Proposed Rule2026-20277
Federal Scholarship Tax Credit
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
October 2, 2026
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains proposed regulations regarding the nonrefundable Federal tax credit for qualified contributions to scholarship granting organizations to fund qualified elementary and secondary school education scholarships. The proposed regulations would affect taxpayers who make such qualified contributions, States that elect to participate by certifying organizations as scholarship granting organizations, and the organizations that have been certified as scholarship granting organizations by one or more electing States. This document also provides notice of a public hearing on the proposed regulations.
Full Text
<html>
<head>
<title>Federal Register, Volume 91 Issue 190 (Friday, October 2, 2026)</title>
</head>
<body><pre>
[Federal Register Volume 91, Number 190 (Friday, October 2, 2026)]
[Proposed Rules]
[Pages 62818-62868]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-20277]
[[Page 62817]]
Vol. 91
Friday,
No. 190
October 2, 2026
Part II
Department of the Treasury
-----------------------------------------------------------------------
Internal Revenue Service
-----------------------------------------------------------------------
26 CFR Part 1
Federal Scholarship Tax Credit; Proposed Rule
Federal Register / Vol. 91, No. 190 / Friday, October 2, 2026 /
Proposed Rules
[[Page 62818]]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-117199-25]
RIN 1545-BR97
Federal Scholarship Tax Credit
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and public hearing.
-----------------------------------------------------------------------
SUMMARY: This document contains proposed regulations regarding the
nonrefundable Federal tax credit for qualified contributions to
scholarship granting organizations to fund qualified elementary and
secondary school education scholarships. The proposed regulations would
affect taxpayers who make such qualified contributions, States that
elect to participate by certifying organizations as scholarship
granting organizations, and the organizations that have been certified
as scholarship granting organizations by one or more electing States.
This document also provides notice of a public hearing on the proposed
regulations.
DATES: Written or electronic comments must be received by December 1,
2026. The public hearing is being held on Tuesday, December 15, 2026,
at 10 a.m. Eastern Time (ET). Requests to speak and outlines of topics
to be discussed at the public hearing must be received by December 1,
2026. If no outlines are received by December 1, 2026, the public
hearing will be cancelled. Requests to attend the public hearing must
be received by 5 p.m. ET on Thursday, December 10, 2026.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically via the Federal eRulemaking Portal at <a href="https://www.regulations.gov">https://www.regulations.gov</a> (indicate IRS and REG-117199-25) by following the
online instructions for submitting comments. Once submitted to the
Federal eRulemaking Portal, comments cannot be edited or withdrawn. The
Department of the Treasury (Treasury Department) and the IRS will
publish for public availability any comments submitted to the IRS's
public docket. Send paper submissions to: CC:PA:01:PR (REG-117199-25),
Room 5503, Internal Revenue Service, P.O. Box 7604, Ben Franklin
Station, Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Constance Chien, (202) 317-7002, or Andrew Fahmy, (202) 317-3840;
concerning the submission of comments, the public hearing, and to be
placed on the building access list to attend the public hearing,
Publications and Regulations Section, (202) 317-6901 (not toll-free
numbers) or by email at <a href="/cdn-cgi/l/email-protection#b4c4c1d6d8ddd7dcd1d5c6dddad3c7f4ddc6c79ad3dbc2"><span class="__cf_email__" data-cfemail="126267707e7b717a7773607b7c7561527b60613c757d64">[email protected]</span></a> (preferred).
SUPPLEMENTARY INFORMATION:
Authority
This document contains proposed additions to 26 CFR part 1 (Income
Tax Regulations) addressing the application of the credit available for
qualified contributions under section 25F of the Internal Revenue Code
(Code),\1\ as added by section 70411 of Public Law 119-21, 139 Stat. 72
(July 4, 2025), commonly known as the One, Big, Beautiful Bill Act
(OBBBA).
---------------------------------------------------------------------------
\1\ Unless otherwise indicated, all section references are to
the Internal Revenue Code or the Treasury Regulations issued
thereunder.
---------------------------------------------------------------------------
The proposed regulations are issued under section 25F(h), which
expressly delegates authority to the Secretary of the Treasury or the
Secretary's delegate (Secretary) to issue such regulations or other
guidance as the Secretary determines necessary to carry out the
purposes of section 25F, including regulations or other guidance (1)
providing for enforcement of the requirements under section 25F(d) and
(g), and (2) with respect to recordkeeping or information reporting for
purposes of administering the requirements of section 25F. The proposed
regulations also are issued under the express delegation of authority
in section 7805(a) of the Code, which authorizes the Secretary to
prescribe all needful rules and regulations for the enforcement of the
Code, including all rules and regulations as may be necessary by reason
of any alteration of law in relation to internal revenue.
Background
I. Overview
As added by section 70411(a) of the OBBBA, the nonrefundable income
tax credit under section 25F (section 25F credit) is allowed to an
individual who is a citizen or resident of the United States (within
the meaning of section 7701(a)(9)) who makes qualified contributions to
scholarship granting organizations. For purposes of the section 25F
credit, section 25F(c)(5) defines a ``scholarship granting
organization'' (SGO) as any organization that (1) is a public charity,
(2) prevents the co-mingling of qualified contributions with other
amounts by maintaining separate accounts, (3) satisfies each of the
requirements of section 25F(d), and (4) is included on the list
submitted for the applicable covered State under section 25F(g) for the
applicable year. Section 25F(c)(3) defines a ``qualified contribution''
as a charitable contribution of cash to an SGO that uses the
contribution to fund scholarships for eligible students (as defined in
section 25F(c)(2)) solely within the covered State in which the SGO is
listed pursuant to section 25F(g). Section 25F(c)(1) defines a
``covered State'' as ``one of the States, or the District of
Columbia,'' that, for a calendar year, voluntarily elects to
participate under section 25F and to identify the SGOs located in the
State, in accordance with section 25F(g). In order for a contribution
made by a taxpayer to an organization in a covered State to be a
qualified contribution eligible for a section 25F credit, among other
requirements, section 25F requires the State to have identified the
organization as an SGO that satisfies the requirements of section
25F(c)(5) for the applicable calendar year. Pursuant to section
70411(c)(1) of the OBBBA, the provisions of section 25F apply to
taxable years ending after December 31, 2026.
Additionally, for taxable years ending after December 31, 2026,
section 139K, as added by section 70411(b) of the OBBBA, excludes from
the gross income of individuals or their dependents any amounts
received after December 31, 2026, pursuant to SGO-provided scholarships
for qualified elementary or secondary education expenses of eligible
students. See section 70411(c)(2) of the OBBBA.
II. Amount of Section 25F Credit
Section 25F(a) provides that an individual's credit against the tax
imposed by chapter 1 for the taxable year is an amount equal to the
aggregate amount of qualified contributions made by the taxpayer during
the taxable year. Section 25F(b) provides that the amount of the
section 25F credit allowed to a taxpayer for a taxable year is subject
to a reduction and limitation. Section 25F(b)(2) provides that the
amount allowed as a section 25F credit for a taxable year is reduced by
the amount allowed as a credit on any State tax return of the taxpayer
for qualified contributions made by the taxpayer during the taxable
year. Section 25F(b)(1) provides that the amount of the section 25F
credit allowed to any taxpayer for any taxable year may not exceed
$1,700. In addition, section 25F(e) prohibits a double benefit to a
taxpayer by providing that any qualified
[[Page 62819]]
contribution for which a section 25F credit is allowed cannot be taken
into account as a charitable contribution for purposes of section 170.
Section 25F(f) provides for the carryforward of unused section 25F
credit amounts. Section 25F(f)(1) provides that, if the section 25F
credit allowable for any taxable year exceeds the limitation imposed by
section 26(a) for such taxable year reduced by the sum of the credits
allowable under sections 21, 22, 24, 25, 25A, 25B, 25C, and 25E, such
excess is carried to the succeeding taxable year and added to the
credit allowable under section 25F(a) for such taxable year. However,
section 25F(f)(2) provides that no credit may be carried forward under
section 25F(f) to any taxable year following the fifth taxable year
after the taxable year in which the credit arose. For this purpose,
section 25F(f) provides that section 25F credits are treated as used on
a first-in, first-out basis.
III. Requirements for Scholarship Granting Organizations
An organization can qualify as an SGO only if it satisfies each
requirement in section 25F(c)(5). Under section 25F(c)(5), the
organization must:
(1) Be described in section 501(c)(3), be exempt from tax under
section 501(a), and not be a private foundation;
(2) Prevent the co-mingling of qualified contributions with other
amounts by maintaining one or more separate accounts exclusively for
qualified contributions;
(3) Satisfy each of the requirements of section 25F(d); and
(4) Be included on the list submitted under section 25F(g) for the
applicable year by the covered State in which the organization is
located.
The requirements in section 25F(d) referred to in section
25F(c)(5)(C) that an SGO also must satisfy are as follows:
(1) Provide scholarships to 10 or more students who do not all
attend the same school;
(2) Spend not less than 90 percent of its income on scholarships
for eligible students (90 percent of income spending requirement);
(3) Provide scholarships only for qualified elementary or secondary
education expenses described in section 530(b)(3)(A) (relating to
Coverdell education savings accounts) of an eligible student;
(4) Provide scholarships to eligible students with a priority for:
(a) Students awarded a scholarship the previous school year, and
thereafter;
(b) Any eligible students who have a sibling who was awarded a
scholarship from such organization;
(5) Not earmark or set aside contributions for scholarships on
behalf of any particular student;
(6) Verify the annual household income and family size of eligible
students who apply for scholarships to ensure such students meet the
area median gross income requirement of section 25F(c)(2)(A) (defining
area median gross income ``as such term is used in section 42''), and
limit the awarding of scholarships to eligible students who are members
of a household for which the income does not exceed the amount
established under section 25F(c)(2)(A); and
(7) Not award a scholarship to any disqualified person, as
determined pursuant to rules similar to the rules of section 4946
(relating to private foundations).
IV. State List of Scholarship Granting Organizations
Section 25F(g)(1)(A) provides that, not later than January 1 of
each calendar year (or, with respect to the 2027 calendar year, as
early as practicable), a State that voluntarily elects to participate
under section 25F must provide to the Secretary a list of the SGOs that
meet the requirements described in section 25F(c)(5) and are located in
the State. A State's participation under section 25F allows SGOs
located in the State and therefore included on the State SGO list to
receive qualified contributions for which individuals may be eligible
to claim a section 25F credit.
Section 25F(g)(1)(B) provides that the election under section
25F(g) must be made by the Governor of the State or by such other
individual, agency, or entity as is designated under State law to make
such elections on behalf of the State with respect to Federal tax
benefits.
Section 25F(g)(2) provides that the State SGO list submitted under
section 25F(g)(1)(A) must include a certification that the individual,
agency, or entity submitting such list on behalf of the State has the
authority to perform this function.
V. Prior Guidance Relating to the Section 25F Credit
The Treasury Department and the IRS have issued preliminary
guidance with respect to the section 25F credit. On November 25, 2025,
the Treasury Department and the IRS issued Notice 2025-70, 2025-50
I.R.B. 773, to request comments regarding issues arising under section
25F that should be addressed in guidance, including issues on which
guidance is most quickly needed, such as issues relating to the annual
certification by a State as well as SGO requirements.
On December 12, 2025, the Treasury Department and the IRS issued
Rev. Proc. 2026-6, 2026-2 I.R.B. 314, to provide the exclusive
procedure for a State to make an election during 2026 to be a ``covered
State'' prior to identifying SGOs in the State in accordance with
section 25F(g).
VI. Public Feedback Received
The Treasury Department and the IRS have received feedback from
taxpayers, tax professionals, and other stakeholders regarding section
25F, including feedback received in response to Notice 2025-70. These
proposed regulations are informed by these responses. The major areas
with respect to which public stakeholders provided feedback are
discussed in the following Explanation of Provisions.
Explanation of Provisions
I. Definitions
Proposed Sec. 1.25F-1(a) would provide definitions of terms
generally applicable for purposes of applying section 25F and
Sec. Sec. 1.25F-0 through 1.25F-5 (section 25F regulations), including
certain defined terms for which additional context is provided in this
part of the Explanation of Provisions.
As noted in part IV of the Background section of this preamble,
section 25F(g)(1)(A) states that an electing State must provide a list
of the SGOs that meet the requirements described in section 25F(c)(5)
and are located in the State. Many stakeholders suggested that
``located in the State'' should mean registered to do business in the
State and in compliance with otherwise applicable State laws for
nonprofit organizations. Some of these stakeholders stated that
requiring physical headquarters or in-State staff would be unnecessary,
inconsistent with existing State tax credit programs, and would
significantly hinder effective multistate SGOs that are well-positioned
to deliver scholarships at scale.
Other stakeholders stated that an SGO should be required to have a
physical presence in the State if required by State law, arguing that
``located in the State'' straightforwardly means headquartered in the
State, rather than simply being authorized or registered to solicit
donations there. These stakeholders stated that the phrase ``located in
the State'' appears in more than 90 sections of the U.S. Code and that
none could be read to mean ``authorized to operate.'' Many of these
stakeholders expressed the concern that allowing large multistate SGOs
to be located in a State
[[Page 62820]]
where they did not have a physical presence might limit a State's
ability to implement its educational policies.
Proposed Sec. 1.25F-1(a)(10) would, for purposes of section 25F,
define an organization as ``located in a State'' if the organization is
authorized to do business in the State and is in compliance with the
generally applicable State laws and requirements for charitable
organizations in the State, including provisions for transparency,
accountability, and fraud prevention.\2\ The Treasury Department and
the IRS have determined that this definition is consistent with the
legislative purpose of section 25F to increase access to scholarship
funds.
---------------------------------------------------------------------------
\2\ However, proposed Sec. 1.25F-5(e)(2) would prohibit covered
States from imposing requirements on SGOs that are more restrictive
than the requirements in section 25F(c)(5).
---------------------------------------------------------------------------
Proposed Sec. 1.25F-1(a)(12) would provide that a ``qualified
contribution'' is a charitable cash contribution made by an individual
to an SGO to the extent it is designated as such by the donor at the
time of contribution. If the SGO provides any goods or services as
consideration for any part of the contribution, then the value of those
goods and services must be subtracted from the amount of the charitable
contribution to arrive at the amount of the qualified contribution.
For this purpose, the term ``cash'' would mean physical currency,
check, money order, electronic transfer (including, for example, by
credit or debit card), after-tax payroll deduction, or other similar
method, in each case all in U.S. dollars, but would not include any
digital assets.
Under this proposed rule, the donor would be required to designate
to the recipient SGO, at the time of making the contribution, that the
contribution is intended to be a qualified contribution, which would
require the SGO to deposit the contribution into the SGO's section 25F
segregated account as part of the SGO's compliance with sections
25F(c)(3) and 25F(c)(5)(B) and proposed Sec. 1.25F-3(b)(2) or (c)(3)
(as applicable, for single-State SGOs and multistate SGOs,
respectively). If the SGO is a multistate SGO, the donor would be able
to direct the recipient SGO to allocate the qualified contribution to
the multistate SGO's section 25F segregated account for any of the
covered States on whose State SGO list the SGO appears. Once a
qualified contribution has been deposited into an SGO's section 25F
segregated account, the SGO must use the funds in accordance with the
operational requirements in section 25F(d) and proposed Sec. 1.25F-
3(c) to maintain its status as an SGO.
In response to Notice 2025-70, stakeholders asked that SGOs be
allowed to verify that scholarships are spent on qualified elementary
or secondary education expenses by using a third-party vendor that
verifies the expenses and prevents duplication, which stakeholders
referred to as a digital wallet. These proposed regulations would allow
the use of a qualified digital wallet to establish that the SGO
verified that scholarships are spent on qualified elementary or
secondary education expenses. Proposed Sec. 1.25F-1(a)(13) would
define a ``qualified digital wallet'' as an electronic payment platform
in which a third-party provider provides a streamlined interface for
managing the administration of section 25F scholarships by having
eligible students and their families submit purchase requests, by
tracking approved expenses, and by maintaining controls to ensure that
all payments are made for qualified elementary or secondary education
expenses by pre-approving vendors and paying vendors directly or
requiring timely submission of receipts. The Treasury Department and
the IRS request comments on this definition of qualified digital wallet
and whether additional safe harbors for verification that scholarships
are spent on qualified elementary or secondary education expenses
should be included in the final regulations.
Section 25F(c)(4) provides that a ``qualified elementary or
secondary education expense'' is any expense of an eligible student
that is described in section 530(b)(3)(A), which describes such
qualified expenses as being related to elementary or secondary school
enrollment or attendance. Section 530(b)(3)(B) provides that the term
``school'' means any school that provides elementary education or
secondary education (kindergarten through grade 12), as determined
under State law. In addition, section 25F(c)(2) states that an
``eligible student'' must, among other things, be eligible to enroll in
a public elementary or secondary school, and section 25F(d) requires an
SGO to provide scholarships to 10 or more students who do not all
attend the same school.
Section 25F(c)(5) provides that a scholarship granting organization
is any organization described in section 501(c)(3), exempt from tax
under section 501(a), and not a private foundation, which prevents the
co-mingling of qualified contributions with other amounts by
maintaining one or more separate accounts exclusively for qualified
contributions; satisfies each of the requirements of section 25F(d);
and is included on the list submitted under section 25F(g) for a
particular calendar year by the covered State in which the organization
is located.
Proposed Sec. 1.25F-1(a)(16) would provide that a ``scholarship
granting organization'' or ``SGO'' is an organization as defined in
section 25F(c)(5) and proposed Sec. 1.25F-3(b). Accordingly, donations
made to an organization that generates State tax credits may or may not
give rise to a section 25F credit, depending on whether the
organization separately satisfies the Federal tax law requirements to
be an SGO for purposes of the section 25F credit. For example, a
contribution to an organization that qualifies for State tax credits
but is not included on the State SGO list, as would be defined in
proposed Sec. 1.25F-1(a)(24), of one or more covered States in which
the SGO is located, does not give rise to the section 25F credit.
Notice 2025-70 recognized that organizations may fundraise and
award scholarships in more than one State and distinguished an
organization that is located in only one State (single-State
organization) from one that is located in more than one State
(multistate organization). The proposed regulations would continue this
distinction in proposed Sec. 1.25F-1(a)(20), defining a ``single-State
SGO'' as an organization that is included on the State SGO list of only
one covered State, and proposed Sec. 1.25F-1(a)(11), defining a
``multistate SGO'' as an SGO that is included on the State SGO list of
more than one covered State.
Although proposed Sec. 1.25F-5(e)(2) would clarify that a State
may not narrow the required elements of an SGO as described in section
25F(c)(5) and proposed Sec. 1.25F-3(b) and (c), any particular SGO may
narrow its own focus and adopt more stringent requirements than those
applicable under section 25F. For example, an SGO may choose to limit
its scholarships for qualified elementary and secondary education
expenses to specific subject matter areas such as science or foreign
languages, or to students whose household income is less than 80
percent of the area median gross income, provided that the SGO meets
the statutory and regulatory requirements for SGOs. The Treasury
Department and the IRS assume that SGOs will publicize their particular
missions, the scope of their scholarships for eligible students, and
their successes in achieving better student outcomes in order to
attract more qualified
[[Page 62821]]
contributions from taxpayers supportive of their mission.
Stakeholders requested clarification regarding the meaning of the
term ``school'' for purposes of section 25F. Section 25F does not
define the term ``school'' or separately cross-reference the definition
in section 530(b)(3)(B). Section 25F(c)(4), however, defines a
``qualified elementary or secondary education expense'' as any expense
of an eligible student that is described in section 530(b)(3)(A). Each
of the three categories of expenses described in section 530(b)(3)(A)
depends on the student's enrollment or attendance at, or otherwise
being in, a school. For purposes of section 530(b)(3), section
530(b)(3)(B) defines ``school'' as any school that provides elementary
education or secondary education (kindergarten through grade 12), as
determined under state law. Accordingly, the definition in section
530(b)(3)(B) applies in determining whether an expense is described in
section 530(b)(3)(A) and therefore is a qualified elementary or
secondary education expense under section 25F(c)(4).
