TL;DR

  • If you already run a 501(c)(3), most of the formation work is done. Your exemption, EIN, bank accounts, and charitable-solicitation registration all carry over, and no new Form 1023 is required.
  • One test decides whether retrofitting is even the right move: whether scholarship granting is at least 85% of your activities. At or above that line (counting the administration and fundraising that support it), Treasury’s proposed regulations let you run the 90% spending test on your segregated §25F account alone. Below it, at least 90% of all your gross receipts must go to scholarships, which most multi-program nonprofits cannot meet. A scholarship fund usually clears the line. An organization with other real programs usually should form a separate SGO entity instead.
  • The gaps an existing organization has to close are narrow and specific: articles language, §25F language in the bylaws, a conflict-of-interest policy, a separate account used only for qualified contributions, and a board without family or business ties among its members, whose own families are not the ones you plan to fund.
  • All of it can be voted at one board meeting, recorded in minutes.
  • Then you rejoin the normal path: qualify under the §25F operating rules, register in the IRS SGO portal once it opens, and get on your state’s list. The free retrofit audit walks it as a checklist and saves your progress.

Every article about starting a Scholarship Granting Organization starts at incorporation. That is the wrong beginning for a lot of the people reading them. School foundations, parish and synagogue scholarship funds, community charities, and existing state tax-credit scholarship organizations already exist, already hold exemption letters, and already move scholarship money. For them the question is not how to form a nonprofit. It is which parts of the organization they already have will satisfy §25F, and what has to change.

This is that answer: what carries over, what does not, and the honest test for whether your organization should retrofit at all.

Should you retrofit at all?

Start here, because it is the decision that everything else depends on. §25F requires a qualifying SGO to spend at least 90% of its income on scholarships for eligible students. Treasury’s proposed regulations, released October 1, 2026, read “income” as the organization’s total gross receipts from all sources, on the cash method and unreduced by expenses, not only the qualified contributions that earn the credit. The one exception is a safe harbor: if at least 85% of the organization’s activities are scholarship granting (counting the administration, fundraising, and compliance that support them), the test is measured against its segregated §25F account instead, where income is the qualified contributions and earnings credited to that account. The proposal is not final, but SGOs may rely on it for contributions made on or after January 1, 2027.

So the 85% activity test is the question for an existing nonprofit, and it is a different test from the 90%. It looks at what the whole organization does: §25F scholarships, state tax-credit scholarships, and any other scholarships all count, as does administrative, fundraising, governance, investment, compliance, and outreach work to the extent it supports scholarship granting. The 90% test, by contrast, counts only money actually paid out as scholarships to eligible students. Treasury has not said how to measure “activities” beyond that support rule; it asked commenters whether the measure should be receipts, expenditures, staff time, program-service activity, or something else, and whether 85% is the right line. If you plan to be listed in two or more states, the 85% test is mandatory, with no whole-organization fallback.

Read that as a budget rule and the fork becomes obvious. Below the 85% line, everything your organization does that is not a scholarship has to fit inside the remaining 10% of everything it takes in, alongside your rent, salaries, audit, and software. So:

  • Already essentially a scholarship fund? Retrofit. If scholarships are at least 85% of what you do, the safe harbor runs the 90% test on your §25F account, and the rest of this article is your project plan.
  • Running other real programs? A food pantry, a school, a camp, a community center, an advocacy budget. Form a separate SGO entity instead, and leave your existing organization alone. Filing a fresh nonprofit takes weeks. Restructuring a mixed budget to survive a 90% test takes years, and often destroys the programs that made the organization worth having. Treasury anticipates this, and its temporary regulations let a state list a new SGO whose 501(c)(3) application is still pending, as long as the exemption, once granted, is effective by January 1 of the list year. For a 2027 list, that means forming the new organization (and filing for exemption on time under the IRS’s general exemption rules, which Treasury’s preamble cites, so it reaches back to formation) by January 1, 2027 (see the 2027 calendar).
This is the one thing to get right before spending money. Boards routinely amend documents first and run the numbers second, then discover that the organization cannot pass 90% without cutting a program the board will never agree to cut. Run two checks on last year’s actuals. First, the activity test: how much of what the organization does is scholarship granting, counting the administration and fundraising that support it? Because Treasury has not fixed a measure, test it more than one way (spending, staff time, receipts). If you clear 85% comfortably on each, the 90% test moves to your §25F account. If you don’t, run the second check: total gross receipts against scholarship dollars paid out. If scholarships are not already north of 90% of everything, ask what would have to disappear to get there, and whether a second entity is simply the cleaner answer.

