has the definition in section 530(b)(3)(B): a school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law. Qualified expenses are those described in section 530(b)(3)(A). Treasury says it will issue separate section 530 guidance on qualified expenses and schools “as soon as possible so that taxpayers may rely on it.”

An electronic payment platform run by a third-party provider that takes purchase requests from families, tracks approved expenses, and ensures payments go only to qualified expenses by pre-approving vendors and paying them directly or requiring timely receipts.

A single-State SGO is on one covered state’s SGO list; a multistate SGO is on more than one.

An individual who is a U.S. citizen or resident, for qualified contributions made while a citizen or resident. The credit is nonrefundable and “is allowed against the tax imposed for the taxable year by sections 1 and 55(a),” that is, against both regular income tax and the alternative minimum tax.

“For purposes of section 25F(b)(1), married taxpayers who elect to file a joint return under section 6013(a) and § 1.6013-1(a) are treated as separate taxpayers.”

Each spouse has a separate $1,700 cap, so a couple can claim up to $3,400 on a joint return when each spouse makes qualified contributions of at least $1,700. In the rule’s Example 2, each spouse gives $2,000 and each gets a $1,700 credit, “a total of $3,400 that may be claimed on B and C’s joint return,” subject to their combined tax liability.

The credit is the lesser of (i) the year’s qualified contributions “reduced (but not to below zero) by the sum of any State credits with regard to those qualified contributions” or (ii) $1,700. The state credit comes off before the cap: in the preamble’s example, a $2,500 contribution with a $500 state credit yields a $1,700 federal credit, not $1,200. When a state credit covers both qualified and non-qualified gifts, it is treated as allowed first on the non-qualified amount. A state tax deduction, as opposed to a credit, does not reduce the federal credit.

The credit cannot exceed tax liability under section 26(a) after certain other nonrefundable credits. Unused credit carries forward for up to five years, used first-in, first-out and before the current year’s credit.

A contribution credited under §25F (including an amount carried forward) cannot also be deducted under section 170. Any portion not credited may be deductible if it meets the section 170 rules.

A partner’s distributive share of a partnership’s gift to an SGO, or a shareholder’s pro rata share of an S corporation’s gift, is not a qualified contribution. The credit is for individuals giving directly.

A donor may rely on an organization being on the IRS SGO list (and not shown as removed) at the time of the gift, unless the donor knew it did not qualify or was responsible for, or aware of, the act or failure that later got it removed.

A donor claims the credit on Form 8525, Federal Scholarship Tax Credit (or successor form), listing the unique donor number from each SGO. A donor who leaves a number off “will be presumed not to have made a qualified contribution to that SGO,” a presumption the donor can rebut with the SGO’s acknowledgment or other satisfactory evidence.

An SGO is a section 501(c)(3) public charity (not a private foundation) that keeps qualified contributions in a §25F segregated account, meets the operational requirements, awards no scholarships to disqualified persons, is on the state SGO list of one or more covered states in which it is located, and meets the reporting and recordkeeping rules. A donor’s designated gift goes into the segregated account whether or not the donor ends up receiving a credit.

Scholarships to 10 or more students who do not all attend the same school; the 90 percent of income spending requirement; verification that scholarships pay only qualified expenses, go only to eligible students, and go to students solely within the state; renewal and then sibling priority; and no earmarking for a particular student.

“If at least 85 percent of a single-State SGO’s activities consist of scholarship granting activities (whether pursuant to section 25F, in accordance with State tax credit scholarship rules, or any other scholarship granting activities), then the SGO may apply the operational requirements of paragraph (c)(1) of this section to the organization’s section 25F segregated account, rather than to the organization as a whole.”

Administrative, fundraising, governance, investment, compliance, and outreach work counts as scholarship granting to the extent it supports scholarship granting. Treasury asks for comments on how to measure activities and whether 85 percent is the right threshold.

At least 85 percent of a multistate SGO’s activities must be scholarship granting. It keeps a separate §25F segregated account for each covered state that lists it, lets donors designate how their gift is allocated among those states, deposits gifts as designated, and meets the operational requirements separately for each state’s account.

“Income of the organization means the total gross receipts of the organization from all sources computed using the cash receipts and disbursements method of accounting . . . unreduced by any expenses, regardless of the overall method used by the organization in its books and records.”

For a single-State SGO using the safe harbor, and for each state account of a multistate SGO, “income” is instead the qualified contributions received by, and earnings credited to, the §25F segregated account during the year. Each year’s income must be spent by the last day of the following taxable year, so a first year’s requirement is not tested until the end of the second year. Amounts count as spent when paid (a multi-year award counts in the year each payment is made), spending is applied to the earliest year’s income first, refunds from schools or vendors are new income in the year returned, and nothing counts as spent in more than one year. Funds transferred to a qualified digital wallet count as spent on the transfer date if the SGO does not keep ownership of them.

SGOs must have reasonable procedures to prevent and detect fraud, including systems to stop duplicate awards for the same expense. Payments to families are limited to qualified reimbursements backed by receipts and verified by the SGO. Tuition, fees, room and board, and similar school charges must be paid directly to the school. Other vendors may be paid directly if verified as appropriate providers and unrelated to the recipient. Schools and vendors must return overpayments and payments made in error. A qualified digital wallet is an approved method.