Section 25F(d)(1)(A) also uses the term ``school'' in requiring an
SGO to provide scholarships to 10 or more students who do not all
attend the same school. To provide a consistent rule for purposes of
both section 25F(c)(4) and section 25F(d)(1)(A), these proposed
regulations provide that the term ``school'' has the meaning given in
section 530(b)(3)(B).
The requirement in section 25F(c)(2)(B) that an eligible student be
eligible to enroll in a public elementary or secondary school is
distinct from the requirement that an SGO provide scholarships only for
qualified elementary or secondary education expenses. The definition of
eligible student does not itself require that the student be enrolled
in or attending a school at the time of the scholarship application or
award. However, an expense is a qualified elementary or secondary
education expense only if it satisfies section 530(b)(3)(A), including
the applicable connection to a school described in section
530(b)(3)(B). For example, a student who is eligible to enroll in a
public school may receive a scholarship during the summer before the
school year begins and incur qualified elementary or secondary
education expenses in connection with enrollment in a school later that
year.
The Treasury Department and the IRS have received many comments
requesting guidance under section 530(b)(3) that will clarify the
meaning of qualified expenses and schools and intend to issue that
guidance as soon as possible so that taxpayers may rely on it.
II. Federal Scholarship Tax Credit for Qualified Contributions
A. In General
Generally, an individual taxpayer who is a United States citizen or
a resident of the United States (as would be defined in proposed Sec.
1.25F-1(a)(15)) is allowed a nonrefundable credit against the tax
imposed for the taxable year by sections 1 and 55(a) for qualified
contributions made by the taxpayer to an SGO during that taxable year.
The amount of the credit allowed for a taxable year generally is equal
to the aggregate amount of qualified contributions made by the taxpayer
during any period of that taxable year in which the taxpayer is a
United States citizen or resident of the United States, reduced (but
not below zero) by the amount of any State credits claimed for such
qualified contributions, and subject to a cap of $1,700. As a
nonrefundable credit, the section 25F credit claimed in a particular
year cannot exceed the tax liability of the individual taxpayer for
that year. Any unused credit may be carried forward for up to five
years. In addition, any qualified contribution for which a credit is
allowed under section 25F may not be taken into account as a charitable
contribution for purposes of section 170.
In making a contribution to claim a credit under section 25F, a
taxpayer may contribute to any SGO without regard to the taxpayer's
residence and may rely on the donee organization's presence on the IRS
SGO list (and not listed as removed from that list) at the time of the
contribution to establish that the organization is an SGO, regardless
of which covered States included the organization on their respective
State SGO lists. For example, a taxpayer residing in State X may
contribute to an SGO in State Y so long as the SGO is on State Y's SGO
list. See proposed Sec. 1.25F-2(b), described in part II.E. of this
Explanation of Provisions.
B. Meaning of the Word ``Taxpayer'' in Section 25F(a) and (b)
Section 25F(a) provides that an ``individual'' who is a citizen or
resident of the United States may claim a credit based on an amount
equal to the aggregate amount of qualified contributions ``made by the
taxpayer.'' Section 25F(b) further provides that (1) the section 25F
credit allowed to ``any taxpayer'' for any taxable year ``shall not
exceed $1,700'' and (2) the amount of the allowed section 25F credit
``shall be reduced by the amount allowed as a credit on any State tax
return of the taxpayer for qualified contributions made by the taxpayer
during the taxable year.''
C. Married Taxpayers Filing Jointly
A significant number of stakeholders requested that the term
``taxpayer'' in section 25F(a) and (b) be applied separately to each
spouse filing a joint return, which the stakeholders asserted would
allow a married couple a combined section 25F credit of up to $3,400 on
a joint return.
These stakeholders observed that the Code and regulations
thereunder have long recognized that a joint return consists of two
taxpayers, absent express statutory language to the contrary.
Generally, the Code specifies whether a dollar limitation for a credit
or deduction differs based on filing status. See, e.g., sections 22(c)
(specifying credit amounts for single individuals, joint filers, and
married taxpayers filing separately), 36(b)(1) (providing a first-time
homebuyer credit of up to $8,000 or $4,000 for married taxpayers filing
separately), and 164(h)(6)(B) (2018) (limiting the deduction for State
and local taxes to $10,000 or $5,000 for married filing separately).
However, the Code does not always provide for a dollar limitation based
on filing status. Moreover, the term taxpayer for purposes of the Code
is defined as ``any person subject to any internal revenue tax,'' and
person is defined to include ``an individual.'' Section 7701(a)(1) and
(14).
The Treasury Department and the IRS interpret section 25F to limit
the credit amount that may be claimed to $1,700 per individual
taxpayer, allowing married couples filing jointly to potentially claim
up to $3,400 on their joint tax return provided that each spouse has
made qualified contributions of up to $1,700. This interpretation is
consistent with other instances in which a joint return is treated as
consisting of two individual taxpayers. See, e.g., Treas. Reg. Sec.
1.151-1(b) (``Since, in the case of a joint return, there are two
taxpayers (although under section 6013 there is only one income for the
two taxpayers on such return, i.e., their aggregate income), two
exemptions are allowed on such return, one for each taxpayer
spouse.''); Sec. 1.6013-4(b) (``Although there are two taxpayers on a
joint return, there is only one taxable income.''). The statutory
language of ``any taxpayer'' without any limitation in section 25F also
implies the broadest interpretation and is consistent with how the term
taxpayer is defined in section 7701(a).
[[Page 62822]]
D. Contributions From Partnerships and S Corporations
The Treasury Department and the IRS interpret the language of
section 25F(a) to limit the section 25F credit to individuals making
qualified contributions directly to one or more SGOs, rather than
through one or more entities. The language used in section 25F(a),
including the references to both ``individual'' and later ``taxpayer,''
is consistent with the language used in other individual income tax
credit provisions in the Code and does not mean that the person making
the qualified contribution is intended to differ from the person
claiming the credit. See sections 23(a)(1), 25C(a), and 25D(a). This
interpretation is consistent with the purpose of section 25F, which is
to provide a credit for qualified contributions made by individuals.
Thus, proposed Sec. 1.25F-2(a)(3) would provide that, although a
partnership or S corporation's contribution to an SGO may be treated as
a separately stated charitable contribution under section 170 and
deductible under section 170 by the partner or S corporation
shareholder, that contribution is not a qualified contribution made by
the partner or S corporation shareholder for purposes of section 25F.
Therefore, a partner may not take into account such partner's
distributive share of the partnership's charitable contributions to an
SGO in determining the amount of the partner's qualified contributions
under section 25F. Similarly, a shareholder of an S corporation may not
take into account such shareholder's pro rata share of the S
corporation's charitable contributions to an SGO in determining the
amount of the shareholder's qualified contributions under section 25F.
E. Reliance on SGO Status
Section 25F(c)(3) requires a qualified contribution to be, among
other things, made to a ``scholarship granting organization.'' Proposed
Sec. 1.25F-2(b) would establish a reliance rule, providing that, in
order to ensure that a taxpayer's contribution is being made to an SGO,
the taxpayer generally may rely on the IRS SGO list at the time the
qualified contribution is made. However, to prevent situations in which
a taxpayer could abuse this grant of reliance, proposed Sec. 1.25F-
2(b) also would provide that such reliance is not available to a
taxpayer if the taxpayer (1) had knowledge that the recipient
organization did not satisfy the requirements of section 25F(c)(5) and
Sec. 1.25F-3(b) at the time of the contribution; or (2) was at least
in part responsible for, or was aware of, the act, the failure to act,
or the substantial and material change on the part of the organization
that gave rise to the removal of the organization from the IRS SGO list
after the date of the taxpayer's contribution.
F. Calculation of the Section 25F Credit
Section 25F(b) limits the section 25F credit allowed by both the
amount allowed as a credit on any State tax return of the taxpayer for
qualified contributions made by the taxpayer during the taxable year
and by a $1,700 annual limitation.
Many stakeholders requested guidance on how to apply the reduction
for the amount allowed as a State tax credit for such contributions.
Stakeholders identified various possible options, including requiring
taxpayers to make separate contributions for State and Federal credits.
Some stakeholders requested that taxpayers be allowed to take advantage
of both State and Federal tax credits in a way that would not reduce
the benefit of either credit.
Section 25F(a) describes the taxpayer's credit allowed as the total
``amount of qualified contributions made by the taxpayer during the
taxable year,'' before the application of any limitations under section
25F(b). Although the statute includes the $1,700 limitation in section
25F(b)(1) and the State credit reduction in section 25F(b)(2), the
Treasury Department and the IRS do not interpret this ordering of the
provisions as reflecting an intent to apply the $1,700 limitation to
the amount of a taxpayer's qualified contributions before application
of the State credit reduction. Such an interpretation would, for
example, limit a taxpayer's section 25F credit for a $2,500 qualified
contribution for which the taxpayer claims a $500 State credit to
$1,200 (that is, $1,700 in creditable qualified contributions after
application of the section 25F(b)(1) limitation less the $500 State
credit after the subsequent application of the State credit reduction
in section 25F(b)(2)).
The Treasury Department and the IRS view the State credit reduction
as intended to prevent a taxpayer from receiving combined Federal and
State tax benefits exceeding the value of the taxpayer's qualified
contributions. It is not otherwise intended to limit the section 25F
credit for taxpayers in States that currently provide State credits for
their qualified contributions, which would discourage those States from
continuing to provide a State tax incentive that would significantly
reduce an available Federal tax incentive. Because the Treasury
Department and the IRS interpret section 25F(b) as limiting the credit
to $1,700 only after applying the State credit reduction, proposed
Sec. 1.25F-2(a) and (c)(1) would clarify that the amount of the
taxpayer's qualified contributions is reduced by the amount of State
credits for such qualified contributions before applying the $1,700
limitation.
Proposed Sec. 1.25F-2(c)(1) would provide that the section 25F
credit for qualified contributions is the lesser of the following two
amounts:
(1) The aggregate amount of the taxpayer's qualified contributions
for the taxable year made while the taxpayer was a United States
citizen or a resident of the United States reduced (but not to below
zero) by the sum of any State credits with regard to those qualified
contributions; or
(2) $1,700.
In general, the following steps would be performed to calculate a
taxpayer's section 25F credit: first, the taxpayer determines the
aggregate amount of the taxpayer's qualified contributions for the
taxable year; second, subtract from that amount the sum of any State
credits that were allowed with regard to those qualified contributions;
and third, determine the lesser of $1,700 or the amount computed in the
second step. In computing the State credits in the second step
described in the preceding sentence, only the credits allowed based on
qualified contributions would be taken into account; any credit allowed
for a contribution that is not a qualified contribution would not be
taken into account.
Because a taxpayer may be allowed a State credit for a contribution
that includes both a qualified contribution and an amount that is not
designated as a qualified contribution, proposed Sec. 1.25F-2(c)(2)
would provide that, for purposes of that second step, a State credit is
treated as being allowed first from the donor's contributions that are
not qualified contributions, and only thereafter from the donor's
qualified contributions. This ordering rule preserves the maximum
amount of qualified contributions available for a section 25F credit.
Because proposed Sec. 1.25F-1(a)(22) would define a State credit
as any tax credit offered by a State for making a contribution to an
SGO that is allowed (as defined in Sec. 1.25F-1(a)(22)) on the
taxpayer's State tax return, the allowance of a deduction (as opposed
to a credit) for State income tax purposes generally would not affect
the amount of the section 25F credit.
Although section 25F(e) and proposed Sec. 1.25F-2(f) provide that
a qualified contribution for which a credit is
[[Page 62823]]
allowed under section 25F may not be taken into account as a charitable
contribution for purposes of section 170, the portion of a qualified
contribution not taken into account in determining the section 25F
credit may be deductible as a charitable contribution if such
contribution meets the requirements of section 170 and the regulations
thereunder.
G. Tax Liability Limitation
Section 25F(a) provides that the section 25F credit is allowed
against ``the tax imposed by this chapter for the taxable year,'' and
section 25F(f) clarifies that the credit allowable for any taxable year
may not exceed the limitation imposed by section 26(a) for such taxable
year, reduced by the sum of the credits allowable under subpart A
(other than sections 25F, 23, and 25D).
Proposed Sec. 1.25F-2(d) would clarify that the credit allowed
under section 25F for a taxable year may not exceed the taxpayer's tax
liability as defined in section 26(a), based on the tax imposed for
such taxable year as reduced by the sum of the nonrefundable personal
credits that may not be carried forward (specifically, the credits
allowed under sections 21, 22, 24, 25, 25A, 25B, 25C, and 25E).
H. Carryforward of Unused Credits
Similar to sections 23(c) (adoption credit carryforward) and 25D(c)
(residential clean energy credit carryforward), section 25F(f) provides
for a carryforward of the unused section 25F credit to enable taxpayers
to claim the unused section 25F credit against a future tax liability.
Although a taxpayer cannot claim a section 25F credit of more than
$1,700 for any taxable year, the cumulative amount of section 25F(f)
credit carryforwards can be used against a tax liability of more than
$1,700 for a single taxable year. See proposed Sec. 1.25F-2(h)
(Example 5).
Proposed Sec. 1.25F-2(e) would provide rules on the application of
this carryforward provision, including a prohibition on carrying
forward any credit to a taxable year following the fifth taxable year
after the taxable year in which the credit arose. This provision also
would provide that credits carried forward to a taxable year would be
used on a first-in, first-out basis and would be used prior to current
year credits.
I. Reporting and Substantiation of Qualified Contributions
Section 25F(h) provides that the Secretary shall issue such
regulations or other guidance as the Secretary determines necessary to
carry out the purposes of section 25F, including with respect to
recordkeeping or information reporting for purposes of administering
the requirements of section 25F.
Notice 2025-70 solicited comments regarding reporting and
recordkeeping requirements for SGOs, including requirements relating to
qualified contributions. In response, stakeholders and commenters asked
that SGOs be required to provide electronically a written statement to
the donor about the contribution. Moreover, several expressed concerns
with collecting and reporting a donor's taxpayer identification number
(TIN). The Treasury Department and the IRS share the stakeholders'
concern that requiring taxpayers to provide TINs to SGOs when making a
qualified contribution would be burdensome, could chill an individual's
desire to make contributions to an SGO, and might result in unnecessary
exposure of sensitive taxpayer information. At the same time, the
ability to match contribution information provided by SGOs with that
provided by individual taxpayers is important both to ensure effective
administration of the section 25F credit and to facilitate the States'
monitoring of SGO compliance with the operational requirements under
section 25F(d) and Sec. 1.25F-3(c), including the 90 percent of income
spending requirement.
Thus, proposed Sec. 1.25F-4(c)(1), also discussed in part IV.C. of
this Explanation of Provisions, would provide special rules relating to
the reporting of qualified contributions to SGOs that would include the
use of a unique donor number provided by the SGO. Proposed Sec. 1.25F-
4(c)(1) would require an SGO to generate a unique donor number and to
provide it to the donor as part of a timely written acknowledgement no
later than January 31 of the calendar year following the calendar year
in which the donor made a qualified contribution to the SGO. Because
each SGO will be generating its own unique donor numbers, a taxpayer
making qualified contributions to more than one SGO would receive a
different donor number from each SGO. Proposed Sec. 1.25F-2(g)(1)
would require a taxpayer who is attempting to claim a section 25F
credit to substantiate the taxpayer's credit on Form 8525, Federal
Scholarship Tax Credit (or successor form), by reporting such
information as may be required in the form instructions, including, for
each SGO to which the taxpayer has made a qualified contribution during
the taxable year, the unique donor number that the SGO was required to
provide as part of a timely written acknowledgement.
If the taxpayer fails to report the required unique donor number on
the taxpayer's Form 8525, Federal Scholarship Tax Credit (or successor
form), proposed Sec. 1.25F-2(g)(2) would create a presumption that the
taxpayer did not make a qualified contribution to that SGO. However,
this presumption may be rebutted by the taxpayer's submission of the
timely written acknowledgement from the SGO that includes such unique
donor number or other evidence satisfactory to the Commissioner of the
amount of the contribution(s) from the taxpayer and the fact that the
contributions were designated as qualified contributions, all within
the response time prescribed in a written request from the IRS.
J. Examples
Many stakeholders requested that the proposed regulations provide
examples of the calculation of the section 25F credit. Proposed Sec.
1.25F-2(h) would provide five such examples.
III. Scholarship Granting Organizations
A. Overview
Section 25F(c)(5) defines the term ``scholarship granting
organization'' and requires compliance with the operational
requirements in section 25F(d). Proposed Sec. 1.25F-3(a) would provide
a roadmap for the rules in proposed Sec. 1.25F-3; proposed Sec.
1.25F-3(b) would define the term SGO; proposed Sec. 1.25F-3(c) would
provide operational requirements for SGOs; and proposed Sec. 1.25F-
3(d) would define disqualified persons with respect to an SGO.
B. Definition of Scholarship Granting Organization
As provided in section 25F, proposed Sec. 1.25F-3(b) would define
a ``scholarship granting organization'' as an organization that: (1) is
described in section 501(c)(3), is exempt from tax under section
501(a), and not a private foundation, as defined in section 509(a); \3\
(2) prevents the co-mingling of qualified contributions with other
amounts by maintaining a section 25F segregated account; (3) satisfies
the operational requirements of section 25F(d)(1) and proposed Sec.
1.25F-3(c); (4) does not award scholarships to any disqualified person;
(5) is included on the State SGO list of one or more covered States in
which the SGO is located; and (6) satisfies the reporting
[[Page 62824]]
and recordkeeping requirements in Sec. 1.25F-4.
---------------------------------------------------------------------------
\3\ One way to search such organizations is the Tax Exempt
Organization Search Tool on the IRS website at <a href="https://www.irs.gov/charities-non-profits/search-for-tax-exempt-organizations">https://www.irs.gov/charities-non-profits/search-for-tax-exempt-organizations</a>.
---------------------------------------------------------------------------
Proposed Sec. 1.25F-3(b)(2) would require each SGO to prevent the
co-mingling of qualified contributions with other amounts by depositing
all qualified contributions into a section 25F segregated account and
would require the SGO to maintain a complete set of books and records
for the section 25F segregated account. A contribution designated by a
donor as a qualified contribution would need to be deposited in this
section 25F segregated account regardless of whether the donor
ultimately receives a tax credit for the qualified contribution. Once a
qualified contribution is designated as such by a donor, neither the
donor nor the recipient organization would be permitted to revoke such
designation to reduce administrative burden and provide certainty.
C. Operational Requirements for Scholarship Granting Organizations
Proposed Sec. 1.25F-3(c)(1) would provide operational requirements
for SGOs, proposed Sec. 1.25F-3(c)(2) would provide a safe harbor for
a single-State SGO whose activities are 85 percent scholarship granting
activities (operational requirement safe harbor), and proposed Sec.
1.25F-3(c)(3) would provide the operational requirements that
multistate SGOs would need to satisfy.
Proposed Sec. 1.25F-3(c)(1) would provide that the organization
would need to: (1) provide scholarships to 10 or more students who do
not all attend the same school; (2) satisfy the 90 percent of income
spending requirement described in part III.D of this Explanation of
Provisions; (3) verify that scholarships are used solely for qualified
elementary or secondary education expenses; (4) verify that
scholarships are awarded only to eligible students; (5) verify that the
recipient eligible students are solely within the State; (6) award
scholarships with a priority for eligible students awarded a
scholarship for the previous school year and, thereafter, for any
eligible students who have a sibling who was awarded a scholarship from
such SGO; and (7) not earmark or set aside contributions for
scholarships on behalf of any particular student.