A second entity is not a defeat. Companion organizations with an overlapping mission and a separate board are a common nonprofit structure, and Treasury’s own preamble says the safe harbor “may require the formation of new organizations to conduct section 25F activities.” If that is your path, the from-scratch builder starts at stage one, and the full narrative version is how to start an SGO.

What carries over

For organizations on the retrofit side of the fork, the good news is most of stage one is already banked:

  • Your 501(c)(3) determination. §25F requires an organization described in 501(c)(3), exempt under 501(a), and not a private foundation. You already hold the letter, and adding scholarship purposes does not trigger a new exemption application when the new language stays inside 501(c)(3) exempt purposes.
  • Your EIN and corporate existence. Nothing to re-file.
  • Your charitable-solicitation registration. Most established nonprofits already registered with their state charities regulator, which is a step from-scratch founders still have ahead of them. Keep the renewals current. It now does federal work too: under Treasury’s temporary regulations, an organization is “located in” a state for §25F if it is authorized to do business there and complies with that state’s general charity laws.
  • Your banking, accounting, and audit relationships. You will add an account, not replace a stack.
  • Your track record. Not a legal requirement, but when your state opens its §25F process, it has to find that your documentation shows the ability and intent to meet the federal operating rules. An organization with years of filed 990s and real scholarship history is a much easier approval than a three-month-old shell.

The five gaps to close

What does not carry over is anything §25F-specific, because §25F did not exist when your documents were drafted. Five gaps show up in almost every existing organization.

1. The §25F language in your governing documents

This is the big one, and it is the one most likely to be missed. Treasury’s temporary regulations (October 1, 2026) do not let an organization simply self-certify to its state. The state certifies to the IRS that its own procedures let it determine each listed organization meets the federal requirements. Until an organization has filed its first §25F annual certification and audit (which, for the first state lists, means every organization, however long it has existed), the state relies on its governing documents, bylaws, and written policies, which must expressly require the organization to satisfy the federal SGO operating requirements, beyond a general promise to comply with the law.

Generic nonprofit bylaws do not say any of that, so they fail the check. The fix is a bylaws amendment adding a §25F compliance article, passed by whatever vote your own bylaws require. Our bylaws template carries that article and fills in from your organization’s details; you can adopt the whole document or lift the article into yours.

2. Missing clauses in your articles of incorporation

Read your articles for two things: a purpose clause limiting the organization to 501(c)(3) exempt purposes, and a dissolution clause dedicating assets to exempt purposes. Older articles, especially ones drafted from a generic state template, are frequently missing one. If yours are, file a certificate of amendment through the same state office you incorporated with. The articles walkthrough has the language and your state’s filing details.

3. A conflict-of-interest policy

The IRS asks about one on the exemption application, and §25F makes it operationally necessary: scholarships cannot go to disqualified persons, which in practice means insiders and their families. Treasury’s proposed regulations draw that circle wide: officers, directors, and trustees; anyone who helps select recipients or set award amounts, including committee members and unpaid volunteers; substantial contributors; and the family members of all of them. There is no exception for blind or anonymized selection. For an existing nonprofit, the substantial-contributor test is the one to check: it reaches anyone who gave more than $5,000 in your taxable year if that was also more than 2% of your total contributions that year, tested across the whole organization and again within the §25F account, and it lasts for that year and the next. If your largest donors keep giving at that level, their families cannot receive awards. If your organization never adopted a policy, or adopted one nobody has seen since, adopt the IRS sample policy and collect signed annual disclosures from every director and selection committee member. More in our coverage of the disqualified-person rules.

4. A separate account for qualified contributions

The statute requires an SGO to maintain one or more separate accounts used exclusively for qualified contributions, with no co-mingling. “We track it in a fund in QuickBooks” is not what the statute describes. Open a real, dedicated account, authorize it by board resolution, and keep administrative money out of it. Under Treasury’s proposed regulations the account may hold only qualified contributions and their earnings, every gift a donor designates as a §25F contribution must be deposited into it (whether or not that donor ends up claiming the credit), and you keep a complete set of books and records for it. If you use the 85% safe harbor, this account is also what the 90% test is measured on. If you end up serving several states, the proposed regulations require a separate §25F account for each state that lists you, so build the habit now.

5. A board that can actually award scholarships

Because §25F bars awards to insiders and their families, a board whose members are related to each other, or to the families you intend to serve, makes the rule nearly impossible to honor. Under the proposed regulations, a director’s children, grandchildren, nieces, and nephews are all out, and a director or selection committee member stays disqualified through the end of the year after leaving, so rotating a parent off the board does not free their child for an award right away. Confirm you have at least three directors with no family or business ties among them, and recruit your selection committee with the same rule in mind. This is also the moment to check that your registered agent is current: stale agents are how corporations quietly get administratively dissolved.

