Do Credit Card Fees Count Against Your SGO's 10%? The Payment-Rail Problem Nobody Is Pricing In

Every SGO budget conversation eventually reaches the same line item, and almost none of them price it correctly: payment processing. Under Section 25F's structure, the question of who absorbs a 2.5% card fee is not a rounding error — at scale it is one of the largest claims on the only money an SGO can legally spend on itself.

The Mechanism

Start with the rule. Section 25F requires at least 90% of an SGO's income to be spent on scholarships. Under the general rule described in Treasury's June 2026 preview, that 90% is measured against the organization's total receipts, unreduced by expenses.

"Unreduced by expenses" is the whole problem. A donor gives $1,000 by card. The processor keeps $25. The SGO counted $1,000 of income, so it owes $900 to scholarships — and the $25 fee is just another expense competing for the remaining $100, alongside staff, software, the annual audit, and everything else in the 10% allowance.

Scale it up at a 2.5% blended card rate:

• On $1,000,000 raised: $900,000 owed to scholarships, a $100,000 administrative allowance — and $25,000 of it already consumed by card fees. A quarter of the budget, gone before the first salary.
• On $10,000,000 raised: $9,000,000 to scholarships, a $1,000,000 allowance — and $250,000 in card fees.

The percentage is constant, which is exactly the problem: processing is the one administrative cost that scales in lockstep with fundraising success, permanently claiming roughly a quarter of the allowance at any size if gifts arrive by card.

Why This Program Is Structurally Made of Small Gifts

State tax-credit scholarship programs often run on large gifts — corporate donors, six-figure commitments — where payment rails are negotiated. Section 25F is the opposite. The credit caps at $1,700 per taxpayer per year ($3,400 for a married couple as two individuals), so the program is structurally built from thousands of individual gifts clustered at or below $1,700.

That is the worst possible profile for percentage-based card pricing. A $1,700 gift on a card at 2.9% plus 30 cents costs about $49.60 to accept. The same gift by ACH costs well under a dollar. Multiply that gap across an entire donor file and the rail choice — not the processor's rate sheet — is the decision that matters.

Two other features of Section 25F sharpen the point. Qualified contributions must be cash — no appreciated securities. And donor-advised fund distributions do not work, because the credit runs to the individual taxpayer. The standard major-gift playbook of stock gifts and DAF grants is unavailable here, which makes efficient handling of ordinary cash gifts unusually important.

Might the Safe Harbor Help? Do Not Plan on It

Under the June safe harbor, income for the 90% test is measured by the amount held in the segregated account. If a processor nets its fee before funds reach that account, the base drops — a $1,000 gift lands as $975, and arguably the fee came off the top rather than out of the 10%.

But there is a serious counterargument. The donor's creditable contribution is the gross $1,000; the acknowledgment must say $1,000; and the statute requires separate accounts holding qualified contributions exclusively — which arguably requires crediting the gross amount to the account and paying the fee from elsewhere. Treasury has not resolved which reading controls. It is on the open-questions list for the September proposed regulations.

The planning posture writes itself: assume fees count against the 10%, and treat any relief in September as upside.

The Playbook

The fix is architectural, not negotiable-rate shopping.

Make ACH the default rail. Design the giving flow so bank transfer is the primary, lowest-friction path and cards are the fallback — not the reverse. For a program built on $1,700 gifts, this single choice recovers more administrative budget than any other operational decision available to a new SGO.

Ask donors to cover processing — and use the $1,700 cap to your advantage. Donor-covered-fee prompts are standard practice in online giving. Section 25F adds a wrinkle that makes them work better: the credit caps at $1,700 regardless of gift size, so a donor asked for $1,750 claims exactly the same credit as one who gives $1,700. The excess is clean headroom that can absorb processing without touching the scholarship math. (How amounts above the credit cap are characterized should follow your counsel's guidance once final regulations land.)

Pass processing through at cost — never marked up. Whoever runs your payments — platform, processor, bank — the fee that reaches the SGO's books should be the actual cost. In a program where every administrative dollar is scrutinized against a statutory cap, a marked-up processing fee is indefensible in front of a board and worse in front of a programmatic auditor.

Keep fee accounting visibly separate from the scholarship account. Whatever September decides about the safe-harbor base, an SGO that can show gross contributions credited, fees paid transparently, and scholarships funded at or above 90% per account is in a defensible position under either reading.

The Takeaway

Payment processing is where Section 25F's small-gift structure and its 10% cap collide. An SGO that lets its donor file default to card payments has silently committed a quarter of its administrative capacity to interchange. An SGO that builds ACH-first flows, invites donors to cover fees, and passes costs through transparently keeps that capacity for the things the 10% actually has to fund. In this program, payment rails are not plumbing. They are budget policy.