A new tax credit boosts K-12 scholarships via SGOs, expanding private education access. Schools must navigate regulations and best practices.
What are SGOs and what’s changing?
The recently passed One Big Beautiful Bill Act (OBBBA) includes a new federal tax credit for contributions to scholarship granting organizations (SGOs) — nonprofit organizations whose primary mission is to provide scholarships to eligible K–12 students attending qualified private schools.
Under the new law:
- Individuals may claim a nonrefundable federal tax credit of up to $1,700 for cash contributions to SGOs.
- The credit is dollar-for-dollar against federal income tax liability.
- The amount allowed as a credit shall be reduced by any state credit allowed.
- Contributions cannot be earmarked for specific students.
- SGOs must operate in states that opt in to the program.
- Unused credits may be carried forward for up to five years.
- Starting for amounts received after December 31, 2026, scholarships for qualified elementary or secondary education expenses provided by SGOs to eligible students (or their dependents) will not be included in gross income for federal tax purposes.
- Qualified expenses are defined under Section 530(b)(3)(A), including tuition, fees, books, supplies, equipment, tutoring, and other supplementary services.
What are the requirements for SGOs?
To qualify, SGOs must:
- Be a 501(c)(3) organization exempt from tax under Section 501(a) and must not be a private foundation
- Operate exclusively within the state where donations are received
- Provide scholarships to 10 or more students who do not all attend the same school
- Eligible students must be a member of a household with income not greater than 300% of the area’s median gross income
- Eligible students must be eligible to enroll in a public elementary or secondary school
- Not co-mingle qualified contributions with other funds
- Allocate not less than 90% of revenue to scholarships for eligible students
- Avoid earmarking contributions to specific students
- Exclude board members and major donors from scholarship eligibility
Schools themselves may not qualify as SGOs unless they meet the “substantially all” test — meaning nearly all activities must relate to awarding scholarships. Most schools will need to partner with or create a separate nonprofit SGO.
How to create an effective SGO
If your school is considering launching an SGO, here are key steps:
- Establish a 501(c)(3) nonprofit with a mission focused on scholarship distribution.
- Set up financial infrastructure to enable fund segregation and audit readiness.
- Develop scholarship criteria and application processes aligned with AMGI thresholds.
- Build donor engagement tools — webpages, calculators, FAQs, and webinars.
Tips for strengthening your scholarship granting organization
- Transparency — Publish annual impact reports and scholarship metrics
- Compliance — Conduct regular reviews to promote adherence to federal and state rules
- Equity — Prioritize renewal students and siblings to maintain continuity
- Collaboration — Partner with other schools or community organizations to broaden reach
- Education — Host webinars and Q&A sessions with tax advisors to guide donors
SGO challenges to watch for
Despite the promise of SGOs, several challenges may arise:
- Regulatory uncertainty — Treasury guidance is pending, and state participation is still evolving.
- State participation — Only donors in “covered states” are eligible. Schools should monitor whether their state opts in and how SGOs are certified. The contributions must be used to fund scholarships for eligible students solely within the state in which the SGO is listed.
- Self-dealing risks — Schools must verify SGOs are fully independent to avoid disqualification.
- Operational complexity — Income verification, fund segregation, and scholarship tracking require strong systems.
- Donor behavior shifts — New tax rules may impact giving patterns, especially among small donors.
Given the requirement to grant scholarships to 10 individuals from different schools, it may not make sense for a school to create an SGO for the benefit of its students. However, associations, foundations, school support organizations, etc. may be interested in developing these programs or entities where multiple schools can benefit.
How CLA can help with tax credits and new laws
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 can position themselves to benefit from this new landscape — while delivering meaningful impact to families and communities.
CLA’s nonprofit professionals can help you assess the implications of these changes and develop strategies to adapt. If you'd like help drafting donor communications, setting up an SGO, or modeling tax scenarios, reach out to a CLA advisor.