The one board meeting

All five gaps close at a single properly noticed board meeting. The agenda is short:

  1. Approve the articles amendment (if yours needs one).
  2. Approve the bylaws amendment adding the §25F compliance article.
  3. Adopt the conflict-of-interest policy and collect the disclosures.
  4. Authorize opening the segregated account for qualified contributions, and name who can sign on it.
  5. Name the officer who will register the organization in the IRS SGO portal when it opens. Treasury’s temporary regulations require a contact who can legally bind the organization (or who holds a Form 2848 power of attorney), and ask organizations to register as soon as possible, preferably before appearing on any state list.
  6. Record the whole thing in minutes, and keep them in the permanent records book.

The builder’s meeting walkthrough scripts that agenda and drafts the minutes from your answers. It is written for a first organizational meeting, and it adapts to a retrofit cleanly: you are amending rather than adopting. If your board meets by video, the same page creates a signing link so directors sign the policy and disclosures electronically instead of chasing paper.

Have a lawyer read the amendments before you file them. Our templates were drafted from the statute and Treasury’s June 2026 preview, not adapted from lawyer-drafted precedent, because no §25F precedent exists yet. That makes them a strong starting draft and a poor substitute for counsel who knows your state’s nonprofit corporation act. Have counsel check them against the October 2026 proposed and temporary regulations before you adopt them. This is legal information, not legal advice.

Four organizations that need a different answer

  • Private foundations. §25F requires a public charity, full stop. Converting a foundation is a real legal project, so the practical path is usually funding or forming a separate public-charity SGO. Confirm your classification on your determination letter or in the IRS Tax Exempt Organization Search before planning anything.
  • Existing state STOs, SGOs, and SSOs. You are the best-positioned organizations in the country, and you still are not automatically federally listed. State program approval and §25F listing are separate processes with separate tests. The good news is the 85% test: state tax-credit scholarships count as scholarship granting, so an organization that already does little else will likely clear it and can run the 90% test on its §25F account. That matters, because Treasury’s analysis of Form 990 data found that existing state-program SGOs spent 78% of revenue on program-related expenses on average in fiscal year 2024, and 72% of them spent less than 90%. Clearing 85% does not finish the job, though. You still need the governing-document language, a separate §25F account, and the federal versions of rules your state program may handle differently: the disqualified-person rule (selection committee members included, no blind-selection exception), the residence rule (§25F scholarships go only to students who reside in the state that lists you, wherever they attend school), the 300% of area median gross income limit and its four verification methods, the payment rules, and the annual audit and certification.
  • A single school’s foundation. §25F requires scholarships to 10 or more students who do not all attend the same school. A foundation that exists to fund one school cannot satisfy that alone; it either broadens its awards or partners with a multi-school SGO. See what §25F means for private schools.
  • Organizations in states that have not opted in. Do the governance work anyway. Forming and getting listed are two different things: you can be fully §25F-ready in a state that has not joined. Treasury’s temporary regulations also settle the “located in the State” question: an organization is located in any state where it is authorized to do business and complies with that state’s general charity laws, with no headquarters or in-state staff required, and a participating state must list every qualifying organization located there that seeks inclusion. Kentucky’s July 2026 regulation, for example, already allowed foreign nonprofit entities with confirmed public-charity status to file its SGO declaration. Two limits apply. Scholarships from a state’s §25F account go only to students who reside in that state, so another state’s list does not let you fund students at home. And appearing on two or more states’ lists makes you a multistate SGO, which must clear the 85% activity test and keep a separate account for each state. Check where your state stands.

Cost and timeline

A retrofit is dramatically cheaper than a formation. There is no $600 IRS user fee, because there is no new exemption application. The real costs are a state amendment fee (commonly $25 to $150, and nothing if your articles already have the required clauses), an attorney review of the amendments, and staff time. The recurring cost to budget is the annual financial and programmatic audit in Treasury’s proposed regulations: an organization with more than $500,000 in total receipts (all receipts, not only the §25F account) must hire an external, independent professional; one at or under $500,000 may use a committee of independent people unrelated to management. See the audit rule.

The schedule is set by your own board calendar rather than by any agency: one meeting to vote, a few weeks for the state to process an amendment, an afternoon to open the account. What you cannot compress is the part that is not yours to control, which is your state’s §25F list process. Treasury’s temporary regulations, released October 1, 2026, require each state to file its 2027 advance election by January 1, 2027 (a state that misses it has no SGOs for 2027) and give states until February 15, 2027 to submit their 2027 lists, so every state’s 2027 application deadline falls on or before that date. Being finished before the window opens is the entire advantage of doing this in 2026.