Proposed Sec. 1.25F-3(c)(2) would provide an operational
requirement safe harbor. If at least 85 percent of a single-State SGO's
activities consist of scholarship granting activities (whether pursuant
to section 25F, in accordance with State tax credit scholarship rules,
or any other scholarship granting activities), then the SGO may apply
the operational requirements to the organization's section 25F
segregated account, rather than to the organization as a whole. For
example, for a single-State SGO using the operational requirement safe
harbor, the requirement that an SGO verify that scholarships are used
solely for qualified elementary and secondary education expenses would
apply only to scholarships granted with funds disbursed from the SGO's
section 25F segregated account.
For purposes of this activity test, administrative, fundraising,
governance, investment, compliance, outreach, and other activities are
treated as scholarship granting activities to the extent each such
activity is conducted in support of scholarship granting activities.
This activity test, applied to the organization as a whole, is intended
to measure the organization's mission and purpose, and is separate from
the 90 percent of income spending requirement, for which only
expenditures on scholarships for eligible students are taken into
account.
While section 25F(b)(2) contemplates that an SGO may be conducting
activities giving rise to a State credit for qualified contributions
received during the taxable year, section 25F(d) contemplates that an
SGO meets the operational requirements organization-wide. To allow SGOs
to conduct section 25F scholarship activities alongside State
scholarship activities giving rise to a State credit, and to allow SGOs
to raise funds for administrative costs that would not count toward the
90 percent of income spending requirement, the operational requirement
safe harbor would be a narrow administrative accommodation for
organizations whose overall operations overwhelmingly consist of
granting scholarships.
If at least 85 percent of the organization's activities are
scholarship granting activities, then the organization's overall
mission and operations would be considered aligned with the statutory
scholarship purpose behind the section 25F credit. The operational
requirement safe harbor would be limited to organizations whose
activities are at least 85 percent scholarship granting activities
because, for organizations with more than 15 percent of non-scholarship
activities, the section 25F segregated account would not be a reliable
proxy for the statutory phrase ``organization.'' The Treasury
Department and the IRS have determined that such a result would be
inconsistent with section 25F(d)(1), which applies the SGO requirements
at the organization level.
Recognizing that the proposed operational requirement safe harbor
may require the formation of new organizations to conduct section 25F
activities, these proposed regulations provide relief for tax-exempt
entities whose exempt status is pending with the IRS, as discussed in
part V.D. of this Explanation of Provisions.
Proposed Sec. 1.25F-3(c)(3) would provide operational requirements
for multistate SGOs. Because section 25F(c)(5)(B) requires an SGO to
maintain one or more separate accounts exclusively for qualified
contributions, a multistate SGO would be required to maintain a
separate section 25F segregated account for each covered State on whose
State SGO list the organization appears, and would need to meet the
requirements of proposed Sec. 1.25F-3(c)(1) separately for its section
25F segregated account for each covered State on whose State SGO list
the SGO appears. The SGO must allow donors to designate how their
qualified contribution should be allocated among one or more of the
covered States on whose State SGO list the SGO appears and all
qualified contributions must be deposited in accordance with donor
designations. Consistent with the intent of the statute that the
organization be a scholarship granting organization, at least 85
percent of a multistate SGO's activities would be required to be
scholarship granting activities.
The Treasury Department and the IRS request comments as to whether
further guidance is needed regarding how an organization measures its
scholarship-granting activities, including whether the determination
should be based on receipts, expenditures, staff time, program-service
activity, or another administrable metric, as well as whether 85
percent is a reasonable threshold to ensure that the organization's
overall mission and operations are aligned with the statutory
scholarship purpose behind the section 25F credit.
D. 90 Percent of Income Spending Requirement
Section 25F(d)(1)(B) provides that an SGO must spend not less than
90 percent of ``the income of the organization'' on scholarships for
eligible students.
1. Definition of Income
Many stakeholders advocated that the term ``income of the
organization'' apply only to qualified contributions, citing concerns
that an SGO might not be able to operate if its overhead was limited to
10 percent of the organization's entire income.
[[Page 62825]]
The Treasury Department and the IRS have determined that the best
reading of the statutory term ``income of the organization'' is the
total gross receipts of the organization from all sources, computed
using the cash receipts and disbursements method of accounting during
its annual accounting period, unreduced by any expenses, regardless of
the overall method used by the organization in its books and records,
and proposed Sec. 1.25F-3(c)(4)(ii)(A) would adopt this definition.
The separate account requirement found in section 25F(c)(5)(B) is a
tracing and anti-commingling rule for qualified contributions; it does
not limit the income denominator in section 25F(d)(1)(B) to qualified
contributions or earnings on those contributions.
However, in response to stakeholder concerns, and consistent with
the purpose of section 25F that an SGO should be using the vast
majority of its income for awarding scholarships, proposed Sec. 1.25F-
3(c)(4)(ii)(B) would provide that, for a single-State SGO using the
operational requirement safe harbor, income of the organization, for
purposes of the spending requirement, means the total amount of
qualified contributions received by, and earnings credited to, the
section 25F segregated account during the taxable year. For a
multistate SGO, income of the organization, for purposes of this
spending requirement, means the total amount of qualified contributions
received by, and earnings credited to, the section 25F segregated
account during the taxable year and is determined separately for each
section 25F segregated account in each covered State.
2. Timing of 90 Percent of Income Spending Requirement
Stakeholders noted that the statute does not provide a timeframe
for this spending requirement and asked that the proposed regulations
provide that the income may be spent over more than one year.
Stakeholders said that the 90 percent rule may pose a challenge for
SGOs in the startup phase, as many administrative costs will be fixed.
Stakeholders also pointed out that, although the SGO list is based on a
calendar year, many SGOs operate on a fiscal year. Some stakeholders
suggested permitting timely spending to occur during the ``current or
next fiscal year'' of the nonprofit entity; be calculated on a rolling
average; or be subject to a phase-in period to accommodate start-up
costs. Other stakeholders stated that regulations should not provide
special accommodation for income or expense fluctuations, including
start-up costs or multi-year smoothing.
In response to this feedback, proposed Sec. 1.25F-3(c)(4)(iii)(A)
would require an organization to meet the 90 percent of income spending
requirement as of the last day of the taxable year following the
taxable year in which such income is received. Thus, although the 90
percent of income spending requirement ultimately would need to be met
for an SGO's first year of operation, that requirement may be
satisfied, from a timing perspective, by the end of the SGO's second
year of operation.
3. Accounting for the 90 Percent of Income Spending Requirement
To simplify calculations and increase administrative efficiency,
proposed Sec. 1.25F-3(c)(4)(iii)(B) would provide that amounts are
treated as spent when paid under the cash method of accounting.
Given this cash method of accounting requirement, funds allocated
for future disbursements (for example, multi-year scholarships) would
not be considered ``spent'' until they are paid. Thus, any award for a
future year would only count toward satisfaction of the 90 percent of
income spending requirement for the year in which it is paid. This is
consistent with the annual accounting and eligibility principles
reflected in the statutory requirements of section 25F, including the
requirement that the SGO determine the ``annual'' household income and
family size of eligible students and that the scholarship recipient be
an eligible student located in the State, in each case as of the time
when the scholarship is paid.
Further, provided an SGO does not retain ownership of funds
transferred to a third party for disbursement through a qualified
digital wallet, the SGO will be treated as having spent the transferred
funds as of the date of transfer for purposes of the 90 percent of
income spending requirement.
Proposed Sec. 1.25F-3(c)(4)(iii)(C) would provide that amounts are
treated as paid from contributions and other income received in the
earliest year first, and then from subsequent years in chronological
order; and proposed Sec. 1.25F-3(c)(4)(iii)(D) would provide that, if
an SGO receives a return of any payments made to a school or vendor
that are in excess of the student's costs or that were disbursed in
error, the return would be treated as income received in the year of
the return and would need to be spent by the end of the taxable year
following the year of the return.
Finally, proposed Sec. 1.25F-3(c)(4)(iii)(E) would provide that in
no event would any amount spent by an SGO be treated as spent in more
than one year.
E. Verification That Scholarships Are Used Solely for Qualified
Elementary or Secondary Education Expenses
Many stakeholders noted that waste, fraud, and abuse have been
found in some existing State-level scholarship credit programs and said
that States need to be able to implement safeguards designed to
prevent, identify, and address such behaviors. Stakeholders stated that
the primary sources of fraud and abuse in existing scholarship programs
are the awarding of more than one scholarship to the same student for
the same qualified elementary or secondary education expense if the
total of the awards exceeds the expense and the misuse of scholarships
for unqualified expenses or for extravagant expenses that are only
nominally related to the student's educational needs.
Accordingly, proposed Sec. 1.25F-3(c)(5) would require SGOs to
implement reasonable procedures for the prevention and detection of
fraud and abuse, including systems to prevent and detect the
duplication of scholarship awards to the same student for the same
qualified elementary or secondary education expense. In addition,
proposed Sec. 1.25F-3(c)(5) would require an SGO to verify that
scholarship funds are used exclusively for qualified elementary or
secondary education expenses in accordance with the allowable methods
of payment described in proposed Sec. 1.25F-3(c)(5)(ii) through (v).
First, proposed Sec. 1.25F-3(c)(5)(ii) would provide that no money
may be paid to the family of the eligible student other than as
qualified reimbursements. A qualified reimbursement would be a
reimbursement of an expense for which the family of the eligible
student provides a receipt, and the SGO verifies that the payment was
made, that the expense is a qualified elementary or secondary education
expense, and that the reimbursement satisfies the SGO's procedures to
prevent a single expense from being reimbursed for more than the total
cost by more than one source.
Proposed Sec. 1.25F-3(c)(5)(iii) would require that tuition, fees,
room and board, and other similar expenses described in section
530(b)(3)(A) that are charged by the school must be paid directly to
the school. Proposed Sec. 1.25F-3(c)(5)(iii) would further require the
SGO to require the school to return any payments from the SGO that are
in excess of the student's costs, or that are disbursed by the SGO in
error.
[[Page 62826]]
Proposed Sec. 1.25F-3(c)(5)(iv) would allow an SGO to pay other
vendors directly if the vendor has been verified as an appropriate
provider of such services or items; is not related, directly or
indirectly, to the scholarship recipient; and is required to return any
payments from the SGO that are in excess of the student's costs or that
were disbursed by the SGO in error.
Proposed Sec. 1.25F-3(c)(5)(v) would allow an SGO to use a
``qualified digital wallet,'' as defined in proposed Sec. 1.25F-
1(a)(13), to pay qualified elementary or secondary education expenses.
The Treasury Department and the IRS note that section 25F(c)(5)(A)
requires that an SGO must be a public charity under section 501(c)(3)
(section 501(c)(3) public charity); therefore, scholarships provided by
an SGO must further exempt purposes. Section 25F(c)(4) defines a
qualified elementary or secondary education expense as any expense of
an eligible student that is described in section 530(b)(3)(A),
providing the outer boundaries of qualified expenses; however an SGO
must award scholarships only for those expenses that are reasonably
necessary to further the organization's charitable exempt purposes.
In addition, an organization is not described in section 501(c)(3)
if it provides goods or services that confer more than incidental
private benefit or otherwise exceed what is reasonably necessary to
accomplish those purposes. For example, Rev. Rul. 69-175, 1969-1 C.B.
149, concluded that a nonprofit organization, formed by parents of
pupils attending a private school that provides school bus
transportation for its members' children, serves a private rather than
a public interest and does not qualify for exemption under section
501(c)(3).
Section 501(c)(3) organizations that make distributions of their
funds to individuals must establish that such distributions are made on
a true charitable basis in furtherance of the purposes for which they
are organized. See, e.g., Rev. Rul. 56-304, 1956-2 C.B. 306. In the
context of private foundation scholarships, Sec. 53.4945-4(c) requires
grant procedures that are reasonably calculated to ensure the funds are
used for the intended charitable purpose and tie scholarship
expenditures to the purpose of the grant. In the context of private
foundation grants under an employer-related scholarship program, Rev.
Proc. 76-47 provides that a scholarship must be motivated by a
disinterested educational purpose, not by private or business
interests.
The Treasury Department and the IRS request comments on how section
501(c)(3) requirements interact with section 25F and whether any
clarifications are needed in the final regulations.
Multiple stakeholders requested clarification regarding the scope
of the category of education expenses allowed to be paid for with
scholarships provided from qualified contributions to SGOs, and they
offered many suggestions of the types of expenses that would be
beneficial to eligible students. Section 25F defines these permissible
expenses by reference to qualified elementary or secondary education
expenses as described in section 530(b)(3)(A). The Treasury Department
and the IRS recognize that guidance describing the types of expenses
permitted is critical to States, SGOs, eligible students, and other
stakeholders. Such guidance will be issued separately under section
530. As indicated previously, the Treasury Department and the IRS are
working on the development of that guidance and are treating the
issuance of that guidance as a high priority.
F. Method of Verifying That a Student's Household Income Is Not Greater
Than 300 Percent of Area Median Gross Income
Section 25F(d)(1)(F) requires an SGO to verify the annual household
income of eligible students who apply for scholarships. This includes
verifying that the student is an individual who is a member of a
household with an income that, for the calendar year prior to the date
of the application for a scholarship, is not greater than 300 percent
of the area median gross income.
Many stakeholders addressed how income should be measured for these
purposes. One stakeholder suggested that the forthcoming regulations
clarify the relevant timeframe for measuring the student's household
income. Some stakeholders suggested using information reported on Form
1040 and identifying members of the student's household based on who
claims the eligible student as a dependent. Other stakeholders
expressed concern with using section 42, the statutory provision for
determining the Federal low-income housing credit, for determining
income and family size because the section 42 definition encompasses
all individuals who might be living in the same residence, including
multiple generations of a family or unrelated individuals living
together in the same location. Moreover, certain stakeholders suggested
allowing SGOs to rely on eligibility determinations from other means-
tested, public assistance programs. Other stakeholders suggested
allowing SGOs to rely on a combination of tax returns, wage statements,
and similar information in order to verify student eligibility.
In defining an eligible student, section 25F(c)(2)(A) incorporates
the term ``area median gross income (as such term is used in section
42).'' Proposed Sec. 1.25F-3(c)(6) would define area median gross
income in a manner consistent with the rules applicable to section 42.
Additionally, these proposed rules would define household income based
on the rules applicable to section 42, but with a slight modification
as explained in part III.F.1 of this Explanation of Provisions. Under
section 42(g)(4), the rules in section 142(d)(2)(B) are applicable to
these income determinations. Section 142(d)(2)(B)(i) then refers to
Section 8 of the United States Housing Act of 1937 (Public Law 75-896)
for determinations of annual income and area median gross income.
Accordingly, proposed Sec. 1.25F-3(c)(6) would require determining
area median gross income and household income in a manner that
generally is consistent with determinations under Section 8, including
adjustments for family size. To assist SGOs in verification of
household income, the IRS anticipates publishing the applicable
limitations by geographic area and family size annually in guidance
published in the Internal Revenue Bulletin.
Stakeholders asked that the proposed regulations clarify that an
SGO is not required to give scholarships to students in a household
with income up to 300 percent of area median gross income. The statute
allows an SGO to give scholarships up to that income limit, but an SGO
may focus on students below that limit. For example, an SGO that limits
scholarships to students that are members of households with an income
not greater than 50% of area median gross income, and that otherwise
meets all the requirements under section 25F to be an eligible SGO,
would be an eligible SGO for purposes of section 25F.
1. Household Income
The regulations issued by the Department of Housing and Urban
Development relating to Section 8 are found in 24 CFR part 5. The
definition of ``household income'' used in 24 CFR 5.609 is broader than
the Federal tax definition of ``income'' and includes items such as
child support, alimony received, and the imputed returns on assets
(based on the current passbook savings rate) if the value of a family's
net assets exceeds $50,000 and the actual returns from a given asset
cannot
[[Page 62827]]
be calculated. Thus, the definition includes certain items not received
in the form of cash, including unrealized appreciation in a home.
Although this Section 8 definition forms the basis of the
definition in the proposed regulations to determine the income limit
specified in section 25F(c)(2)(A), in the interest of sound Federal tax
administration, the proposed regulations would modify this definition
for purposes of measuring a particular household's income against the
300 percent statutory limit. Specifically, in determining the household
income of an eligible student, the proposed regulations would disregard
items not received in cash by a member of the household because such
items are unlikely to be documented and verifiable. The proposed
regulations, therefore, would disregard the amount of a Section 8
housing allowance, any imputed return on assets, and other items not
received in cash. The Treasury Department and the IRS have proposed
this approach after consideration of the purpose of section 25F and the
fact that approximately 95 percent of the children in the United States
are in households with income below the 300 percent of area median
gross income limit provided in section 25F(c)(2)(A). This proposed
definition of a particular household's income would be expected to
simplify the income verification process for families and SGOs by
disregarding non-cash items (such as imputed returns on home equity)
that generally would not be shown on any tax or financial documents and
may be dependent on current valuations.
2. Household
The Section 8 regulations at 24 CFR 5.100 define the term
``household'' as ``family, foster children and adults, and PHA-approved
live-in aide.'' This definition then refers to 24 CFR 5.403 for the
definition of ``family,'' which focuses on who is living together; it
could be a single person or ``a group of persons residing together.''
Accordingly, for purposes of proposed Sec. 1.25F-3(c)(6), proposed
Sec. 1.25F-1(a)(4)(iii) would define ``household'' as including the
individual seeking to be an eligible student and the group of persons
residing with that individual.
For purposes of determining the number of members of the student's
household in situations in which the student resides in more than one
household during the year (for example, in cases of shared custody),
proposed Sec. 1.25F-3(c)(6)(ii)(B) would identify the relevant
household as the one in which the student resides for the longest
period of time during the year. If the time spent by the student in
each residence is equal, then the household of the taxpayer with the
highest household income would be the relevant household for purposes
of section 25F.
3. Verification of Household Income
For purposes of verifying that a scholarship recipient satisfies
the household income requirement, proposed Sec. 1.25F-3(c)(6) would
require SGOs to use either the direct income verification method, the
categorical eligibility verification method, or one of two safe
harbors: the low-income-area tutoring and special-needs safe harbor,
and the foster-child safe harbor. The categorical eligibility method,
the low-income-area tutoring and special-needs safe harbor, and the
foster-child safe harbor are intended to reduce burdens for families
and SGOs by not requiring SGOs to collect more sensitive household-
income information than is necessary if other reliable indicators of
household income are present, while including administrable
documentation and audit safeguards that will allow for the appropriate
administration of section 25F.
Under the direct income verification method, an SGO would verify
income through review of written documentation provided by scholarship
applicants, including pay stubs, prior year Federal or State tax
returns, IRS transcripts, Forms W-2, evidence of other income not
reflected on such documents (such as child support and alimony not
reported as income), or a certification that would verify income
through other relevant data sources.
Under the categorical eligibility verification method, an SGO would
verify that the household income did not exceed 300 percent of area
median gross income through review of written documentation, such as an
award letter, dated within the last 12 months, documenting that an
individual in the student's household currently is approved for
assistance from or participation in Supplemental Nutrition Assistance
Program (SNAP), Temporary Assistance for Needy Families (TANF), the
Special Supplemental Nutrition Program for Women, Infants, and Children
(WIC), Section 8 housing, or Supplemental Security Income (SSI)). This
safe harbor responds to comments requesting a streamlined eligibility
method for eligible students who are highly unlikely to be members of a
household with income above 300 percent of area median gross income,
thus reducing administrative burden by relying upon eligibility
determinations that have already been made by government agencies.
Because the statute requires that this determination be made on a
household basis, eligibility for participation in reduced-price or free
lunch programs that apply to an entire school, rather than on an
individual level, is not considered adequate verification for this
purpose.
The Treasury Department and the IRS request comments on other
needs-based programs, such as State or Tribal programs, that also
should be included in this categorical eligibility verification method.
Additionally, proposed Sec. 1.25F-3(c)(6)(iii)(C) would provide a
safe harbor for SGOs awarding individual scholarships for academic
tutoring or special needs services at schools in low-income areas.
