IRS Guidance on Scholarship Granting Organizations and the §25F Tax Credit

The landscape for independent and private school scholarships is changing, thanks to new IRS guidance on scholarship granting organizations (SGOs) and the Section 25F tax credit.

If you’re a school leader, nonprofit professional, or donor, understanding these updates is essential for enhancing opportunities and enabling compliance.

What’s new: IRS Revenue Procedure 2026-6

The IRS released Revenue Procedure 2026-6, which outlines the exclusive process for states to make an “Advance Election” to become a “covered state” under Section 25F of the Internal Revenue Code. This election is a prerequisite for identifying SGOs and unlocking the new tax credit for donors beginning in 2027.

Why advance election matters

States that make an advance election can notify potential SGOs of their participation before submitting the official SGO list. This gives organizations more time to prepare for the new credit, build infrastructure, and engage donors ahead of the 2027 launch.

Understanding the Section 25F credit

Section 25F introduces a nonrefundable income tax credit for individuals who make qualified cash contributions to SGOs. To qualify: 

• The donor must be a U.S. citizen or resident 
• The SGO must use the funds to provide scholarships for eligible students within the state 
• The state must elect to participate and identify SGOs that meet statutory requirements for the applicable year

How states participate

States must submit a list of qualifying SGOs to the IRS, including a certification of authority from the submitting entity. For 2027, the list is due by January 1 (or as soon as practicable), with future IRS guidance expected to clarify submission procedures and deadlines.

The advance election process

To make an advance election for 2027, states must submit IRS Form 15714 between January 1, 2026, and the final submission date (to be specified). No alternative methods or attachments will be accepted. After making an advance election, the only subsequent submission allowed is the state SGO list with all required certifications.

Compliance and consequences

States that fail to submit their SGO list by the deadline will not have any qualifying SGOs for the 2027 calendar year. This makes timely compliance critical for schools and donors hoping to benefit from the new credit.

Practical implications for schools and nonprofits

SGO formation

To be eligible, an SGO must be established as a 501(c)(3) organization, have a mission focused on scholarship distribution. In setting up this SGO, it should draft compliant bylaws and set up robust financial systems. The SGO must be included on the annual list of eligible SGOs submitted each applicable year by the state in which the SGO is located.

Contributions will qualify for the federal credit if they are used to grant scholarships to students at public and private elementary schools located within their states.

A school will likely need to partner with a separately established SGO

SGOs must distribute scholarships to at least 10 students who do not all attend the same school and must meet other requirements under the tax law.

Qualified elementary or secondary education expenses

Qualifying expenses generally include tuition, fees, books, supplies, room and board, and supplementary items and services (including extended day programs) required or incurred in connection with enrollment or attendance as an elementary or secondary school student at a public, private, or religious school.

Recommended practices 

• Publish annual impact reports 
• Conduct regular compliance reviews 
• Prioritize equity in scholarship distribution

Challenges 

• Regulatory uncertainty remains as Treasury guidance is pending 
• The terms “public school” or “private school” are not defined
• Only donors in covered states are eligible, and SGOs must be fully independent to avoid disqualification 
• Operational complexity — income verification, fund segregation, and scholarship tracking — requires strong systems 
• States may impose other requirements on private schools at which these funds are used, such as meeting certain attendance requirements, teacher qualifications, or federal or state nondiscrimination requirements

Looking ahead

The SGO provision in the One Big Beautiful Bill Act offers a powerful opportunity to expand access to independent school education. With thoughtful planning and strategic execution, schools and nonprofits can position themselves to benefit from this new landscape — while delivering meaningful impact to families and communities.

How CLA can help you navigate IRS guidance

As the IRS and Treasury release further guidance, staying informed and proactive will be key. If you’re considering launching an SGO or want to understand how these changes affect your organization, consult with your tax advisors and monitor updates closely.

Note: The IRS also released Notice 2025-70, which was seeking comments on all aspects of the certification process. Although comments were due by December 26, 2025, there will still be consideration made for comments submitted after this date.