Work it as a checklist

Reading the plan and executing it are different projects. The retrofit audit is this article as a live checklist: you tick what your organization already has, and each row tells you the §25F gap that item typically leaves open and exactly where to close it. Ticking a box there fills in the same checklist the from-scratch path uses, so when the retrofit is done you continue straight into the §25F operating rules, fundraising registration, and the state list without repeating yourself.

It is free, there is no paywall on any of it, and a free account saves your progress across devices and emails you when your state’s SGO process moves.

Frequently asked questions

Can an existing 501(c)(3) become an SGO without a new IRS application?

Yes. Your 501(c)(3) determination carries over (as long as you are a public charity, not a private foundation), and adding scholarship purposes does not require a new Form 1023 as long as the new language stays within 501(c)(3) exempt purposes. Before any paperwork, check the 85% activity test in Treasury's proposed regulations: it decides whether the 90% spending test applies to your §25F account or to everything you take in. The retrofit work after that is state-level (a certificate of amendment to your articles, if yours lack the required clauses) and internal governance (a bylaws amendment, a conflict-of-interest policy, and a segregated account), plus registration in the IRS SGO portal once it opens. What you cannot skip is the state list: §25F donations are creditable only if your organization appears on a participating state's list for that year.

Does the 90% rule apply to all of our income or only to §25F donations?

It depends on how much of your work is scholarships. Treasury's proposed regulations, released October 1, 2026, read 'income' as total gross receipts from all sources, on the cash method and unreduced by expenses, so an organization that runs other programs has to fit every non-scholarship dollar inside the same 10%. The exception is a safe harbor: if at least 85% of your activities are scholarship granting (counting the administration, fundraising, and compliance that support them), you measure the 90% test against your segregated §25F account instead, where income is the qualified contributions and earnings credited to that account. The proposal does not say how to measure 'activities' beyond that support rule; Treasury has asked for comments on it. That 85% line is the single most important number for an existing nonprofit.

We run other programs besides scholarships. Can we still be an SGO?

Only if scholarship granting is at least 85% of your activities, under Treasury's proposed regulations; then the 90% test runs on your segregated §25F account. Below that line, the 90% test applies to all your gross receipts and forces your other programs, along with all administration, into the 10% of income that does not have to go to scholarships, which usually breaks either the test or the program. To be listed in two or more states you must clear 85%, with no fallback. The cleaner path is a separate SGO entity: a new nonprofit whose only job is scholarships, with your existing organization continuing unchanged. Treasury acknowledges its rule may require forming new organizations, and its temporary regulations let a state list a new organization whose 501(c)(3) application is still pending, as long as the exemption, once granted, is effective on or before January 1 of the list year.

Our nonprofit is already an approved SGO in our state's own tax-credit program. Are we set?

You are the best-positioned kind of organization in the country, but state program approval is not federal §25F listing. State tax-credit scholarships count as scholarship granting under the 85% test, so a scholarship-focused state SGO will likely clear it and can run the 90% test on its §25F account. That matters because Treasury's own analysis of Form 990 data found that 72% of existing state-program SGOs spend less than 90% of revenue on program-related expenses. The gaps are more than paperwork, though: §25F language in your governing documents, a separate account used exclusively for qualified federal contributions, the federal disqualified-person rule (which covers selection committee members and has no blind-selection exception), the residence rule (scholarships from your §25F account go only to students who reside in the state that lists you), the 300% of area median gross income limit with the federal verification methods, the federal payment rules, and an annual audit and certification.

Can a private foundation become an SGO?

Not directly. §25F requires an organization described in 501(c)(3), exempt under 501(a), and not a private foundation. Converting a private foundation to public-charity status is a real legal project (termination or a 60-month conversion), so for most foundations the practical move is funding or forming a separate public-charity SGO. Check your determination letter or the IRS Tax Exempt Organization Search to confirm which you are before you plan anything else.

Do we need to amend our articles of incorporation?

Only if they are missing something. Read them for two things: a purpose clause limiting the organization to 501(c)(3) exempt purposes, and a dissolution clause dedicating assets to exempt purposes. Older articles frequently lack one or both. If a clause is missing, file a certificate of amendment with the same state office you incorporated through; it is usually a short form and a small fee.

When does the retrofit need to be finished?

Contributions made on or after January 1, 2027 can earn the credit, and only when made to organizations on a participating state's list for that year. Treasury's temporary regulations, released October 1, 2026, require a state to file its 2027 advance election by January 1, 2027 and give it until February 15, 2027 to submit its 2027 list, so the deadline you are actually working toward is your state's own application deadline, which falls on or before February 15. The governance work (articles, bylaws, policy, account, minutes) is entirely within your control and can be finished long before the window opens, which is the point of doing it now.