The state opt-in requirement is often the first significant planning constraint organizations encounter when exploring the SGO model. Understanding why the requirement exists and what it actually requires of states helps in interpreting your own state's situation.
Why state opt-in is required
The federal tax credit under Section 25F is available only for contributions to SGOs on the certified list of a state that has elected to participate. That election is filed with the IRS by the governor or whoever state law designates — legislation is not required, and states elect annually. The design reflects a policy judgment: the federal government creates the financial incentive, but states administer the program and are accountable for the organizations they list.
A state that opts in takes on an oversight role. It establishes an approval process, reviews SGO applications, and monitors compliance with both the federal requirements and any additional state-level requirements. A state that does not opt in simply does not participate — organizations in that state cannot offer the federal credit to their donors.
What a participating state has to build
The election itself is a form. Standing up the program behind it — whether by statute or by executive action — means establishing:
An SGO approval process. The state must designate an agency — typically the department of revenue or department of education — to receive and review SGO applications and grant approval to qualifying organizations.
Compliance with federal minimums. The state's program must require that approved SGOs meet the federal structural requirements: 501(c)(3) status with SGO primary mission, multi-student multi-school distribution, and no earmarking.
Annual reporting requirements. The statute requires that SGOs file annual reports with the approving state. States specify what those reports must contain — the federal statute does not prescribe the content.
States can add requirements above the federal baseline. Some states require additional financial disclosures, more frequent reporting, or specific procedures for income verification. Multi-state SGOs face potentially different requirements in each state where they operate.
What to do in non-opted states
If your state has not yet opted in, the formation timeline is uncertain — but preparation is not wasted. Use the time before your state's opt-in to:
Complete the federal formation prerequisites: 501(c)(3) status review, governing document analysis, board structure assessment, and scholarship program design. These steps are necessary regardless of your state's opt-in timeline.
Monitor your state legislature and your governor's office. Thirty states were already on the IRS participating-state list for 2027 as of July 2026, so the remaining decisions are increasingly executive ones — track relevant bills, but watch for an election filed directly.
Develop a formation timeline that leaves room for the state listing period, whose length nobody can yet quote: no state has published a Section 25F SGO list, and the IRS has deferred that deadline and procedure to future guidance. A state electing in mid-2026 does not mean you can be operational by January 2027 if you have not done the preparatory work.
Course outline
Module 02