Pursuant to this safe harbor, if an SGO provides scholarships to
individual students at schools in a low-income area for individual
academic tutoring, or for special needs services in the case of a
special needs student, and the individual students receiving those
services are selected by the school on the basis of the particular
student's academic or special need, the recipient students would be
treated as meeting the household income requirement regardless of
whether the student's household income is verified. These proposed
regulations would provide two situations where the safe harbor could be
used to streamline verification of household income. First, if the
school is located in a qualified census tract, as identified at <a href="https://www.huduser.gov/portal/sadda/sadda_qct.html">https://www.huduser.gov/portal/sadda/sadda_qct.html</a> (or successor website), or
in guidance published in the Federal Register or Internal Revenue
Bulletin (see Sec. Sec. 601.601(d)(2) and 601.602 of this chapter) or,
as appropriate, in forms, instructions, and publications available on
<a href="https://www.irs.gov">https://www.irs.gov</a>. Second, if the school certifies that at least 80
percent of its students reside in such a qualified census tract,
regardless of the location of the school.
In order to avail itself of this safe harbor, however, proposed
Sec. 1.25F-3(c)(6)(iii)(C) would require that the SGO annually obtain
and provide to the covered State a third-party audit addressing the
SGO's compliance with the safe harbor requirements. The auditor's
report would be required to include several certifications, including
that the school meets one of the two qualified census tract eligibility
requirements described above; that the scholarship recipients were
selected by the school based on academic or other need; that tutors or
other providers were qualified to render the services obtained with
scholarship funds; that the
[[Page 62828]]
student's need for the services, including the nature and extent of the
services needed, is independently diagnosed by a professional not
associated with the provider or vendor of the services; and that the
services met appropriate quality standards, were provided with a
duration and frequency commonly required to produce benefit, and their
impact on each individual scholarship recipient was assessed.
Finally, proposed Sec. 1.25F-3(c)(6)(iii)(D) would provide a safe
harbor for foster children. Specifically, eligible students who are
foster children would be treated as meeting the household income
requirement regardless of whether the student's household income is
verified. For this purpose, proposed Sec. 1.25F-1(a)(5) would define a
``foster child'' as a child who has been removed from the custody of a
parent or legal guardian and placed under the care or placement
authority of, or has become the legal responsibility of, a child
welfare agency, regardless of whether the child has been or will be
placed with a person by an authorized placement agency or by judgment,
decree, custody order, or any other order of any court of competent
jurisdiction (other than an order appointing a legal guardian of the
child). The term ``authorized placement agency'' would mean a State,
the District of Columbia, a possession of the United States, a foreign
country, an Indian Tribal government (as defined in section
7701(a)(40)), or an agency or organization that is authorized by a
State (including a non-federally recognized Tribe that otherwise is
authorized to act on such matters under applicable State law), or a
political subdivision of any of the foregoing, to place children for
legal adoption or in foster care.
G. Students Solely Within the State
Section 25F(c)(3) defines a qualified contribution as a charitable
contribution of cash to an SGO ``that uses the contribution to fund
scholarships for eligible students solely within the State in which the
organization is listed pursuant to subsection (g).'' However, it is
unclear whether ``solely within the State'' limits the eligible
students who may receive scholarships, the use of the scholarships, or
both. This distinction is consequential: if the phrase modifies
eligible students, contributions may qualify so long as the
scholarships benefit only students residing in the State in which the
SGO is listed. On the other hand, if it instead modifies the
scholarships, only expenses incurred in the State in which the SGO is
listed would qualify, regardless of the residence of the eligible
student.
Some stakeholders have suggested that the proposed regulations
allow scholarships to be awarded to students residing within the State
in which the SGO is listed, even if the student is attending school in
another State. Other stakeholders suggested allowing scholarships to be
awarded to students attending school within the State in which the SGO
is listed, even if they reside in a different State. These stakeholders
stated that Congress intended the provisions of section 25F to be
broadly applied to benefit the highest number of eligible students.
These stakeholders also cited a desire for maximum flexibility for
children in military families, children attending boarding schools, and
children living near a State border and attending school in a State
bordering the State of their residence.
Some stakeholders suggested that the intent of the statute appears
to be focused on where students attend school, rather than where
students reside, or that a school located outside of a covered State
should not be able to receive section 25F scholarship funds, regardless
of where the SGO is located.
Another stakeholder proposed that, once a scholarship is awarded by
an SGO, the scholarship funds should ``attach'' to the student and not
be restricted with regard to the State in which the funds are used,
consistent with West Virginia's Hope Scholarship and with Indiana's
voucher program, for example.
The Treasury Department and the IRS interpret the statutory
language ``eligible students solely within the State in which the
organization is listed'' to refer to the residence of the student,
rather than where a school is located. Accordingly, proposed Sec.
1.25F-3(c)(7) would provide that a contribution is considered used to
fund scholarships for eligible students solely within the State in
which the organization is listed pursuant to proposed Sec. 1.25F-3(g)
only if the students receiving scholarships reside in that State as
determined under State law. Exceptions to this rule would be provided
for students who are dependents of a member of the Armed Forces of the
United States, as well as for students who are dependents of an
individual residing on Indian Lands (as defined in 25 U.S.C. 3501(2)).
Proposed Sec. 1.25F-3(c)(7) also would provide examples
illustrating the application of these rules.
H. Priority in Awarding Scholarships
Section 25F(d)(1)(D) requires that SGOs, in their award selections,
give priority consideration to students awarded a scholarship the
previous year, and then to any eligible student who had a sibling who
was awarded a scholarship by that SGO.
Proposed Sec. 1.25F-3(c)(8) would provide that an SGO has
flexibility to consider the particular needs of potential scholarship
recipients and the type of expenses for which the scholarship is being
awarded. For example, a prior scholarship recipient should be given
priority with regard to an award for tuition, fees, and room and board,
to ensure that the eligible student is able to continue attending the
same school. Similarly, the siblings of such an award recipient should
be given priority so that siblings are able to attend the same school.
However, if a scholarship is awarded based on need for individual
academic tutoring or special needs services, the fact that a student
was a previous scholarship recipient, or that a student has a sibling
who was a previous scholarship recipient, may not be relevant and
priority instead can be based on need for the services.
I. Disqualified Persons
Notice 2025-70 requested comments on the definition of a
disqualified person for purposes of section 25F(d)(2). Stakeholders
generally supported treating SGO officers and directors as disqualified
persons, but some suggested that family members of such officers and
directors should remain eligible for scholarships. Some stakeholders
specifically suggested that exceptions should be permitted if the SGO
employs uniform, blind, or anonymized scholarship selection procedures.
The Treasury Department and the IRS have determined that such an
exception is inconsistent with section 25F. Section 25F(d)(2)(B)'s
incorporation of the term ``rules similar to'' those of section 4946
reflects the same Congressional choice embodied in the self-dealing
rules of section 4941: categorical prohibitions are preferred to
exceptions relying on inquiries into procedural safeguards or benign
intent. Allowing for ``blind'' or ``anonymized'' selection procedures
to modify the otherwise categorical prohibitions would present a
significant and unjustified deviation from the rules set forth in
section 4946. Moreover, section 25F requires that SGOs prioritize
students awarded a scholarship the previous year and students with a
sibling who was awarded a scholarship by such organization, meaning
that truly ``blind'' or ``anonymized'' selection procedures are
impossible.
[[Page 62829]]
Some stakeholders suggested that selection committee members or
anyone with influence over the awarding of scholarships should be
considered disqualified persons. Others suggested that selection
committee members should not be disqualified if they are not
compensated or have no material financial interest in the SGO.
The Treasury Department and the IRS have determined that
individuals who participate in the awarding of scholarships by the SGO
should be treated as disqualified persons and that an exception for
uncompensated members with no financial interest in the SGO is
unwarranted. The relevant concern is not whether an individual has a
financial interest in or compensation from the SGO, but whether such
individual has the ability to confer a financial benefit on themselves
or a family member by influencing scholarship awards.
Several stakeholders addressed how to define ``substantial
contributor'' for purposes of section 25F. Many recommended that the
definition be consistent with section 4946, under which a substantial
contributor is generally any person who contributed an aggregate amount
of more than $5,000, if such amount is more than 2 percent of the total
contributions the organization received before the end of the taxable
year in which that person's contributions were received. Notice 2025-70
requested comments on whether to exclude the $5,000 threshold and rely
solely on the 2 percent threshold, the aim of which would be to prevent
the development of small organizations intended to benefit small groups
of related people without explicitly violating the earmarking
prohibition. Stakeholders suggested this approach could
disproportionately harm small or start-up SGOs and reduce scholarship
availability.
Upon further consideration, the Treasury Department and the IRS
have concluded that the stated concern is addressed by the existing
private benefit doctrine, which would prevent such an organization from
properly being recognized as described in section 501(c)(3), thus
causing it to be unable to qualify as an SGO. Accordingly, proposed
Sec. 1.25F-3(d)(2)(i) adopts the 2 percent and $5,000 thresholds,
consistent with section 4946.
However, consistent with the operational requirement safe harbor,
which allows SGOs to simplify compliance with the section 25F
operational requirements by measuring them at the section 25F
segregated account level, these proposed regulations also would apply
the disqualified person requirement at the section 25F segregated
account level. Application at the section 25F segregated account level
ensures that scholarships are not awarded to disqualified persons
measured at the same operational level at which the SGO otherwise
satisfies section 25F(d). Thus, proposed Sec. 1.25F-3(d)(2) would
provide that a substantial contributor means any person who contributed
an aggregate amount of more than $5,000 to a section 25F segregated
account during the taxable year, if such amount is more than 2 percent
of the total contributions received by that section 25F segregated
account during the taxable year.
One stakeholder recommended removal of the substantial contributor
rule altogether or alternatively incorporating a higher threshold to be
considered a disqualified person. The proposed regulations would not
eliminate the substantial contributor rule or increase the dollar
threshold, as substantial contributors may be able to exercise
influence over an SGO by virtue of the size of their contribution
relative to the size of total contributions.
Some stakeholders suggested that the substantial contributor
calculation should be considered each year based on contributions from
that year only, rather than cumulative contributions from the
organization's inception. The proposed regulations would adopt this
approach based on the view that it better reflects the expected giving
patterns to SGOs and more accurately identifies those donors whose
current level of contributions may give them meaningful influence.
Accordingly, proposed Sec. 1.25F-3(d)(2) would determine substantial
contributor status based on contributions received during the taxable
year.
A few stakeholders suggested a rule completely prohibiting SGOs
from providing scholarships to the family members of any donors. The
proposed regulations do not adopt the recommendation. The substantial
contributor framework already addresses this concern by identifying
those donors who may have meaningful influence over the SGO. Extending
this status to all donors regardless of contribution size would sweep
in contributors with no meaningful influence and could deter
contributions in a manner inconsistent with section 25F's broader
goals.
For purposes of determining persons who are substantial
contributors, a person would be treated as making all contributions
made by his or her spouse. A person's status as a substantial
contributor is determined as of the close of each taxable year.
Further, proposed Sec. 1.25F-3(d)(4) would provide that once an
individual is treated as a substantial contributor for a given taxable
year of the SGO, such individual will be treated as a substantial
contributor for that taxable year as well as the immediately succeeding
taxable year of the SGO.
Evaluating substantial contributor status at taxable year end could
result in an SGO unknowingly awarding scholarships to individuals who
become disqualified persons by virtue of contributions made after the
award of the scholarship. To reduce the risk of an SGO losing its SGO
status by inadvertently awarding a scholarship to a disqualified
person, proposed Sec. 1.25F-3(d)(2)(ii) would indicate that a
scholarship awarded to a disqualified person will not be treated as
such if, at the time the scholarship was awarded, two requirements are
met for that taxable year. First, the recipient would not have been a
disqualified person had the substantial contributor determination been
made as of the date of the award based on contributions received by the
organization through that date. Second, the SGO did not know or
reasonably expect that the recipient would become a disqualified
person. Proposed Sec. 1.25F-3(d)(5) would provide examples
illustrating the rules addressing disqualified persons.
One stakeholder proposed a rule prohibiting board members,
officers, and substantial contributors from having financial interests
in recipient schools. The Treasury Department and the IRS have
determined that such a prohibition is not required by section 25F.
Board members, officers, and substantial contributors would be defined
as disqualified persons and conflicts that may arise as a result of
their relationships with recipient schools would be subject to scrutiny
under other provisions of the Code, such as sections 501(c)(3) and
4958.
Accordingly, proposed Sec. 1.25F-3(d)(1) provides the following
list of those included in the definition of a disqualified person for
purposes of section 25F: substantial contributors to the SGO or to the
25F segregated account; officers, directors, or trustees of the SGO (or
individuals with similar powers and responsibilities); any individual
participating in the selection of scholarship recipients, including as
a member of a committee; and members of the families of any such
person. Proposed Sec. 1.25F-3(d) would clarify that, for these
purposes, members of one's family include only spouses, ancestors and
descendants of the individual or the individual's spouse, siblings of
the individual or the
[[Page 62830]]
individual's spouse, the descendants of siblings, and the spouse of any
of these individuals. Descendants would be defined to include legally
adopted children and stepchildren of any individual.
IV. Reporting and Recordkeeping Requirements for SGOs
A. Overview
Proposed Sec. 1.25F-4 would provide reporting and recordkeeping
requirements for organizations for purposes of section 25F that
supplement the general recordkeeping requirements under section 6001
imposed on all persons liable for a tax imposed under Title 26.
Proposed Sec. 1.25F-4(b) would describe the mandatory registration
process for organizations through the IRS SGO portal. Proposed Sec.
1.25F-4(c) would provide the requirements for an organization's
acknowledgement, recordkeeping and reporting for the receipt of amounts
designated as qualified contributions. Proposed Sec. 1.25F-4(d) would
describe the rules relating to an SGO's annual reporting requirements.
Proposed Sec. 1.25F-4(e) would describe an organization's annual
financial and programmatic audit requirement.
B. Mandatory Registration Through IRS SGO Portal
In determining how to enforce and administer the requirements of
section 25F, the Treasury Department and the IRS considered paper or
electronic communications and determined that an IRS SGO portal would
provide the most efficient way to timely interact with SGOs. Proposed
Sec. 1.25F-4(b) would require an organization to register
electronically through the IRS SGO portal, which will allow each
organization to obtain instructions for creating a unique donor number,
based on a uniform format to be used by all SGOs, and report qualified
contribution information to the IRS. The organization also would use
the IRS SGO portal to periodically authorize disclosure of the
organization's name and identifying information on the IRS SGO list for
a calendar year, available on <a href="https://www.irs.gov">https://www.irs.gov</a>. An organization must
authorize such disclosure if it wants the IRS to publish such
information on the IRS SGO list.
Because an organization would not be able to generate the unique
donor number to provide it to a donor until the organization registers
in the IRS SGO portal, and because a donor would need that unique donor
number to substantiate a qualified contribution, proposed Sec. 1.25F-
4(b)(2) would require an organization to complete the registration
process with the IRS as soon as possible and preferably before the
organization appears on any State SGO list. Until the organization has
registered in the IRS SGO portal, the organization will not be able to
comply with the acknowledgement and reporting requirements, and that
compliance is a necessary part of substantiating that a donor's
qualified contribution is eligible for the credit allowed under section
25F.
Proposed Sec. 1.25F-4(b)(3) would describe the information
required to register, specifically: the organization's name, IRS
employer identification number (EIN), address, telephone number, and
year of formation; the name of a person whom the IRS may contact if
there is an issue with the organization's registration; the
organization's taxable year; and any other information the IRS deems
necessary for purposes of administering the requirements of section 25F
as provided in guidance. Proposed Sec. 1.25F-4(b)(4) would provide
that the IRS will review the information provided to verify that all
the required information has been submitted and will provide
instructions to the organization for creating a unique donor number in
a uniform format to be used by all SGOs, for each donor who has
designated at least one payment to the organization as a qualified
contribution to the SGO during the calendar year.
C. Donor Acknowledgement and Reporting of Qualified Contributions
Received by SGOs
Notice 2025-70 asked what information SGOs should be required to
provide to their donors, including whether SGOs should be required to
provide the donor with written substantiation in order for the donor to
take the section 25F credit. Many stakeholders recommended that SGOs
provide a standardized donor acknowledgement form to taxpayers that
would include the donor's name and address, the name of the SGO and its
EIN, and the amount of the qualified contribution. Other stakeholders
suggested that SGOs should not be responsible for reporting the
particulars of a donation, other than informing donors that the
donation could be eligible for the section 25F credit.
Proposed Sec. 1.25F-4(c)(1) would require the organization to
transmit a timely written acknowledgement to each donor with respect to
qualified contributions made by such donor during the calendar year.
Proposed Sec. 1.25F-4(c)(1)(i) would require the timely written
acknowledgement to include: the organization's EIN; the total amount of
contributions made by the donor to the organization during the calendar
year that the donor designated as qualified contributions; the unique
donor number provided to the donor; a statement as to whether the
organization provided any goods or services in consideration for any
qualified contributions made by the donor; and a description and good
faith estimate of the value of any such goods or services. Proposed
Sec. 1.25F-4(c)(1)(ii) would require organizations to provide the
timely written acknowledgement to the donor no later than January 31 of
the calendar year following the calendar year in which the donor made a
qualified contribution. The timely written acknowledgement may be
provided in writing or in any other form acceptable to the donor,
including by electronic delivery if the donor consents to receiving the
statement electronically and has not withdrawn the consent before the
statement is furnished.
Proposed Sec. 1.25F-4(c)(2) would require organizations to report
information about qualified contributions to the IRS. Proposed Sec.
1.25F-4(c)(2)(i) would require the following information to be reported
with respect to each unique donor number assigned by the organization:
the donor's name and address, the aggregate amount of qualified
contributions made by the donor to the organization during the calendar
year; and any other information the IRS deems necessary for purposes of
administering the requirements of section 25F, as may be described in
further guidance. Proposed Sec. 1.25F-4(c)(2)(ii) would require
organizations to report this information no later than February 28 of
the year following the calendar year in which such qualified
contributions were made. Unless otherwise provided in guidance, the
reporting would be required to be done through the IRS SGO portal in
accordance with the instructions provided therein.
D. Reporting Operational Information to the IRS
Some stakeholders had suggested relying on an SGO's ``sworn
compliance affidavit'' in determining whether an organization meets the
criteria and requirements of being an SGO. Other stakeholders insisted
that an SGO's self-attestation alone should not be sufficient, but
suggested that an individual responsible for the operation of the SGO,
or an approved third party, could attest that the SGO complied with all
statutory requirements.
[[Page 62831]]
Other stakeholders advocated for the regulations to provide a
``standard Federal checklist,'' as States vary in their capacity to
review nonprofit organizations and many have no existing SGO oversight
programs.
In accordance with the concept of such a checklist, these proposed
regulations would provide that SGOs must annually certify that they
meet the criteria and requirements of being an SGO. Stakeholders stated
that, absent a standard Federal checklist, allowing each State to
interpret and enforce Federal eligibility requirements would likely
result in a patchwork of standards, procedures, and reporting
obligations that would significantly increase administrative complexity
and compliance costs, particularly for SGOs operating in multiple
States.
Thus, proposed Sec. 1.25F-4(d) would require an organization that
was an SGO for any part of its taxable year to provide an annual
certification to the IRS. Proposed Sec. 1.25F-4(d)(2)(i) would require
the organization to annually certify, with respect to its taxable year
or the period within its taxable year during which it was an SGO, that
such organization: was described in section 501(c)(3) and exempt from
tax pursuant to section 501(a), and not a private foundation, as
defined in section 509; prevented the co-mingling of qualified
contributions with other amounts by maintaining a section 25F
segregated account, which must contain only qualified contributions and
the earnings therefrom, for each covered State on whose State SGO list
the SGO appears, deposited all qualified contributions into that
section 25F segregated account, and maintained a complete set of books
and records for each of its section 25F segregated accounts; satisfied
the operational requirements of section 25F(d)(1) and proposed Sec.
