Federal Scholarship Tax Credit: Next Steps for SGOs

A new federal tax credit could create a meaningful funding opportunity for Scholarship Granting Organizations (SGOs) providing K-12 scholarships — but SGOs may need to act well before the credit becomes available.

Beginning in 2027, eligible taxpayers may claim a federal income tax credit of up to $1,700 for contributions to qualifying SGOs in participating states. Unlike a charitable deduction, the credit directly reduces federal income tax liability, which may make SGO contributions more attractive to donors.

As states opt in and Treasury prepares additional guidance, organizations considering SGO status should begin evaluating governance, operational, and compliance requirements now. Learn what’s new with the SGO opportunity and the steps your organization should take.

The SGO tax credit: Recent developments are accelerating implementation

Various IRS, Treasury, and Joint Commission on Taxation (JCT) updates have moved the federal SGO program closer to implementation.

• In late May 2026, JCT released its Blue Book, which provides additional insight into the credit’s operation.
• In June, the IRS announced more than half of U.S. states made an advance election to participate in the Federal Scholarship Tax Credit (FSTC) program for 2027.
• The U.S. Department of the Treasury expects to issue proposed regulations implementing the credit by the end of September 2026.

States, SGOs, and taxpayers are expected to be able to rely on the Treasury’s proposed regulations for the 2027 tax year.

The Federal Scholarship Tax Credit represents a significant opportunity

The Federal Scholarship Tax Credit offers a substantial benefit to eligible donors because it is a dollar-for-dollar federal tax credit, rather than merely a charitable deduction reducing taxable income.

The potential scale of the tax credit may be significant. A government projection estimates contributions to Scholarship Granting Organizations through the credit could reduce federal revenues by approximately $26 billion over the 10-year budget window, although actual participation and resulting revenue effects will depend on donor activity, state participation, and future implementation guidance.

Individual taxpayers may claim a federal tax credit of up to $1,700 annually for contributions to eligible SGOs. State tax credits generally reduce the available federal credit, while state deductions generally do not.

Key rules known about the SGO tax credit

The statute and JCT Blue Book provide guidance on many important issues. Among the key provisions:

• The credit is generally available only for cash contributions.
• Unused credits generally may be carried forward for up to five years.
• The annual credit limitation is $1,700 per tax return, and married taxpayers filing jointly aren’t entitled to a separate $1,700 credit for each spouse.
• Scholarship recipients generally must satisfy income eligibility requirements.
• SGOs must maintain safeguards against self-dealing and improper donor influence.

Treasury has previewed expanded reporting, recordkeeping, donor-substantiation, and audit requirements, although final requirements remain subject to forthcoming regulations.

Important questions that remain unresolved about the tax credit

Although Treasury has previewed several aspects of the forthcoming regulations, significant questions remain.

How will eligible educational expenses be addressed?

Treasury indicates additional guidance will address eligible educational expenses under the Coverdell Education Savings Account rules, which are incorporated into the SGO tax credit. Treasury says scholarships may be used to support a broad range of educational expenses, including tutoring, support services for students with disabilities, and afterschool enrichment programs.

However, questions remain regarding the full scope of eligible expenses, the treatment of various educational services and programs, and how these rules will be administered in practice. Additional Treasury guidance is expected.

What is the 90% scholarship spending requirement?

The tax credit rules require an SGO to spend at least 90% of its income on scholarships for eligible students, but Treasury hasn’t finalized how that requirement will operate in practice.

One significant issue is how an SGO can satisfy the requirement if substantial contributions are received during the final days or weeks of a tax year. Treasury has previewed a possible segregated-account safe harbor but hasn’t issued formal rules.

Can an SGO conduct other charitable activities?

The statute doesn’t expressly require an SGO to operate exclusively as a scholarship organization. Questions remain regarding whether an existing public charity may continue operating substantial non-scholarship programs while also serving as an SGO.

Do requirements apply to religious integrated auxiliaries?

Questions also remain regarding how certification, reporting, and compliance requirements will apply to religious integrated auxiliaries and other organizations generally not required to file Form 990 returns.

Treasury hasn’t specifically addressed whether organizations exempt from Form 990 filing requirements, such as certain religious integrated auxiliaries, will be subject to alternative reporting procedures for SGO purposes.

How are donor substantiation and reporting handled?

Treasury has previewed donor-substantiation and reporting requirements, including the potential use of IRS-issued donor identification numbers in lieu of Social Security numbers.

However, significant questions remain regarding the certifications and documentation donors will need to claim the credit, the information SGOs ultimately will be required to provide to the IRS, and the administrative compliance procedures. Treasury's forthcoming proposed regulations are expected to provide additional clarity.

What are the state certification requirements?

Participating states play a significant role in identifying eligible SGOs because only organizations included on a participating state's SGO list are eligible to receive contributions generating the federal tax credit. Organizations should also monitor IRS guidance on state participation, advance elections, and SGO list requirements as implementation continues.

In previewing the forthcoming proposed regulations, Treasury indicated an organization generally will be considered located in a participating state if it’s authorized to do business there and complies with generally applicable state charitable organization laws. Treasury further stated participating states may not impose substantive SGO-specific requirements more restrictive than the federal SGO tax requirements, although important implementation questions remain pending issuance of proposed regulations.

Current status of state implementation

Although more than half of the states have elected to participate in the program, state certification procedures remain under development, and approved SGO lists haven’t been broadly published.

Treasury indicated participating states will identify qualifying SGOs for inclusion on state SGO lists, but many states appear to be awaiting Treasury's expected September 2026 guidance before finalizing application and approval procedures. Organizations interested in becoming SGOs should closely monitor both federal developments and state-specific implementation efforts.

Steps organizations interested in SGO status should take now

Organizations considering SGO status should consider:

• Confirming public charity status and evaluating eligibility as an SGO
• Monitoring state certification developments in states that have opted into the program
• Reviewing scholarship governance, eligibility standards, and award procedures
• Establishing segregated accounting systems for qualified contributions
• Developing procedures to document student eligibility, scholarship awards, and compliance with future reporting requirements
• Monitoring Treasury's proposed regulations expected later in 2026

How CLA can help SGOs with the Federal Scholarship Tax Credit

The Federal Scholarship Tax Credit represents a significant opportunity for both donors and scholarship organizations serving K-12 students. However, key implementation questions remain.

Organizations that begin evaluating SGO eligibility, governance, scholarship procedures, and compliance requirements now can be better positioned to take advantage of the program once Treasury issues final guidance.

CLA's nonprofit professionals assist scholarship granting programs and donors with:

• Eligibility and structuring analysis
• Governance and policy review
• Federal and state reporting readiness
• SGO compliance planning
• Treasury guidance implementation
• Scholarship program documentation and internal controls

Contact us

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