Area median gross income and household income follow the Section 8 housing rules, including family-size adjustments, but a household’s income disregards items not received in cash, such as a Section 8 housing allowance or an imputed return on assets. A household is the student and the people living with the student; for a student in two households, it is the one where the student lives longest during the year. The IRS expects to publish the income limits by area and family size each year.

SGOs verify income one of four ways: direct verification (pay stubs, tax returns, IRS transcripts, Forms W-2, and similar records); categorical eligibility (a household member’s SNAP, TANF, WIC, Section 8, or SSI award letter dated within the last 12 months; school-wide free or reduced-price lunch status does not count); a safe harbor for individual tutoring or special-needs services at schools in qualified census tracts, or whose students are at least 80 percent from such tracts, backed by an annual third-party audit; and a foster-child safe harbor. An SGO may set a lower income limit of its own.

“An eligible student is considered solely within a State only if the eligible student resides in that State in accordance with State law. Attending school in a State or purchasing goods or services in a State is not sufficient to treat the student as being solely within a State.”

Two exceptions: a dependent of a member of the Armed Forces is treated as within both the student’s state of domicile and the state where the service member resides, and a dependent of an individual residing on Indian Lands is treated as within both the state of residence and the state where the student attends school.

Renewal and sibling priority apply with flexibility for the type of award: they matter most for tuition, fees, and room and board, while a tutoring or special-needs award can be prioritized by need.

No scholarship may go to a substantial contributor, an officer, director, or trustee (or anyone with similar powers), any individual who participates in selecting recipients or determining scholarship awards, including committee members, or a family member of any of them. There is no exception for blind or anonymized selection, or for unpaid committee members. A substantial contributor is anyone who gives more than $5,000 to the SGO in a taxable year, if that is more than 2 percent of the SGO’s total contributions that year, and also anyone who gives more than $5,000 to a §25F segregated account in a taxable year, if that is more than 2 percent of the account’s contributions that year. Status is determined as of the close of each SGO taxable year; a spouse’s gifts are combined, and the status lasts for that year and the next. An award is not treated as going to a disqualified person if the recipient was not one on the award date and the SGO did not know or reasonably expect the recipient would become one.

Every organization must register electronically in the IRS SGO portal “as soon as possible and preferably before” it appears on any state SGO list, giving its name, EIN, address, telephone, year of formation, contact person, and taxable year. Registration provides instructions for creating unique donor numbers in a uniform format, and it is where the SGO authorizes disclosure on the IRS SGO list. (This piece is also in the temporary regulations.)

By January 31 of the following year, each donor receives a written acknowledgment with the SGO’s EIN, the year’s total designated contributions, the unique donor number, and a statement of any goods or services provided with a good-faith value. Electronic delivery is allowed with the donor’s consent. By February 28, the SGO reports each donor number’s name, address, and annual total to the IRS through the portal. (Also in the temporary regulations.)

Each year an SGO certifies that it met every requirement, including the segregated account, the operational requirements, the disqualified-person rule, its location in each listing state, donor acknowledgments, and the audit. It also reports applications, awards, award sizes, schools, expense categories, income, and the percentage of income spent. The certification is attached to the Form 990; an SGO that does not file one submits it by the 15th day of the 5th month after the period closes. A copy goes to each state that lists the SGO.

Each SGO must undergo an annual financial and programmatic audit and give the results to each listing state. An organization with total receipts above $500,000 must use an external, independent professional or accredited body; at $500,000 or less, it may use a committee of independent persons unrelated to management, with the report signed under penalties of perjury. The audit covers application, selection, award-amount, and payment procedures, expense verification, location in the state, and the operational requirements.

The state-side rules repeat the temporary regulations, which take effect without a comment period and apply from September 1, 2026, with cross-references updated: registration in an IRS State section 25F portal, one-year elections that cannot be revoked once completed, a January 1, 2027 deadline for 2027 advance elections on Form 15714 and a February 15, 2027 deadline for the 2027 SGO list, required certifications for each listed SGO, a transition rule for new organizations, and listing of organizations whose 501(c)(3) applications are pending.

A state certifies that its list includes every organization located in the state that seeks inclusion and meets the requirements. It may remove an SGO only after a procedure that provides due process, and must notify the IRS. Any public SGO list a state keeps must match its latest submitted list, link to the IRS SGO list, and say that donors may rely on the IRS SGO list.

States must require SGOs to meet generally applicable charity rules and must also impose application, documentation, and financial reporting requirements reasonably tailored to the federal tests and to fraud prevention. But a state may not require SGOs to operate “in a manner that is more restrictive than the requirements set forth in section 25F(c)(5) and § 1.25F-3(b) and (c), such as by limiting the type of school that scholarship recipients may attend or the types of qualified elementary or secondary education expenses for which scholarship funds may be used.” State procedures are subject to federal review.

The IRS publishes the IRS SGO list on irs.gov for SGOs that authorize disclosure, organized by covered state. A removed SGO stays visible in strike-through text with its removal date. If the IRS removes an SGO for noncompliance, the SGO can seek review by the IRS Independent Office of Appeals.