1.25F-3(c); did not award a scholarship to any disqualified person; was
located in each State on whose State SGO list the organization was
listed; provided each donor a timely written acknowledgement; and
commissioned a financial and programmatic audit as described in part
IV.E. of this Explanation of Provisions by a qualified independent
third party (or, for organizations with annual receipts of $500,000 or
less, a committee of independent persons unrelated to the
organization's management) and provided the audit report to each
covered State on whose State SGO list the organization was listed.
Proposed Sec. 1.25F-4(d)(2)(ii) would provide additional
certifications relating to operational requirements. Proposed Sec.
1.25F-4(d)(2)(ii)(A) would provide that a single-State SGO must certify
that it provided scholarships to 10 or more students, not all of whom
attended the same school; spent not less than 90 percent of the income
of the organization on scholarships for eligible students; verified
that scholarships were used solely for qualified elementary or
secondary education expenses; verified that scholarships were awarded
only to eligible students who were members of an eligible household and
who were eligible to enroll at a public elementary or secondary school;
verified that the recipient eligible students were solely within the
State; awarded scholarships with a priority (as defined in the proposed
regulations) for eligible students awarded a scholarship for the
previous school year and, thereafter, for any eligible students who
have a sibling who was awarded a scholarship from such SGO; did not
earmark or set aside contributions for scholarships on behalf of any
particular student; and, if the organization used the safe harbor found
in proposed Sec. 1.25F-3(c)(6)(iii)(C) for providing individual
scholarships for individual academic tutoring or special needs services
at schools in low-income areas, that it obtained a third-party audit
and provided the audit report to the covered State in accordance with
proposed Sec. 1.25F-3(c)(6)(iii)(C)(2).
Proposed Sec. 1.25F-4(d)(2)(ii)(B) and (C), respectively, would
require an organization that was either a single State SGO using the
safe harbor in Sec. 1.25F-3(c)(2) or a multistate SGO for any part of
a calendar year within its taxable year to annually certify that at
least 85 percent of such organization's activities during the taxable
year were scholarship granting activities and that each of the elements
of proposed Sec. 1.25F-4(d)(2)(ii)(A) was met separately with respect
to the organization's section 25F segregated account for each covered
State on whose State SGO list the SGO appeared.
Proposed Sec. 1.25F-4(d)(3) would describe the information an
organization that was a single-State SGO for any part of a calendar
year within its taxable year is annually required to report to the IRS.
The information described in proposed Sec. 1.25F-4(d)(3) would assist
States, the IRS, and taxpayers considering making a qualified
contribution in determining the organization's compliance with the
requirements of section 25F, its size, and its mission.
Proposed Sec. 1.25F-4(d)(3)(i) would require an organization to
report, with respect to its taxable year, or the period within its
taxable year during which it was an SGO, the following information: (1)
the number of students that applied for a scholarship; (2) the number
of students selected for a scholarship in accordance with the safe
harbor in proposed Sec. 1.25F-3(c)(6)(iii)(C); (3) the number of
scholarships awarded; (4) the highest, lowest, and average amount of
the scholarships awarded; (5) the number of schools at which the
scholarship recipients were enrolled; (6) aggregate data on each
category of qualified elementary and secondary education expenses for
which scholarship funds were used; (7) the amount of the organization's
income; (8) with regard to the amounts spent on scholarships for
eligible students solely within the State during the taxable year: the
total amount spent during the year; and of the total amount spent
during the year, the amount counted as satisfying the 90 percent of
income spending requirement for the prior year, and the amount counted
as satisfying that requirement for the current year; (9) the percentage
of the prior year's income spent on scholarships for eligible students
solely within the State, taking into account the amounts spent in both
the prior and current years; (10) the percentage of the current year's
income spent on scholarships for eligible students solely within the
State; and (11) any other information required in accordance with
guidance.
Proposed Sec. 1.25F-4(d)(3)(ii) would require a single-State SGO
using the safe harbor found in proposed Sec. 1.25F-3(c)(2) to report
the information described in proposed Sec. 1.25F-4(d)(3)(i) with
respect to its section 25F segregated account, rather than with respect
to the organization as a whole.
Proposed Sec. 1.25F-4(d)(3)(iii) would require a multistate SGO to
report this information separately with regard to its section 25F
segregated account for each covered State on whose State SGO list the
SGO appears.
Proposed Sec. 1.25F-4(d)(4) would provide the time and manner of
reporting the annual certification and information. Except to the
extent otherwise provided in guidance, the certification and
information would need to be provided at such time and in such manner
as the IRS may prescribe by publication, form, or instructions, and
attached to the annual Form 990 for those SGOs required to file Form
990. This requirement would be consistent with feedback advocating for
the use of the Form 990 as an efficient mechanism for reporting SGO
activity due to its standardization, transparency, and consistency
across jurisdictions.
For organizations required to file an annual information return
under section 6033(a), the required form must be included as an
attachment. An organization that is not required to file
[[Page 62832]]
an annual information return under section 6033(a) must provide this
form separately to the IRS on or before the 15th day of the 5th
calendar month following the close of the period for which the form
reports the required certifications and information. Organizations must
concurrently provide a copy of the form to each State on whose State
SGO list the organization appears in accordance with guidance.
E. Required Audits
Some stakeholders suggested periodic SGO audit requirements, noting
the need for lenience in an SGO's first year on a State SGO list.
Another stakeholder suggested that new SGOs should receive ``heightened
scrutiny'' compared to those with a proven track record of managing
donations and administering student scholarships. Stakeholders
suggested that, in years after the first year of operation, SGOs should
be subject to periodic audits, mandatory reporting requirements, and
immediate removal upon noncompliance.
In considering what regulations or other guidance would best carry
out the purposes of section 25F, including for purposes of enforcing
the SGO operational requirements in section 25F(d) and ensuring the
integrity of the State lists of SGOs in section 25F(g), the Treasury
Department and the IRS have attempted to balance the need for State
oversight of SGOs with the burden that such requirement places on State
governments. As a result, proposed Sec. 1.25F-4(e) would require each
organization that was an SGO during any part of the preceding taxable
year to commission and undergo an annual financial and programmatic
audit by a qualified independent third party and to provide the audit
results to each covered State on whose State SGO list the SGO appeared.
Proposed Sec. 1.25F-4(e)(2) would define ``qualified independent
third party,'' for organizations whose total receipts (whether or not
required to be deposited into its section 25F segregated account) for
the most recent taxable year were more than $500,000 as an external,
independent professional or accredited body that regularly assesses an
organization's compliance, financial records, or processes (including
internal controls) against specific standards to perform the audit
required by proposed Sec. 1.25F-4(e). To provide flexibility and
reduce expenses for small entities, proposed Sec. 1.25F-4(e)(2) would
permit an organization whose total receipts for the taxable year did
not exceed $500,000 to use a committee of independent persons unrelated
to the organization's management to conduct the audit, with the report
signed under penalties of perjury.
Proposed Sec. 1.25F-4(e)(3) and (4) would describe the content and
scope of the required audit, providing a list of the items to be
reviewed and addressed.
V. State Election, SGO List, and Certification of SGOs
A. Overview
Proposed Sec. 1.25F-5 would provide rules for a State election and
a State's identification and certification of organizations located in
the State that are SGOs. Proposed Sec. 1.25F-5(b) describes rules that
would apply for the State to register in the IRS State section 25F
portal, which, except for the first year for which the State makes an
election, may be used for the submission of the State election
(including advance election), State SGO list, any changes to the State
SGO list, annual certifications, and any other information required in
accordance with guidance. Proposed Sec. 1.25F-5(c) describes the
requirements that would apply for a State election. Section 1.25F-5(d)
provides rules that would apply regarding the State SGO list, including
information and certifications a State is required to provide for each
organization included on the State SGO list and procedures a State is
required to use in determining whether an organization is an SGO.
Proposed Sec. 1.25F-5(e) addresses rules that would apply to State
administrative requirements for SGOs.
B. IRS State Section 25F Portal
Notice 2025-70 stated that the Treasury Department and the IRS
anticipated that the forthcoming proposed regulations would require the
State to electronically submit the State election, the State SGO list,
and certification to the IRS. Commenters supported an electronic
process for States to submit State SGO lists, as they considered
electronic submissions to be more efficient and timelier than paper
submissions. Thus, proposed Sec. 1.25F-5(b) would require a State that
chooses to participate under section 25F to register for and use the
IRS State section 25F portal in accordance with the instructions
therein.
Proposed Sec. 1.25F-5(b)(2)(i) would provide that the Governor of
the State or such other individual, agency, or entity as is designated
under State law to make elections with respect to Federal tax benefits
on behalf of the State may authorize up to two designated officials to
register for and use the IRS State section 25F portal. Proposed Sec.
1.25F-5(b)(2)(ii) would require each designated official to be an
elected official, the Director of Taxation, or an appointed official of
the State.
Proposed Sec. 1.25F-5(b)(3) would require States to obtain or be
assigned a special-purpose EIN for purposes of registering. The IRS
will inform States how to obtain this EIN and States will not be
required to use a Form SS-4 for these purposes.
Proposed Sec. 1.25F-5(b)(4) would require that the following
information be provided to register: the special-purpose EIN; contact
information, including the name, official title, telephone number, and
email address of the State's designated officials; and any other
information the IRS deems necessary for purposes of administering the
requirements of section 25F as may be described in future guidance.
At the conclusion of the registration process, a State would be
able to electronically transmit through the IRS State section 25F
portal its State election (including advance election), State SGO list,
any changes to the State SGO list, annual certifications, and any other
information required in future guidance.
To mitigate the risk of any State's implementation issues for the
first year for which the IRS State section 25F portal will be
operational, the IRS is considering the creation of alternative
temporary procedures that would be outlined in future guidance to help
ensure that all States that wish to participate under section 25F are
reasonably able to complete their registration for the IRS State
section 25F portal or otherwise submit the State election and State SGO
list for calendar year 2027.
C. State Election
1. In General
Proposed Sec. 1.25F-5(c) would provide the procedure for making a
State election. Proposed Sec. 1.25F-5(c)(1) would provide that, except
as provided in proposed Sec. 1.25F-5(c)(3), the State election may be
made either as an advance election that is perfected through the
submission of the State SGO list or as an election made with such
submission.
Several stakeholders recommended restricting a State's ability to
``opt out'' after having made an election. Many stakeholders believe
that States should not be able to opt out on a year-to-year basis, as
families and students will rely on these scholarships for multiple
years. However, consistent with the requirement in section 25F(c)(5)
that the list submitted for the applicable covered
[[Page 62833]]
State under section 25F(g) is ``for the applicable year,'' proposed
Sec. 1.25F-5(c)(1) would confirm that an election to participate under
section 25F is made only for a single calendar year, and that all of
the requirements in proposed Sec. 1.25F-5(c) must be satisfied for
each year for which an election is made. The advance election procedure
in proposed Sec. 1.25F-5(c)(3), discussed in part V.C.2. of this
Explanation of Provisions, would enable a State to opt in for an
upcoming calendar year by making an advance election and then later, in
effect, opt out by failing to perfect the election in accordance with
proposed Sec. 1.25F-5(c)(3)(ii). The Treasury Department and the IRS
do not interpret section 25F(g) and (c)(5) as allowing for any
revocation once a State has completed its State election, including an
advance election that has been perfected.
As described in section 25F(g)(1)(B), proposed Sec. 1.25F-5(c)(2)
would specify that an election must be made by the Governor of the
State or by such other individual, agency, or entity as is designated
under State law to make such elections on behalf of the State with
respect to Federal tax benefits.
2. Advance Election Procedure
Notice 2025-70 stated that the Treasury Department and the IRS read
section 25F(g) to provide that an election by a State to participate
under section 25F may be made prior to or contemporaneously with the
submission of the State's list of all organizations located in the
State that satisfy the definition of an SGO. On December 12, 2025, the
Treasury Department and the IRS issued Rev. Proc. 2026-6, Advance
Election to Participate Under Section 25F for 2027, to allow States,
including the District of Columbia, to make an Advance Election to
participate in a new tax credit for calendar year 2027.
Proposed Sec. 1.25F-5(c)(3) would provide guidance for States on
how to submit an election in advance of the submission of the State SGO
list, including guidance for States that have submitted an advance
election for 2027 on Form 15714, Advance Election to Participate Under
Section 25F for 2027. A State's failure to timely perfect its advance
election by providing its State SGO list for a calendar year by the
specified date in Sec. 1.25F-5(c)(3)(ii) would result in a failure to
meet the requirements of section 25F(g), effectively preventing any
organization in the State from qualifying as an SGO for the calendar
year for which the advance election was not perfected.
Proposed Sec. 1.25F-5(c)(3)(iii) would provide that the IRS will
maintain and publish on <a href="https://www.irs.gov">https://www.irs.gov</a> a list of States that have
made an advance election.
3. Timing of State Elections Under Proposed Sec. 1.25F-5(c)(3)(i) and
(c)(4)
Proposed Sec. 1.25F-5(c)(3)(i) would identify the time period
during which an advance election may be made and proposed Sec. 1.25F-
5(c)(4) would identify the time period during which a State election
may be made with the submission of the State SGO list.
Notice 2025-70 stated that the Treasury Department and the IRS
anticipated that the forthcoming proposed regulations under section 25F
would require each State electing to participate under section 25F for
the 2027 calendar year to submit to the IRS, by a specified date before
January 1, 2027, the State's list of organizations located in that
State meeting the requirements of section 25F(c)(5) for the 2027
calendar year along with the State's certification under section
25F(g)(2), and that those forthcoming proposed regulations would
include a similar requirement for submission of an annual list and
certification from each electing State for subsequent years.
Proposed Sec. 1.25F-5(c)(3)(i)(A) would provide that, except as
otherwise provided in the transition rule in proposed Sec. 1.25F-
5(c)(3)(i)(B), a State may submit an advance election through the IRS
State section 25F portal on or after January 2 and on or before
September 30 of the calendar year immediately preceding the calendar
year for which the election is being made. The IRS will acknowledge or
otherwise confirm receipt of a State's advance election.
Proposed Sec. 1.25F-5(c)(3)(i)(B) would provide a transition rule
for the first calendar year for which the State makes an election.
Proposed Sec. 1.25F-5(c)(3)(i)(B)(1) would provide that, for calendar
year 2027, a State must submit an advance election on Form 15714 on or
before January 1, 2027. Proposed Sec. 1.25F-5(c)(3)(i)(B)(2) would
provide that, for future years, a State making its first election to
participate under section 25F must submit an advance election as
provided in future guidance. Consistent with these transition rules,
proposed Sec. 1.25F-5(c)(4) would provide that, for the first year in
which the State is electing to participate under section 25F, it cannot
make its election with the submission of the State SGO list.
During the last three months of the immediately preceding calendar
year or on January 1 of the year for which the election is being made,
a State may make its election to participate under section 25F either
as part of submitting its State SGO list for that year with the
required information and certifications, or by perfecting its advance
election made under proposed Sec. 1.25F-5(c)(3)(i)(A) by providing its
State SGO list for that year with the required information and
certifications.
Several stakeholders requested clarification that the deadline for
an election to participate for the 2027 calendar year should be after
January 1, 2027, consistent with section 25F(g)(1)(A). For calendar
year 2027 only, a State must submit its advance election on or before
January 1, 2027, however, the State may perfect its advance election by
submitting its State SGO list on or before February 15, 2027.
Some stakeholders recommended clarifying that the election deadline
for calendar years after 2027 should be no later than 11:59 p.m. on
January 1 of the calendar year, to accommodate an election made by a
Governor who is newly inaugurated. The Treasury Department and the IRS
agree and clarify that, for these purposes, ``on or before January 1 of
that year'' means up to 11:59 p.m. on January 1.
4. Certifications and Other Required Information for State Elections
Proposed Sec. 1.25F-5(c)(5) would require that the person with
authority to make the State election, or a designated official, certify
that the individual, agency, or entity making the State election has
the authority to make the State election on behalf of the State, and
the person authorizing any individuals as designated officials under
proposed Sec. 1.25F-5(b)(2) has the authority to do so.
In addition, proposed Sec. 1.25F-5(c)(5) would require the person
with authority to make the State election or a designated official to:
(1) Provide the enacted statutory or regulatory provisions that are
binding on the State and establish the authority of an individual to
make the State election on behalf of the State, if the individual
making the election is not the Governor of the State (or the Mayor of
the District of Columbia);
(2) Provide the required information and certifications for each
SGO on the State SGO list;
(3) Certify that the State SGO list includes every organization
located in the State that is seeking inclusion on the State SGO list,
and that meets the definition of an SGO, and is operating in a manner
that satisfies the operational requirements in section 25F(d) and
proposed Sec. 1.25F-3(c) and the applicable State requirements;
(4) Provide the certification of State policies and procedures
required for its
[[Page 62834]]
State SGO list in proposed Sec. 1.25F-5(d)(6);
(5) Describe any tax credit (including relevant State statutes,
regulations, and other authoritative guidance) available under State
law for contributions made to SGOs during the calendar year for which
the State is electing to participate under section 25F; and
(6) Provide any other information and certifications described in
future guidance.
D. State SGO Lists
1. Overview
Section 3.03 of Notice 2025-70 stated that the Treasury Department
and the IRS interpret section 25F(g) as requiring each covered State to
verify that each organization on the State's list satisfies all the
requirements of section 25F(c)(5). Section 3.04 of Notice 2025-70
further stated that the Treasury Department and the IRS anticipate that
States will be required to have implemented, and to comply with,
various procedures to verify that the required information submitted by
the covered State is accurate and complete. Section 3.04 of Notice
2025-70 requested comments on what types of uniform policies,
procedures, recordkeeping, or other requirements would be reasonable to
ensure States can reliably verify that each organization meets the
requirements of section 25F(c)(5), and, for States with similar
programs, how those States determine whether organizations are meeting
applicable requirements.
Many stakeholders favored self-attestation by SGOs that they met
the requirements of section 25F(c)(5) so as to avoid the need for any
State-level review process, stating that requiring States to verify
compliance is overly burdensome and could discourage participation.
Several stakeholders expressed concern that providing States with
significant discretion over organizations seeking certification as an
SGO would permit State officials to discriminate against organizations
based on factors other than compliance with the requirements of section
25F. Some stakeholders requested explicit limits on State authority to
prevent intrusion into SGO operations, as well as an appeals process
for any organizations excluded from a State's list based on the State's
administration of SGO requirements.
Proposed Sec. 1.25F-5(d) would provide guidance on State SGO
lists. Proposed Sec. 1.25F-5(d)(2) and (3) would describe the
information and certifications required as part of the State's election
or advance election for a calendar year. Proposed Sec. 1.25F-5(d)(4)
would provide a transition rule for an organization that has not yet
been required to provide information and certifications. Proposed Sec.
1.25F-5(d)(5) would provide a procedure that applies when an
organization's application for recognition of tax-exempt status is
pending with the IRS. Proposed Sec. 1.25F-5(d)(6) would require a
State to make a certification regarding its policies and procedures.
Proposed Sec. 1.25F-5(d)(7) would provide rules for changes to a State
SGO list, and proposed Sec. 1.25F-5(d)(8) would provide rules for the
removal of an SGO from the IRS SGO list. Proposed Sec. 1.25F-5(d)(9)
would provide for the publication of the names of covered States and
their State SGO lists on <a href="https://www.irs.gov">https://www.irs.gov</a>.
2. Information the State Is Required To Provide About Each SGO on Its
State SGO List
Proposed Sec. 1.25F-5(d)(2) would set forth the information that a
State is required to provide annually with respect to each organization
named on the State SGO list, including the name, the EIN, address, and
telephone number of the organization; whether the organization has
received recognition as a section 501(c)(3) public charity, or has a
pending application for such recognition; and any other information the
IRS deems necessary for purposes of administering the requirements of
section 25F as may be described in future guidance.
