The enactment of Section 25F of the Internal Revenue Code—part of the One Big Beautiful Bill Act (P.L. 119-21)—is one of the most significant developments in education-related tax policy in a generation. Building on decades of state-level tax credit scholarship programs, Congress has established a federal framework that channels private philanthropic capital into K-12 scholarships through a new qualifying vehicle: the Scholarship Granting Organization (“SGO”). For schools, charities, and foundations invested in educational access, the moment calls for informed strategic planning.
What Section 25F Creates
Section 25F establishes a federal income tax credit of up to $1,700 per taxpayer per year for contributions to qualifying SGOs—organizations operated exclusively to provide scholarships to eligible K-12 students. To qualify, an SGO must be a 501(c)(3) public charity and must appear on a state-submitted list to the IRS. That state listing requirement is a threshold eligibility condition, not a formality: contributions to unlisted organizations do not qualify for the credit regardless of how the SGO otherwise operates.
Section 25F also preempts any conflicting state requirements for SGO operation, establishing a uniform federal baseline.
Student Eligibility and Scholarship Use
Scholarships may only be awarded to students eligible to enroll in public elementary or secondary schools whose household income does not exceed 300% of the area median gross income. Eligible expenses are broadly defined (tuition, fees, books, supplies, room and board, uniforms, transportation, and supplemental items and services including computer technology and internet access) though homeschooling expenses were excluded from the final legislation. SGOs bear the responsibility of verifying household income and family size for every applicant.
SGOs must also ensure that scholarships are used for qualified expenses and maintain documentation to substantiate each disbursement.
Key Operational Requirements
The structural demands on a qualifying SGO are exacting. At least 90% of the organization’s income must be spent on scholarships each year—a continuing condition of qualification, not an aspirational benchmark. Qualified contributions must be maintained in accounts entirely segregated from other organizational funds, with detailed recordkeeping and annual IRS reporting obligations whose precise contours are still being developed through rulemaking.
SGOs are also required to conduct independent financial audits annually to demonstrate compliance with these requirements.
Scholarships must be awarded to at least ten students who do not all attend the same school. A mandatory prioritization framework applies: prior-year recipients must be considered first, followed by siblings of current recipients, before the broader eligible pool may be served. Failure to follow this prioritization may result in loss of SGO status.
Anti-Abuse Rules
Two categories of anti-abuse rules demand particular attention. First, no contribution may be earmarked for a specific student—funds must flow into the general scholarship pool and be awarded on established criteria. Second, no scholarship may be awarded to a “disqualified person” such as encompassing founders, substantial contributors, officers, directors, and their family members. Organizations with donor-heavy governance structures must map their disqualified person universe carefully before committing to an SGO structure.
Additionally, SGOs must implement conflict-of-interest policies and disclose any potential conflicts in their annual filings.
What This Means to You
The regulatory landscape under Section 25F remains unsettled—IRS guidance is pending, state listing processes are still forming, and penalty frameworks are not yet finalized. Organizations that engage deliberately now, before compliance expectations harden, will be best positioned to participate effectively. We invite you to reach out to discuss how this framework applies to your specific circumstances.