3. Certifications the State Is Required To Provide About Each SGO on
Its State SGO List
Except as provided by the transition rule described in part V.D.4.
of this Explanation of Provisions, proposed Sec. 1.25F-5(d)(3) would
require the State to certify that, with respect to each organization
included on the State SGO list, the organization is located in the
State and the organization prevents the co-mingling of qualified
contributions with other amounts by maintaining a segregated section
25F account exclusively for qualified contributions, depositing all
qualified contributions into its section 25F segregated account, and
maintaining a complete set of books and records for its section 25F
segregated account. The State also would be required to certify that
the organization satisfies each of the operational requirements in
section 25F(d) and proposed Sec. 1.25F-3(c) and that the State has
determined whether the SGO is a single-State or multistate SGO,
reviewed the annual financial and programmatic audit report the
organization is required to provide to the State, reviewed annual
certifications and other information the organization is required to
provide to the IRS and investigated any failure by the SGO to provide
the required certifications and other information, and has become
reasonably satisfied that the SGO has corrected the failure, if
possible, or has put in place procedures to prevent future failures.
Finally, a State would be required to certify that the organization
satisfies any other requirements the IRS deems necessary for purposes
of administering section 25F as may be described in future guidance.
The Treasury Department and the IRS request comments on the
certifications States would be required to make in accordance with
proposed Sec. 1.25F-5(d)(3), including any other certifications that
should be required for a multistate SGO. Comments are also requested on
whether any certification is disproportionately burdensome compared to
the benefits to tax administration.
4. Transition Rule for an Organization That Has Not Yet Been Required
To Provide Information and Certifications to the IRS
In recognition of the fact that much of the required reporting is
of data derived from operations in the prior fiscal year, proposed
Sec. 1.25F-5(d)(4) would provide a transition rule for recently formed
entities and other organizations without such historical data that have
not yet been required to report on their operations as an SGO. This
transition rule allows the State to rely on the organization's
governing documents or bylaws, written policies and procedures, and
other documentation the organization provides to the State as part of
its request to be included on its State SGO list, reducing the burden
on the State for this type of SGO.
However, for each year for which such an organization is included
on the State SGO list during this transition period, proposed Sec.
1.25F-5(d)(4) would require the State to determine that the
organization's provisions, policies, and procedures expressly require
the organization to satisfy the operational requirements in section
25F(d) and proposed Sec. 1.25F-3(c), and that the documentation and
information available to the State evidences the organization's ability
and intent to satisfy such operational requirements. Proposed Sec.
1.25F-5(d)(4) also would require the organization to concurrently
provide the State with a copy of any information and certifications
required to be provided to the IRS before the end of the transition
period.
[[Page 62835]]
5. Procedure That Would Apply When an Organization's Application for
Recognition of Tax-Exempt Status Is Pending With the IRS
Proposed Sec. 1.25F-5(d)(5) would allow a State to include on its
State SGO list those organizations whose application for recognition of
tax-exempt status is pending with the IRS, but only if the State
includes on its State SGO list all organizations seeking inclusion on
that list whose application for recognition of tax-exempt status is
pending with the IRS, the State has complied with the requirements of
proposed Sec. 1.25F-5(d)(4) for each organization, and the State makes
the required certifications regarding the organization's tax-exempt
status. The required certifications include that the organization has
applied for tax-exempt status as a section 501(c)(3) public charity,
the organization's tax-exempt status, if granted, will be effective
retroactively to a date that is on or before January 1 of the year for
which the State SGO list applies, and the State SGO list indicates that
such organization's tax-exempt status is pending IRS recognition. The
determination of whether tax-exempt status will be effective
retroactively to a date on or before that January 1 is determined by
the date of the formation of the organization and the date of its
application for recognition of tax-exempt status. See section 6.09 of
Rev. Proc. 2026-5, 2026-1 I.R.B. 258 (updated annually).
As provided in proposed Sec. 1.25F-5(d)(9)(ii), discussed in part
V.D.9 of this Explanation of Provisions, the IRS will add each of these
organizations to the IRS SGO list upon determining that the
organization qualifies for tax-exempt status as a section 501(c)(3)
public charity, if the organization consents to being included on the
IRS SGO list.
6. Certification of State Policies and Procedures
Proposed Sec. 1.25F-5(d)(6) would require a State to certify that
its policies and procedures, including its procedures for assessing and
responding to audit results, enable the State to make its own
determination that each organization on the State SGO list is located
in the State, is in compliance with section 25F(c)(5)(A) and (B) and
Sec. 1.25F-3(b)(1) through (4) and (6) and is operating in a manner
that satisfies the operational requirements in section 25F(d) and
proposed Sec. 1.25F-3(c) and the applicable State requirements.
Proposed Sec. 1.25F-5(d)(6) also would require that a State certify
that its policies and procedures provide for the prompt removal of an
organization from the State SGO list, and notification to the IRS
through the IRS State section 25F portal of such removal, upon a
determination that an organization is not an SGO or does not meet the
applicable State requirements. A State also would be required to
certify that its policies and procedures require any publicly available
lists of SGOs maintained by the State to be identical to the most
recently submitted State SGO list, include the IRS SGO list's URL
(Uniform Resource Locator), and state that a taxpayer may rely on an
organization's inclusion on the IRS SGO list in accordance with
proposed Sec. 1.25F-2(b). Finally, proposed Sec. 1.25F-5(d)(6) would
require that the State certify that its policies and procedures ensure
that the State's procedures before and after the removal of an
organization from the State SGO list are fairly administered and afford
due process in accordance with applicable Federal and State laws.
7. Changes to State SGO List
Proposed Sec. 1.25F-5(d)(7)(i) and (ii) would provide guidance
regarding the time period during which a State may replace or
supplement its State SGO list for a calendar year. A State would be
able to replace or supplement its State SGO list for a calendar year at
any time before the deadline for perfecting or completing an election
for that year by submitting the change in the IRS State section 25F
portal in accordance with guidance published in the Federal Register or
Internal Revenue Bulletin (see Sec. Sec. 601.601(d)(2) and 601.602 of
this chapter) or, as appropriate, in forms, instructions, and
publications available on <a href="https://www.irs.gov">https://www.irs.gov</a> and through the IRS SGO
portal or IRS State section 25F portal, as applicable. A State would
not be able to make any additions to the State SGO list for a calendar
year after that deadline; instead, any additions a State seeks to make
after such deadline may be included as part of the State's submission
of its State SGO list for the following calendar year.
Proposed Sec. 1.25F-5(d)(7)(iii) would provide that a State may
remove an SGO from its State SGO list at any time during the calendar
year to which that list applies. If an SGO requests to be removed from
a State SGO list, the State would be required to comply.
Many stakeholders requested guidance regarding the State's
discretion in removing an SGO from the State SGO list. Stakeholders
expressed concern that States could remove SGOs arbitrarily or for
political reasons and sought rules to ensure transparency and
uniformity regarding the removal process. In response, proposed Sec.
1.25F-5(d)(7)(iii) would provide that a State could remove an
organization from its State SGO list if the State determines, through a
procedure providing due process to the organization, that the
organization is not located in the State, does not satisfy the
requirements for an SGO in section 25F(c)(5)(A) or (B) and proposed
Sec. 1.25F-3(b), or is not operating in a manner that satisfies the
operational requirements in section 25F(d) and proposed Sec. 1.25F-
3(c) and the applicable State requirements. In each event, the State
would need to indicate the removal and its effective date on its State
SGO list and promptly notify the IRS so the IRS can remove the SGO from
the IRS SGO list for the current year. The organization would be
removed from the relevant part of the IRS SGO list for the current year
to ensure that any contributions to the organization after the date of
its removal from the State or IRS SGO list are not treated as qualified
contributions.
8. Removal of a Non-Compliant Organization From the IRS SGO List
Proposed Sec. 1.25F-5(d)(8) would provide the list of
circumstances under which an organization may be removed from the IRS
SGO list. Under proposed Sec. 1.25F-5(d)(8)(i), the IRS would remove
an organization from the IRS SGO list following its determination that
the organization is not a section 501(c)(3) public charity or automatic
revocation of the organization's tax-exempt status by function of
section 6033(j). Proposed Sec. 1.25F-5(d)(8)(ii) would further provide
that the IRS may remove an organization following its determination
that the organization has failed to comply with a requirement of
section 25F (other than the tax-exempt status requirement in section
25F(c)(5)(A)), or has failed to comply with the regulatory reporting,
recordkeeping or audit requirements, including a failure to report
qualified contributions in accordance with proposed Sec. 1.25F-4(c).
This IRS determination of non-compliance with the requirements of
section 25F would be a Federal tax controversy under section 7803(e)(3)
and Sec. 301.7803-2, which provides the organization an opportunity to
seek review by the IRS Independent Office of Appeals in the time and
manner prescribed in applicable forms, instructions, or other
administrative guidance. Under proposed Sec. 1.25F-5(d)(8)(iii)(A),
the IRS would remove an organization from the part of the IRS SGO list
for a particular covered State upon notification that it has been
removed from the State SGO list of that covered State.
[[Page 62836]]
Finally, proposed Sec. 1.25F-5(d)(8)(iii)(B) would provide that,
if a multistate SGO that is removed from a State SGO list under
proposed Sec. 1.25F-5(d)(8)(iii)(A) continues to satisfy the
operational requirements in section 25F(d) and proposed Sec. 1.25F-
3(c) and one or more other covered States' applicable requirements as
described in proposed Sec. 1.25F-5(e)(1), the SGO will remain on the
IRS SGO list with respect to such other covered States, subject to any
further discretionary examination of the SGO by such other covered
States or the IRS.
9. Publication of Covered States and State SGO Lists
Proposed Sec. 1.25F-5(d)(9)(i) would provide that the IRS will
maintain and publish the IRS SGO list on <a href="https://www.irs.gov">https://www.irs.gov</a>. For those
SGOs that have authorized the disclosure of their information on the
IRS SGO list, the IRS SGO list will contain each SGO included on a
State SGO list for each of the covered States for the calendar year and
reflect each removal from a State SGO list and the date of the removal.
If an SGO does not consent to the disclosure of its information on the
IRS SGO list, a taxpayer would not be able to use the reliance offered
by the IRS SGO list for purposes of establishing that the taxpayer's
contribution to that organization is a qualified contribution. Instead,
the taxpayer would need to rely on other evidence to establish that the
organization is an SGO. If an SGO is removed from the IRS SGO list, its
name and identifying information would be displayed in strike-through
text, along with the date of the organization's removal from the list,
to provide taxpayers with the information they may need in determining
if their contribution is being made, or was made, to a valid SGO and
thus is a qualified contribution eligible for the section 25F credit.
Proposed Sec. 1.25F-5(d)(9)(ii) would provide for updating the IRS
SGO list to include an organization whose tax-exempt status was pending
when the State SGO list was submitted. Upon determining that the
organization qualifies for tax-exempt status and that the effective
date of such tax-exempt status is on or before January 1 of the
calendar year for which the State SGO list applies, the IRS would add
the organization to the IRS SGO list for that year as soon as the
organization gives permission to be included on that list.
The publication of an IRS SGO list is consistent with feedback
requesting that the IRS publish information to facilitate taxpayers'
ability to determine which tax-exempt organizations are eligible to
receive qualified contributions. See proposed Sec. 1.25F-2(b)(1)
(permitting reliance on the IRS SGO list to establish that a
contribution is being made to an SGO).
E. State Administrative Requirements
Stakeholders submitted a broad range of comments regarding the
level of discretion the State should have in reviewing and certifying
SGOs. Concerns were raised that States might seek to prioritize
particular types of schools or students or otherwise implement State
education policies in a manner inconsistent with section 25F.
Proposed Sec. 1.25F-5(e) would provide guidance on State
administrative requirements. Proposed Sec. 1.25F-5(e)(1) would provide
that a State must require that SGOs meet all generally applicable State
requirements for charitable organizations, including any State
requirements that any organization must satisfy to be authorized to do
business in the State and to solicit charitable contributions in the
State. Additionally, States would be required to impose certain
application, documentation and financial reporting requirements that
are reasonably tailored to support the State's determination that the
organization satisfies the operational requirements in section 25F(d)
and proposed Sec. 1.25F-3(c), and to facilitate the prevention and
detection of fraud or abuse, including the misuse of scholarship funds
such as through the duplication of scholarship awards to the same
student for the same qualified elementary or secondary education
expense.
Proposed Sec. 1.25F-5(e)(2) would prohibit a State from requiring
SGOs to operate in a manner that is more restrictive than the
requirements set forth in section 25F(c)(5) and proposed Sec. 1.25F-
3(b) and (c), such as by limiting the type of school that scholarship
recipients may attend or the types of qualified elementary or secondary
education expenses for which scholarship funds may be used. This
prohibition would be responsive to stakeholder feedback expressing
concern that permitting States to impose additional requirements on
SGOs or to exercise discretion to exclude an otherwise qualifying
organization from the State SGO list could lead to arbitrary
determinations and improper discrimination.
Proposed Sec. 1.25F-5(e)(3) would provide that the procedures a
State implements in accordance with proposed Sec. 1.25F-5(e) are
subject to Federal review. Upon discovering a pattern of irregularities
or noncompliance, the IRS, in its discretion, may require a State to
modify its procedures to ensure that its determinations regarding an
organization's location in the State, and its satisfaction of proposed
Sec. 1.25F-3(b) and of the operational requirements in section 25F(d)
and proposed Sec. 1.25F-3(c) are being administered in accordance with
the applicable statutory, regulatory, and appropriate State
requirements.
Nothing in section 25F or these proposed regulations would alter
States' obligations to comply with all other applicable Federal and
State law, for example, the requirements under the Individuals with
Disabilities Education Act, 20 U.S.C. 1400 et seq.
VI. Proposed Applicability Date
Each of proposed Sec. Sec. 1.25F-1 through 1.25F-5 is proposed to
apply to taxable years ending on or after the date on which the
Treasury decision adopting these regulations as final regulations is
published in the Federal Register. Taxpayers, organizations, and States
may rely on these proposed regulations for qualified contributions made
on or after January 1, 2027, in taxable years ending before the date
the Treasury decision adopting these regulations as final regulations
is published in the Federal Register, provided that taxpayers,
organizations, and States follow the portions of the proposed
regulations applicable to each in their entirety and in a consistent
manner.
Special Analyses
I. Regulatory Planning and Review
Executive Orders 12866 and 13563 direct agencies to assess costs
and benefits of available regulatory alternatives and, if regulation is
necessary, to select regulatory approaches that maximize net benefits
(including potential economic, environmental, public health and safety
effects, distributive impacts, and equity). Executive Order 13563
emphasizes the importance of quantifying both costs and benefits,
reducing costs, harmonizing rules, and promoting flexibility.
The proposed regulations have been designated by the Office of
Management and Budget's (OMB) Office of Information and Regulatory
Affairs (OIRA) as subject to review under Executive Order 12866
pursuant to the Memorandum of Agreement (MOA, July 4, 2025) between the
Treasury Department and the Office of Management and Budget regarding
review of tax regulations. OIRA has determined that the proposed
rulemaking is economically significant
[[Page 62837]]
and subject to review under Executive Order 12866 and section 1(c) of
the Memorandum of Agreement. Accordingly, the proposed regulations have
been reviewed by OMB.
Executive Order 14192, titled ``Unleashing Prosperity Through
Deregulation,'' was issued on January 31, 2025. Section 3(a) of E.O.
14192 requires an agency, unless prohibited by law, to identify at
least 10 existing regulations to be repealed when the agency issues a
new regulation. In furtherance of this requirement, section 3(c) of
E.O. 14192 requires that the ``new incremental costs associated with
new regulations shall, to the extent permitted by law, be offset by the
elimination of existing costs'' associated with prior regulations. A
significant regulatory action (as defined in section 3(f) of E.O.
12866) that would impose total costs greater than zero is considered an
E.O. 14192 regulatory action. This proposed rule, if finalized as
proposed, is, therefore, expected to be an E.O. 14192 regulatory
action.
Need for Regulation
Public Law 119-21, 139 Stat. 72 (July 4, 2025), commonly known as
the OBBBA, added new section 25F (Qualified elementary and secondary
education scholarships) to the Code. Section 25F creates a dollar-for-
dollar nonrefundable Federal tax credit of up to $1,700 for
contributions made by individuals to scholarship granting organizations
(SGOs).
The proposed regulations provide clarity to taxpayers, States, and
SGOs to make the section 25F credit operable, including defining
certain terms found in the statute and establishing procedures that
ensure that the qualified contributions that generate the Federal tax
credits are implemented in accordance with the statute.
The Statute and the Proposed Regulations
Section 70411 of the OBBBA added section 25F to the Code. Section
25F creates a tax credit for qualified contributions made by individual
taxpayers to SGOs. SGOs are a type of charitable tax-exempt
organization subject to unique reporting rules and operational and
spending restrictions. They are required to focus their spending almost
exclusively on the provision of scholarships for students eligible to
attend elementary or secondary school who reside in households where
the household income falls below a certain threshold. These
scholarships are restricted to being used for qualified elementary and
secondary school expenses, and the SGO must provide scholarships to at
least 10 students per year who do not all attend the same school.
The proposed regulations provide a number of definitions and
clarifications to the statutory rules governing section 25F. In
particular, the proposed regulations explain the calculation of the
credit amount a taxpayer may claim and specify that qualified
contributions must be made by individuals to receive the section 25F
credit.
In addition, the proposed regulations address operational
requirements of SGOs. The proposed regulations provide guidance for
tax-exempt organizations that wish to operate as SGOs in multiple
States, including what it means to be ``located in the State.''
Furthermore, the proposed regulations consider the statutory
requirement that an SGO spend not less than 90 percent of the
organization's income on scholarships. Recognizing the potential for
organizations to incur legitimate administrative costs in excess of 10
percent of income, the proposed regulations provide a safe harbor for
organizations whose scholarship granting activities are at least 85
percent of the organization's activities. Such organizations may
satisfy the 90% of income spending requirement solely on the basis of a
section 25F segregated account, rather than on the basis of all of the
organization's income. The proposed regulations also provide that an
SGO is responsible for verifying that the scholarships awarded from
qualified contributions it collects are used only to fund qualified
elementary or secondary school expenses for eligible students.
To clarify the definition of an eligible student, the proposed
regulations provide guidance regarding the definition of household
income and family size and clarify that the income limits specified in
the statute will be adjusted for family size. The proposed regulations
offer various methods SGOs may use to verify that a potential
scholarship recipient meets the eligibility criteria set out in the
statute, including safe harbors that do not require SGOs to conduct a
full, direct verification of recipients' household income. Under these
safe harbors, students qualify as eligible to benefit from section 25F
scholarship funds if someone in their household already benefits from
one of a few specified needs-based benefit programs, if the student
attends a school serving students in certain qualified census tracts
and receives a scholarship for academic tutoring or special needs
services, or if a student has been placed in foster care.
The proposed regulations further clarify the definition of student
eligibility by specifying that students are treated as ``solely within
the State'' if the student is a resident of the State under State law,
subject to two exceptions. The proposed regulations also provide rules
defining a ``disqualified person.''
The proposed regulations provide reporting and recordkeeping
requirements for SGOs, including an annual audit requirement. They also
set forth procedures for donors to report and SGO to substantiate the
amount of qualified contributions made by the donor during the taxable
year.
The proposed regulations ensure that SGOs are able to conduct their
scholarship-granting activities with the maximum flexibility permitted
under the statute. The proposed regulations clarify that States cannot
condition inclusion on the SGO list on any additional requirements more
stringent than those specified in the statute and in the proposed
regulations; nor can a State exercise discretion over which SGOs are
included or excluded from the SGO list. The proposed regulations also
prevent States from placing restrictions on the definition of qualified
elementary or secondary school expenses.
A. Baseline
The Treasury Department and the IRS have assessed the benefits and
costs of the proposed regulations relative to a no-action baseline
reflecting anticipated Federal income tax-related behavior in the
absence of these proposed regulations.
B. Affected Entities and Taxpayers
The proposed regulations would affect taxpayers who make qualified
contributions to SGOs and seek to claim the section 25F credit and
students who receive scholarships funded with such contributions. They
would also affect the SGOs that solicit qualified contributions and
award scholarships from these contributions, as well as the States that
may choose to participate in the section 25F credit and, in doing so,
assess the eligibility of SGOs and authorize SGOs to facilitate such
scholarships.
As of August 2026, 30 States have elected to participate in the
section 25F credit. The Treasury Department and the IRS estimate that
600 to 700 SGOs \4\ will operate in these States by 2030. The Treasury
Department and the IRS also
[[Page 62838]]
estimate that more than 11 million taxpayers will make qualified
contributions totaling $26 billion to these SGOs annually.\5\ This is
expected to allow the SGOs operating in these States to fund 2 million
annual ($12,000) \6\ full-time scholarships, or 5 million part-time
($4,500) scholarships, per year by 2030.
---------------------------------------------------------------------------
\4\ This range is based on the average amount of SGOs operating
at the State level, in States which have tax credit scholarships.
The same amount of SGOs per State is assumed to obtain in each State
which opts into the Federal credit.
\5\ Estimates are produced using a 10% take-up rate. This
projected take-up rate is based on data from the 2023 Panel Study of
Income Dynamics, variable ER85243, and estimates of the increased
propensity to contribute when directing the expenditure of one's tax
dollars. Li, Sherry Xin, et al. ``Directed giving enhances voluntary
giving to government.'' Economics Letters 133 (2015): 51-54.
\6\ The annual amount of $12,000 is a rounded average of the
cost to attend one year of private elementary or secondary school in
the states which have opted in to the section 25F credit as of
August 2026. ``Average Private School Tuition Cost'', Private School
Review for 2026, <a href="https://www.privateschoolreview.com/tuition-stats/private-school-cost-by-state">https://www.privateschoolreview.com/tuition-stats/private-school-cost-by-state</a>, last accessed May 1, 2026. Internal
Revenue Service, Federal Scholarship Tax Credit (FSTC). <a href="https://www.irs.gov/government-entities/federal-state-local-governments/federal-scholarship-tax-credit-fstc">https://www.irs.gov/government-entities/federal-state-local-governments/federal-scholarship-tax-credit-fstc</a>, last accessed August 11, 2026.
---------------------------------------------------------------------------
C. Economic Effects of the Proposed Regulations
In general, the proposed regulations would provide clarity to
operationalize the section 25F credit. This clarity is expected to
benefit the up to 2 million students who are expected to receive a
scholarship annually. Research shows that educational choice can lead
to increases in college enrollment and test scores, particularly for
students from economically disadvantaged backgrounds.\7\ The students
who benefit from the proposed regulations are therefore expected to
enjoy an increased probability of completing secondary school and
attending college. Because the financial return from each additional
year of schooling is approximately 10%,\8\ the students who benefit
from the proposed regulations are expected to experience a significant
increase in lifetime earnings.
---------------------------------------------------------------------------
\7\ Deming, David J., Justine S. Hastings, Thomas J. Kane, and
Douglas O. Stanger. ``School choice, school quality, and
postsecondary attainment.'' American Economic Review 104.3 (2014):
991-1013; Angrist, Joshua D., Parag A. Pathak, and Christopher R.
Walters. ``Explaining charter school effectiveness.'' American
Economic Journal: Applied Economics 5.4 (2013): 1-27.
\8\ Deming, David J. ``Four facts about human capital.'' Journal
of Economic Perspectives 36.3 (2022): 75-102. Urquiola, Miguel.
``Competition among schools: Traditional public and private
schools.'' Handbook of the Economics of Education. Vol. 5. Elsevier,
2016. 209-237.
---------------------------------------------------------------------------
The following sections describe in detail the potential economic
impacts of certain specific elements of the proposed regulations.
1. Calculation of Tax Credit
Under section 25F(b), the amount of the credit allowed for a
taxpayer's qualified contributions is reduced by any State tax credit
for such contributions and is limited to a maximum of $1,700. As noted
in part II.F. of the Explanation of Provisions, the Treasury Department
and the IRS interpret section 25F(b) as limiting the credit to $1,700
after applying the State credit reduction, notwithstanding that the
$1,700 limitation in section 25F(b)(1) appears before the State credit
reduction in section 25F(b)(2). This interpretation benefits taxpayers
by maximizing their ability to claim the section 25F credit if they
claim state credits for qualified contributions.
Section 25F(e) states that any qualified contribution for which a
section 25F credit is allowed is not to be taken into account as a
charitable contribution for purposes of section 170. Section 25F(f)
further specifies that the section 25F credit may be carried forward
for up to 5 years if the amount of the credit allowable exceeds the
taxpayer's tax liability. The proposed regulations provide a stacking
order to operationalize these limitations while maximizing the economic
benefits for taxpayers relative to an alternative.
Proposed Sec. 1.25F-2(c) provides a clear and taxpayer-favorable
methodology consistent with the statutory limitations for calculating
the amount of the section 25F credit, beginning with the aggregate
amount of qualified contributions. Under the proposed rule, taxpayers
must first determine the aggregate amount of qualified contributions
for the tax year and then determine which State credits were claimed on
the taxpayer's State tax return or otherwise allowed with respect to
those qualified contributions. The amount allowable as a credit under
section 25F(a) is then the lesser of the aggregate qualified
contributions made during the tax year as reduced by any State tax
credits allowed for such qualified contributions and $1,700.\9\ The
proposed rule clarifies that, if a State credit is allowed with respect
to an individual's contributions of cash to an SGO that includes both a
qualified contribution and an amount that is not a qualified
contribution, then the State credit will be treated as first being
allowed with respect to the amount of the donor's contribution that is
not a qualified contribution and only thereafter treated as being
allowed with respect to the donor's qualified contributions to an SGO.
---------------------------------------------------------------------------
\9\ After taking the lesser of these two amounts, the amount
allowable as a credit is then augmented by the value of any unused
credit carried forward to the tax year from an earlier year.
---------------------------------------------------------------------------
This proposed rule benefits the taxpayer by adopting an ordering
rule that preserves the maximum credit available under the statute. To
illustrate this benefit, consider an example taxpayer who lives in a
State that allows a 100% tax credit of up to $2,000 for contributions
to SGOs. Suppose this taxpayer makes a cash contribution of $5,000 to
an SGO and designates $1,700 of this contribution as a section 25F
qualified contribution. For simplicity, further suppose that this
taxpayer does not itemize the taxpayer's Federal deductions.
The proposed regulation allows the taxpayer to count the $3,300
that is not designated as a ``qualified contribution'' toward the State
tax credit (if otherwise eligible). In this example, the taxpayer could
then receive $2,000 in State tax credits and the remaining $1,700 of
the qualified contribution would qualify for the section 25F credit,
without violating the section 25F(e) denial of double benefit
requirement. Under the proposed regulations, this contribution would
reduce the taxpayer's Federal tax liability by $1,700, and reduce the
State tax liability by $2,000, for a total tax benefit of $3,700.
An alternative interpretation of the statute could have instructed
the taxpayer to use State credits to reduce the amount of qualified
contributions before the amount of non-qualified contributions. Under
this alternative, the taxpayer would have been required to reduce their
$1,700 qualified contribution to zero, because the taxpayer claimed
$2,000 as a credit against State tax liability. Under this alternative,
the taxpayer's $5,000 contribution would not reduce the taxpayer's
Federal tax liability, but would reduce the State tax liability by
$2,000, for a total tax benefit of $2,000.
By adopting this interpretation of the statute, and providing a
corresponding ordering rule, the proposed regulations provide the
example taxpayer with a net benefit of $1,700 relative to the
alternative interpretation referenced in the previous paragraph.
Similar benefits would be conferred upon all taxpayers who avail
themselves of both a State and a Federal credit for contributions to
SGOs. The Treasury Department and the IRS estimate that approximately
46.5 million taxpayers \10\ will be eligible to take both a State and a
Federal tax credit for contributions to SGOs. At a take-up
[[Page 62839]]
rate of 10%, this proposed rule is expected to provide a net benefit of
at most $1,700 per year to 3.1 million taxpayers, and at most $3,400
per year to an additional 1.55 million married taxpayers.
---------------------------------------------------------------------------
\10\ IRS, Statistics of Income Division, Historic Table 2. Last
accessed in July 2026. <a href="https://www.irs.gov/statistics/soi-tax-stats-historical-data-tables">https://www.irs.gov/statistics/soi-tax-stats-historical-data-tables</a>.
---------------------------------------------------------------------------
In addition to the financial benefits that the proposed rule would
confer on the taxpayers who claim both Federal and State tax credits
for contributions to SGOs, the proposed regulations will benefit all
taxpayers by providing clarity regarding the calculation of the credit
amount each taxpayer may claim under section 25F. These clarifications
will help to preserve horizontal equity between taxpayers. In the
absence of the proposed regulations, taxpayers may encounter difficulty
in ascertaining which portions of their contribution are eligible for a
given tax credit or deduction. Without further guidance, taxpayers in
similar tax situations, who make similar gifts to SGOs, may come to
different conclusions about how to maximize the economic benefits from
their charitable contributions.
2. Definition of Terms Needed To Determine Student Eligibility for
Scholarships
The proposed regulations define both income and a family-size
adjustment for income. The income definition expands the number of
students who would be eligible for a scholarship from an SGO that
receives qualified contributions and minimizes compliance burdens
relative to alternatives.
Section 25F(c)(2) defines an eligible student as an individual who
is a member of a household with a calendar-year income not exceeding
300 percent of the area median gross income, and who is eligible to
enroll in a public elementary or secondary school.
Section 25F(c)(2)(A) specifies an income limit for potential
scholarship recipients. This income limit is set at ``300 percent of
the area median gross income (as such term is used in section 42).''
Section 42(g)(4) provides that ``paragraph (2) (other than subparagraph
(A) thereof) . . . of section 142(d) . . . shall apply for purposes of
determining whether any project is a qualified low-income housing
project and whether any unit is a low-income unit.'' Section
142(d)(2)(B)(i) provides a definition of area median gross income as
follows:
``The income of individuals and area median gross income shall
be determined by the Secretary in a manner consistent with
determinations of lower income families and area median gross income
under section 8 of the United States Housing Act of 1937 (or, if
such program is terminated, under such program as in effect
immediately before such termination). Determinations under the
preceding sentence shall include adjustments for family size.''
i. Defining a Family Size Adjustment
The proposed regulations use family size adjustments as defined by
the Department of Housing and Urban Development (HUD) to administer
lower income housing assistance under section 8 of the United States
Housing Act of 1937 (Pub. L. 75-896) (Section 8 housing); see Table 1
below. Section 25F(c)(2)(A) specifies the income limit used to
determine eligibility as ``300 percent of the area median gross income
(as such term is used in section 42).'' To ensure consistency with the
income limits used in section 42, the income limit must be calculated
as the product of 300 percent of the area median gross income and the
HUD family-size multiplier. For example, if a household of three lived
in a location where the area median gross income was $100,000, a child
in this household could be eligible to receive a scholarship funded by
section 25F if the household's income was less than, or equal to,
$270,000 (3 * $100,000 * 0.90). For a household of four living in the
same area, this income limit would be $300,000 (3 * $100,000 * 1.0).
Table 1--Current HUD Family Size Multipliers
--------------------------------------------------------------------------------------------------------------------------------------------------------
Family size 1 2 3 4 5 6 7 8
--------------------------------------------------------------------------------------------------------------------------------------------------------
Multiplier.............................................. 0.70 0.80 0.90 1.00 1.08 1.16 1.24 1.32
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes: For each member of the family in excess of 8, the family size multiplier increases by 0.08.
Sources: Methodology for Determining FY 2026 Section 8 Income Limits, last accessed June 11, 2026. <a href="https://www.huduser.gov/portal/datasets/il/il26/IncomeLimitsMethodology-FY26.pdf">https://www.huduser.gov/portal/datasets/il/il26/IncomeLimitsMethodology-FY26.pdf</a>.
Alternative family size adjustments are widely used in a similar
fashion to achieve horizontal equity. Other alternatives were not
considered for purposes of section 25F, because the statute references
the HUD definition of area median gross income, which uses the HUD
family size multiplier. The HUD multiplier and potential alternatives
all balance adjusting for the higher costs associated with larger
family units with the higher returns to scale available to larger
family units.
ii. Defining Family Size
The proposed regulations define family size as the number of
persons who reside in the same household as the eligible student,
including the eligible student. If the eligible student is part of
multiple households over the course of the year, the relevant household
is the one in which the student resided for the majority of the year.
If the student splits time equally among multiple households, the
proposed regulation states that the relevant household is the one with
the highest household income. This definition is chosen for its
consistency with other commonly used definitions of family size.
Relative to the alternative of not defining family size, its simplicity
is expected to increase administrability and thus alleviate some of the
burdens on SGOs and families as they determine which students are
eligible to receive a scholarship funded by the section 25F credit.
iii. Defining Household Income
Having defined the income limits as a function of area median gross
income and family size, the proposed regulations also provide
guidelines for determining whether a student's household income exceeds
these limits. As the income limits used to determine eligibility for a
section 25F scholarship are closely related to those used by HUD in
administration of section 8 housing and section 42 relating to the low-
income housing credit, a natural candidate for the definition of
household income under section 25F would also follow the definition
used by HUD for those purposes. The proposed regulations would adopt
this definition of income with one modification: household income
includes only cash sources of income, and excludes non-cash sources of
income, such as imputed income on net assets. When a family holds net
assets of $50,000 or more, and the actual returns of this asset cannot
be calculated, the HUD definition of annual income imputes returns on
this asset based on the current passbook savings rate.\11\ This
[[Page 62840]]
condition will often prove irrelevant for families who benefit from
section 8 housing vouchers or section 42 rent restrictions: the most
recent available data indicates that the median renter has a net worth
of only $10,400, far below the threshold for imputing returns on net
assets. By contrast, the median homeowner has a net worth of
$396,000.\12\ If the section 25F definition of household income were to
conform exactly to the definition used by HUD to provide support to
renter households, then many students who reside in owner-occupied
households would be rendered ineligible to receive section 25F
scholarships due to imputed income on family assets.
---------------------------------------------------------------------------
\11\ 24 CFR 5.609 (2000), last accessed June 11, 2026. <a href="https://www.ecfr.gov/current/title-24/subtitle-A/part-5/subpart-F/subject-group-ECFR174c6349abd095d/section-5.609">https://www.ecfr.gov/current/title-24/subtitle-A/part-5/subpart-F/subject-group-ECFR174c6349abd095d/section-5.609</a>.
\12\ Aladangady, Aditya, Jesse Bricker, Andrew C. Chang, Sarena
Goodman, Jacob Krimmel, Kevin B. Moore, Sarah Reber, Alice Henriques
Volz, and Richard A. Windle (2023). Changes in U.S. Family Finances
from 2019 to 2022: Evidence from the Survey of Consumer Finances.
Washington: Board of Governors of the Federal Reserve System,
October, <a href="https://doi.org/10.17016/8799">https://doi.org/10.17016/8799</a>.
---------------------------------------------------------------------------
By using a definition of income that focuses exclusively on cash
income, as opposed to the HUD definition of income, the proposed
regulations greatly expand the universe of children who would be
eligible to receive a scholarship funded through section 25F. The
Treasury Department and the IRS estimate that, under the strict HUD
definition, 64 percent of elementary and secondary school age children
would be expected to be eligible to receive a scholarship, compared to
the 95 percent of children expected to be eligible as a result of the
exclusion of non-cash income provided in the proposed regulations.
These proposed regulations also benefit taxpayers and SGOs by
reducing the burden placed on SGOs to verify eligible students'
incomes: they are able to count only cash sources of income, without
being required to augment this value with an imputation of the non-cash
income received by a student's family or household.
The Treasury Department and the IRS also considered defining
household income as adjusted gross income (AGI) as calculated on Form
1040. This alternative was not chosen for several reasons. First, AGI
must be calculated based on the income and marital status of a tax
unit. The statute contains references to households and families,
rather than tax units. In general, a tax unit may consist of a smaller
set of individuals than a household or a family.\13\ Second, between 3
and 12 percent of U.S. children are not claimed on Federal tax returns.
These unclaimed children are disproportionately concentrated in lower-
income households \14\ and therefore would likely be eligible to
receive a scholarship financed by section 25F contributions if they had
been claimed on a tax return. If the proposed regulations were to adopt
AGI as the definition of income under section 25F, the proposed
regulations would introduce inequities between children who are claimed
as dependents on a Federal tax return, and those who are not because of
potential claimants having insufficient taxable income to require the
filing of a return. The Treasury Department and the IRS estimate that
using AGI as the definition of household income would have reduced the
number of children eligible to receive scholarships by 17%.\15\
---------------------------------------------------------------------------
\13\ Larrimore, Jeff, Jacob Mortenson, and David Splinter.
``Household incomes in tax data: Using addresses to move from tax-
unit to household income distributions.'' Journal of Human Resources
56.2 (2021): 600-631.
\14\ Gee, Geoffrey, Goldin, Jacob, Gray-Hancuch, Joseph, Lurie,
Ithai, and Vedant Vohra. (2026). The Claiming of Children on US Tax
Returns. National Tax Journal, 79(1), 51-71. <a href="https://doi.org/10.1086/736708">https://doi.org/10.1086/736708</a>.
\15\ To arrive at this estimate, Treasury and the IRS analyzed
data from the American Community Survey, using methodology adapted
from the CPS ASEC Tax Model to assign children to eligible tax
units. U.S. Census Bureau, 2024 American Community Survey 1-Year
Public Use Microdata Sample. <a href="https://www.census.gov/programs-surveys/acs/microdata/access.html">https://www.census.gov/programs-surveys/acs/microdata/access.html</a>, last accessed May 11, 2026. Lin,
Daniel. ``Methods and assumptions of the CPS ASEC Tax Model.'' US
Census Bureau (2022). <a href="https://www.census.gov/content/dam/Census/library/working-papers/2022/demo/sehsd-wp2022-18.pdf">https://www.census.gov/content/dam/Census/library/working-papers/2022/demo/sehsd-wp2022-18.pdf</a>.
---------------------------------------------------------------------------
3. Safe Harbor Rules for Student Eligibility
Section 25F(d)(1)(F)(i) specifies that SGOs must verify students'
annual household income and family size to ensure that these students
meet these eligibility requirements. The proposed regulations further
reduce the administrative burden placed on SGOs associated with income
verification by specifying certain safe harbors under which a student
may be considered eligible. The proposed regulations include three safe
harbors: one for students who live with an individual who receives
certain specified types of needs-based social assistance; one for
students generally who attend school in certain low-income or high-
poverty census tracts and receive a scholarship for academic tutoring
or special needs services; and one for students in the foster care
system.
First, the proposed regulations specify that, if an individual in a
student's household currently benefits from specified needs-based
benefit programs, then that student may be considered categorically
eligible to receive a section 25F scholarship. The Treasury Department
and the IRS estimate that 36% of all students are covered by this safe
harbor rule. The Treasury Department and the IRS estimate that the
creation of this safe harbor will not change the number of students who
are eligible to receive scholarships under section 25F.\16\ Rather, the
primary economic impact of this safe harbor is to allow SGOs to reduce
the burden of satisfying the income verification requirement. With
fewer hours and dollars devoted to the income verification process,
this safe harbor would benefit the taxpayer by allowing a greater share
of dollars received by SGOs to be paid out as scholarships. The
Treasury Department and the IRS estimate that the cost savings to SGOs
enabled by the proposed safe harbor will allow SGOs to fund nearly
45,000 scholarships (estimated using an average annual scholarship
amount of $12,000).\17\
---------------------------------------------------------------------------
\16\ The Treasury Department and the IRS used Census data from
the American Community Survey to measure total household income and
household size. Total household income was compared to 300% of area
median gross income, as published by HUD. Using these data sources,
the Treasury Department and the IRS have estimated that
substantially all households with children eligible to attend
elementary or secondary school, located in states which have elected
to participate in the FSTC, have incomes that fall below the 300% of
AMGI limit. U.S. Department of Housing and Urban Development, Office
of Policy Development and Research (PD&R). HUD Multifamily Tax
Subsidy Project (MTSP) Income Limits. <a href="https://www.huduser.gov/portal/datasets/mtsp.html#data_2026">https://www.huduser.gov/portal/datasets/mtsp.html#data_2026</a>, last accessed June 12, 2026.
U.S. Census Bureau, 2024 American Community Survey 1-Year Public Use
Microdata Sample. <a href="https://www.census.gov/programs-surveys/acs/microdata/access.html">https://www.census.gov/programs-surveys/acs/microdata/access.html</a>, last accessed May 11, 2026. Internal Revenue
Service, Federal Scholarship Tax Credit (FSTC). <a href="https://www.irs.gov/government-entities/federal-state-local-governments/federal-scholarship-tax-credit-fstc">https://www.irs.gov/government-entities/federal-state-local-governments/federal-scholarship-tax-credit-fstc</a>, last accessed June 12, 2026. Annual
Update of the HHS Poverty Guidelines, 91 FR 1797 (January 15, 2026).
<a href="https://www.govinfo.gov/content/pkg/FR-2026-01-15/pdf/2026-00755.pdf">https://www.govinfo.gov/content/pkg/FR-2026-01-15/pdf/2026-00755.pdf</a>
Last accessed June 15, 2026.
\17\ As of June 2026, The Work Number charges $46.95 to verify
one employer record for the period of one calendar year. If each
eligible student lives in a household where the adults collectively
have two employer records per calendar year, verifying the sources
of household income associated with the scholarship application will
cost approximately $100. The proposed safe harbor will reduce these
costs for scholarship applications from students who live in states
which have elected to participate in the FSTC, and who live with at
least one recipient of a means-tested assistance program. The
Treasury Department and the IRS analyzed data from the American
Community Survey and determined that approximately 6 million
households, containing 10 million children between the ages of 5 and
17, meet these criteria. Per EdChoice, 52% of parents would prefer
to educate their child at a private school, charter school, or
homeschool. If 52% of the children who are eligible to receive
section 25F scholarships under this safe harbor apply to an SGO for
a scholarship, the cost of conducting employment verifications for
all of these applications will be $520 million. If the cost of an
average scholarship is assumed to be $12,000 per child, these cost
savings are sufficient to cover an average annual scholarship for
nearly 45,000 eligible children. ``Social Service Verification,''
Equifax: The Work Number, <a href="https://theworknumber.com/solutions/products/social-service-verification">https://theworknumber.com/solutions/products/social-service-verification</a>, last accessed June 16, 2026;
U.S. Census Bureau, 2024 American Community Survey 1-Year Public Use
Microdata Sample. <a href="https://www.census.gov/programs-surveys/acs/microdata/access.html">https://www.census.gov/programs-surveys/acs/microdata/access.html</a>, last accessed May 11, 2026; ``Monthly Public
Opinion Tracker,'' EdChoice, <a href="https://edchoice.mcdatahub.com/edchoice/">https://edchoice.mcdatahub.com/edchoice/</a>, last accessed June 16, 2026.
---------------------------------------------------------------------------
[[Page 62841]]
Second, the proposed regulations specify that, if an SGO provides
scholarships to individual students at a school in a low-income area
for individual academic tutoring or for special needs services of a
special needs student, and the recipient students are selected by the
school on the basis of the particular student's need, the SGO may
consider those students as having satisfied the income eligibility
requirement if either the school is located in, or at least 80% of
students at the school reside in, a qualified census tract. A census
tract is designated as ``qualified'' under section 42 if a sufficiently
large number of resident households are low-income or if the poverty
rate there is sufficiently high.\18\ The Treasury Department and the
IRS do not have readily available parameters and models to quantify the
number or location of schools that work with SGOs to fund tutoring or
other educational services for their students. The Treasury Department
and the IRS estimate that the creation of this safe harbor will
modestly increase the number of students who are eligible to receive
scholarships under section 25F, and that it will facilitate the
awarding of scholarships to students whose family may be unlikely to
provide sufficient information to allow the SGO to verify the students'
household income. This safe harbor would confer eligibility on
approximately 170,000 students who would otherwise not be considered
eligible. This represents only 0.6% of the estimated number of eligible
students, inclusive of this safe harbor.\19\ However, this safe harbor
is expected to reduce the barriers to take-up faced by students who
live in qualified census tracts, or who attend school in a qualified
census tract, and thereby increase these students' access to
educational resources provided through section 25F scholarships.\20\
---------------------------------------------------------------------------
\18\ See Sec. 42(5)(B)(ii).
\19\ To arrive at this estimate, the Treasury Department and the
IRS analyzed Census data from the American Community Survey,
together with the 2026 list of qualified census tracts published by
the Department of Housing and Urban Development. U.S. Department of
Housing and Urban Development, Office of Policy Development and
Research (PD&R). HUD Multifamily Tax Subsidy Project (MTSP) Income
Limits. <a href="https://www.huduser.gov/portal/datasets/mtsp.html#data_2026">https://www.huduser.gov/portal/datasets/mtsp.html#data_2026</a>,
last accessed June 12, 2026. U.S. Census Bureau, 2024 American
Community Survey 1-Year Public Use Microdata Sample. <a href="https://www.census.gov/programs-surveys/acs/microdata/access.html">https://www.census.gov/programs-surveys/acs/microdata/access.html</a>, last
accessed May 11, 2026. Internal Revenue Service, Federal Scholarship
Tax Credit (FSTC). <a href="https://www.irs.gov/government-entities/federal-state-local-governments/federal-scholarship-tax-credit-fstc">https://www.irs.gov/government-entities/federal-state-local-governments/federal-scholarship-tax-credit-fstc</a>, last
accessed June 12, 2026.
\20\ These barriers may include, for example, the effort costs
associated with learning about the availability of section 25F
credit-funded scholarships, finding out about one's own eligibility,
and completing the application. Currie, Janet. 2006. ``The Take-up
of Social Benefits.'' In Public Policy and the Distribution of
Income (pp. 80-148). Russell Sage Foundation. <a href="https://collaborate.princeton.edu/en/publications/the-take-up-of-social-benefits/">https://collaborate.princeton.edu/en/publications/the-take-up-of-social-benefits/</a>; Finkelstein, Amy, and Notowidigdo, Matthew J. 2019.
``Take-up and Targeting: Experimental Evidence from SNAP.'' The
Quarterly Journal of Economics, 134(3), 1505-1556. <a href="https://doi.org/10.1093/qje/qjz013">https://doi.org/10.1093/qje/qjz013</a>.
---------------------------------------------------------------------------
Finally, the proposed regulations specify that a foster child is
categorically eligible to receive a scholarship under section 25F.
Nearly 350,000 school-age children were in the foster care system as of
December 2024.\21\ The median amount of time a foster child remains in
foster care is 15 months,\22\ during which time as many as one-third of
foster children will experience at least three separate placements.\23\
If a child is a transitory resident of several different households
over the course of the year, most of which do not reflect the true set
of resources available to that child,\24\ then an SGO may be uncertain
how to verify this child's household income or receive cooperation from
all available households. Nevertheless, children in foster care
disproportionately come from families with incomes well below 300% of
area median gross income, which would make these children eligible to
receive a section 25F scholarship.\25\ This proposed rule would reduce
the administrative burden associated with verifying household income
for foster children by reducing any uncertainty the SGO may face in the
income verification process. This would further benefit the taxpayer,
eligible students, and SGOs by allowing the SGO to reduce expenses on
income verification; the Treasury Department and the IRS estimate that
the associated savings total nearly $20 million per year and could be
redirected toward scholarships for at least an additional 1,500
children.\26\
---------------------------------------------------------------------------
\21\ Annie E. Casey Foundation, ``Children in Foster Care by Age
Group in United States,'' <a href="https://datacenter.aecf.org/data/tables/6244-children-in-foster-care-by-age-group">https://datacenter.aecf.org/data/tables/6244-children-in-foster-care-by-age-group</a>. Last accessed June 16,
2026.
\22\ Bald, Anthony, Joseph J. Doyle Jr., Max Gross, & Brian
Jacob. (2022). ``Economics of Foster Care.'' Journal of Economic
Perspectives, 36(2), 223-246. <a href="https://pubs.aeaweb.org/doi/pdf/10.1257/jep.36.2.223">https://pubs.aeaweb.org/doi/pdf/10.1257/jep.36.2.223</a>.
\23\ Annie E. Casey Foundation. 2023. ``What impacts placement
stability?'' <a href="https://www.casey.org/media/23.07-QFF-SF-Placement-Stability-Impacts.pdf">https://www.casey.org/media/23.07-QFF-SF-Placement-Stability-Impacts.pdf</a>. Last accessed June 16, 2026.
\24\ As of 2019, only 31.94% of children in the foster care
system were placed in kinship care. Bald, Anthony, Joseph J. Doyle
Jr., Max Gross, & Brian Jacob. (2022). ``Economics of Foster Care.''
Journal of Economic Perspectives, 36(2), 223-246. <a href="https://pubs.aeaweb.org/doi/pdf/10.1257/jep.36.2.223">https://pubs.aeaweb.org/doi/pdf/10.1257/jep.36.2.223</a>.
\25\ Berger et al. (2017) reports that the mean income of
families who experience a Child Protective Services investigation is
$19,142, measured in constant 2009 dollars; the standard deviation
of this mean was $12,247. An unusually high-income investigated
family, with an income of two standard deviations above the mean,
would then have an income of $43,636. This value was less than 300%
of the 2009 area median gross income for all 50 states and the
District of Columbia. Berger, L. M., Font, S. A., Slack, K. S., &
Waldfogel, J. (2017). Income and child maltreatment in unmarried
families: Evidence from the earned income tax credit. Review of
Economics of the Household, 15(4), 1345-1372. <a href="https://link.springer.com/article/10.1007/s11150-016-9346-9">https://link.springer.com/article/10.1007/s11150-016-9346-9</a>. U.S. Department
of Housing and Urban Development, Office of Policy Development and
Research (PD&R). HUD Multifamily Tax Subsidy Project (MTSP) Income
Limits. <a href="https://www.huduser.gov/portal/datasets/mtsp.html#data_2009">https://www.huduser.gov/portal/datasets/mtsp.html#data_2009</a>,
last accessed June 18, 2026.
\26\ This estimate again assumes $100 per income verification
and a take-up rate of 52%. These values are multiplied by the
approximately 350,000 children in foster care and then divided by
the $12,000 assumed average cost of a scholarship to arrive at the
estimated number of additional scholarships that could be provided
with the savings enabled by the proposed regulations.
---------------------------------------------------------------------------
As a result of the choice to define household income as cash
income, and the inclusion of these three safe harbors, the Treasury
Department and the IRS estimate that 96% of children located in States
that have elected to designate SGOs under section 25F will be eligible
to receive section 25F scholarship funds.
[[Page 62842]]
Table 2--Share of Children in States Eligible To Receive 25F Scholarships, by Income Definition
----------------------------------------------------------------------------------------------------------------
Share
Family size multiplier Family definition Income definition Safe harbors eligible
(%)
----------------------------------------------------------------------------------------------------------------
No multiplier.................... Tax unit............ Adjusted Gross None.................. 79
Income.
No multiplier.................... Family.............. All................. None.................. 64
HUD family size multipliers...... Family.............. All................. None.................. 65
HUD family size multipliers...... Household........... All................. None.................. 64
HUD family size multipliers...... Household........... Cash only........... None.................. 95
HUD family size multipliers...... Household........... Cash only........... Categorical 96
eligibility,
qualified census
tracts, foster care.
----------------------------------------------------------------------------------------------------------------
Notes: Denominator includes all children ages 5 to 17 who reside in States that have made advance elections to
participate in the section 25F credit as of July 2026.
Sources: U.S. Department of Housing and Urban Development, Office of Policy Development and Research (PD&R). HUD
Multifamily Tax Subsidy Project (MTSP) Income Limits. <a href="https://www.huduser.gov/portal/datasets/mtsp.html#data_2026">https://www.huduser.gov/portal/datasets/mtsp.html#data_2026</a>, last accessed June 12, 2026. U.S. Department of Housing and Urban Development, Office of
Policy Development and Research (PD&R). Qualified Census Tracts (QCT) Data. <a href="https://www.huduser.gov/portal/datasets/qct.html">https://www.huduser.gov/portal/datasets/qct.html</a>, last accessed June 12, 2026. U.S. Census Bureau, 2024 American Community Survey 1-Year
Public Use Microdata Sample. <a href="https://www.census.gov/programs-surveys/acs/microdata/access.html">https://www.census.gov/programs-surveys/acs/microdata/access.html</a>, last accessed
May 11, 2026. Internal Revenue Service, Federal Scholarship Tax Credit (FSTC). <a href="https://www.irs.gov/government-entities/federal-state-local-governments/federal-scholarship-tax-credit-fstc">https://www.irs.gov/government-entities/federal-state-local-governments/federal-scholarship-tax-credit-fstc</a>, last accessed June 12, 2026.
Feenberg, Daniel, and Elisabeth Coutts, (1993). ``An introduction to the TAXSIM model.'' Journal of Policy
Analysis and Management, 12(1), 189-194. <a href="https://taxsim.nber.org/taxsim35/">https://taxsim.nber.org/taxsim35/</a>, last accessed June 29, 2026.
Steven Ruggles, Sarah Flood, Matthew Sobek, Daniel Backman, Grace Cooper, Julia A. Rivera Drew, Stephanie
Richards, Renae Rodgers, Jonathan Schroeder, and Kari C.W. Williams. IPUMS USA: Version 16.0 [dataset].
Minneapolis, MN: IPUMS, 2025. <a href="https://doi.org/10.18128/D010.V16.0">https://doi.org/10.18128/D010.V16.0</a>. Lin, Daniel, (2022). ``Methods and
assumptions of the CPS ASEC tax model.'' US Census Bureau. <a href="https://www.census.gov/content/dam/Census/library/working-papers/2022/demo/sehsd-wp2022-18.pdf">https://www.census.gov/content/dam/Census/library/working-papers/2022/demo/sehsd-wp2022-18.pdf</a>, last accessed June 29, 2026.
4. Safe Harbor Rules for Income and Spending Requirements Faced by SGOs
Under section 25F(d)(1)(B), SGOs are required to spend no less than
90% of the income of the organization on scholarships for eligible
students. This would be a binding constraint for most SGOs. The
proposed regulations would clarify the definition of ``income of the
organization'' and provide several safe harbor rules which would allow
for greater participation by SGOs and more scholarships for eligible
students. In particular, the proposed regulations would allow the
income spending requirement to be satisfied at the level of the section
25F segregated account provided that at least 85 percent of the SGO's
activities are scholarship granting activities. This proposed
regulation would allow SGOs to spend more than 10% of their income on
overhead or other expenses if such income is not part of the section
25F segregated account.
The Treasury Department and the IRS estimate that, among the SGOs
currently authorized to administer State-level scholarship programs,
program-related expenditures represented 78% of total revenues, on
average, in fiscal year 2024. Analysis of Form 990-series data reveals
that 72% of existing SGOs spend less than 90% of revenue on program-
related expenditures. These program-related expenditures include, but
are not limited to, scholarship disbursements. Therefore, nearly three-
quarters of SGOs--approximately 450 SGOs in participating States--are
expected to benefit from this provision.
The Treasury Department and the IRS expect that the downstream
effect of this proposed rule will be a function of its impact on the
aggregate flow of donations to SGOs. The proposed rule would have two
types of economic effects: the first would increase the number of SGOs,
while the second would reduce the contributions made to each individual
SGO.
First, the proposed regulation is expected to increase the number
of SGOs able to operate under section 25F. In the absence of the
regulation, nearly 75% of SGOs would need to make substantial changes
to their operations, and many might choose not to be certified as an
SGO at all.\27\ The Treasury Department and the IRS do not have readily
available parameters and models to assess precisely the number of
public charities that would decline to operate as SGOs in the absence
of the regulation; however, a conservative estimate suggests that as
many as 450 public charities would find the 90% of income rule too
burdensome and difficult to satisfy to justify seeking SGO status.\28\
As charitable donations tend to rise with the number of public
charities,\29\ this first effect of the regulation should tend to
increase the volume of scholarship dollars available to students. Given
the conservative estimate of the effect of this regulation on the
number of public charities applying to operate as SGOs, the Treasury
Department and the IRS estimate that, in the absence of this proposed
regulation, SGOs would receive 18% fewer qualified contributions. The
proposed regulation is estimated to benefit SGOs and eligible students
by increasing qualified contributions by $4 billion per year.\30\
---------------------------------------------------------------------------
\27\ The Treasury Department and the IRS assume that, in the
absence of a requirement to spend no more than 10% of income on
scholarship disbursements, SGOs would choose the allocation of their
expenditures to best serve their intended beneficiaries: the
children and families who apply for, or receive, scholarships. This
unconstrained allocation may result in a greater share of expenses
spent on the costs of administering scholarship funds. This
assumption follows the Weak Axiom of Revealed Preference: Samuelson,
Paul A. ``A Note on the Pure Theory of Consumer's Behaviour.''
Economica 5.17 (1938): 61-71.
\28\ This figure approximates 75% of the 600-700 SGOs ultimately
anticipated to operate.
\29\ Gayle, Philip G., Teresa D. Harrison, and Jeremy Thornton.
``Entry, donor market size, and competitive conduct among nonprofit
firms.'' International Journal of Industrial Organization 50 (2017):
294-318.; Schmitz, Jan. ``Is charitable giving a zero-sum game? The
effect of competition between charities on giving behavior.''
Management Science 67.10 (2021): 6333-6349.
\30\ Per Table 2 of Schmitz (2021), when the number of charities
in the market increases by 1%, total giving rises by 0.245%. In the
absence of the proposed regulations, the set of SGOs is expected to
contract by nearly 75%. The Treasury Department and the IRS
therefore estimate that total giving to SGOs would fall by 18% in
the absence of the proposed regulation.
---------------------------------------------------------------------------
A second effect of the proposed regulation follows from donors'
documented sensitivity to overhead costs.\31\ For the minority of
organizations expected to operate as SGOs in the absence of the
proposed regulation, the Treasury Department and the IRS estimate that
this proposed regulation will increase the overhead ratio by 125%.\32\
This should translate
[[Page 62843]]
into a 29% reduction in flows of donations to the estimated 28% of
public charities that would operate as SGOs regardless of the proposed
regulation.\33\ However, the Treasury Department and the IRS anticipate
that the reduction in giving to this subset of SGOs would be a
reallocation of qualified contributions across the full set of SGOs.
---------------------------------------------------------------------------
\31\ Gneezy, Uri, Elizabeth A. Keenan, and Ayelet Gneezy.
``Avoiding overhead aversion in charity.'' Science 346.6209 (2014):
632-635; Meer, Jonathan. ``Are overhead costs a good guide for
charitable giving?.'' The Fundraising Reader. Routledge, 2023. 314-
318.
\32\ Note that the overhead ratio is here defined as the share
of income devoted to non-program-related spending: for the set of
SGOs operating as of fiscal year 2024, analysis of Form 990 series
data places the overhead ratio at 22.45%.
\33\ The Treasury Department and the IRS arrive at this figure
by applying an elasticity of charitable giving with respect to its
effici
[…truncated; see source link]Indexed from Federal Register on October 2, 2026.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.