# SGO Guide — Full Content > [SGO Guide](https://sgoguide.com) is the complete infrastructure and administration platform for Scholarship Granting Organizations (SGOs) operating under Section 25F of the One Big Beautiful Bill Act (OBBBA) — the program also known as the Education Freedom Tax Credit (EFTC), the Federal Scholarship Tax Credit (FSTC, the IRS's official label), and the Educational Choice for Children Act (ECCA). This file contains the full text of SGO Guide's public reference content. A shorter index is at [https://sgoguide.com/llms.txt](https://sgoguide.com/llms.txt). Attribution: this material may be quoted or cited with attribution to SGO Guide and a link to the canonical URL given for each section. It is educational content, not legal or tax advice. --- ## [What SGO Guide Offers](https://sgoguide.com/products) There are five things to choose between, and they divide on two questions: whose SGO is it, and who does the day-to-day operating work? Three of the five are ways in. **Start your own SGO** (ClearPath Launch) — the entity is yours and your staff runs it. **We run your SGO** (ClearPath Managed) — the entity, board, and brand stay yours; SGO Guide's team does the operating work, paid from the share of the operating allowance that would otherwise pay staff you did not hire. **Join our SGO** (ClearPath Partner Schools) — a school joins an SGO that SGO Guide operates, owning nothing and auditing nothing. The first two produce an identical legal entity and differ only in who staffs it. The remaining two cut across all three. **ClearPath Advance** is the fundraising suite a school uses to raise the money, and works with any SGO including one not on ClearPath at all. **ClearPath Advisory** is a free consultation that works out which of the three paths fits, with no engagement to sign. Everything else named below is a module of the platform that runs the SGO — not a separate purchase, and not something an organization evaluates on its own. ## The five offers ### [Start your own SGO — ClearPath Launch](https://sgoguide.com/products/launch) Full-service SGO formation: 501(c)(3) structuring, governing documents, state opt-in registration, and Section 25F (Education Freedom Tax Credit) compliance from the ground up. The legal foundation every other ClearPath product is built on. ### [We run your SGO — ClearPath Managed](https://sgoguide.com/products/managed) Full outsourced administration of an SGO you own. Your nonprofit, your board, your brand on every receipt — and our team doing the operating work: donor processing and receipts, application intake and income verification, disbursement, 90/10 accounting, state reporting, and audit preparation. You keep the entity and every decision that has to be the board's; you do not staff the back office. ### [Join our SGO — ClearPath Partner Schools](https://sgoguide.com/products/partner-schools) The fastest way for a school to offer federal tax-credit scholarships: join an SGO we operate instead of forming your own. $0 to start. Your school gets a branded giving page and QR code, donors can name your school as their preferred school, your school confirms enrollment in one click, and the SGO carries every Section 25F obligation. ### [Raise the money — ClearPath Advance](https://sgoguide.com/products/advance) A school's complete fundraising and marketing suite, built for tax-credit giving: a donor CRM that understands households and grandparents, multi-step campaigns across email, text, and print, AI that drafts in your school's voice, print-ready materials with tracked QR codes on every piece, and a tax-credit ask engine that shows each family exactly what their gift costs them. Works whether your SGO is one we run or someone else's. ### [Talk it through first — ClearPath Advisory](https://sgoguide.com/products/advisory) The conversation that comes before you choose anything. We work out with you whether an SGO should be yours at all, who should run it day to day, and what your state actually requires — then point you at the answer, including the one where you do not need us. It costs nothing, and it is where almost everyone starts. ## Inside the platform These run the SGO whichever path the organization took, and whether its own staff or SGO Guide's operates them. ### [ClearPath Donors](https://sgoguide.com/products/donors) The complete donor-facing platform: a branded donation portal, automated Education Freedom Tax Credit (Section 25F) receipts, a full CRM with per-donor limit enforcement, recurring giving management, and ClearPath Pledge — pre-launch pledge drives that build your donor base before giving even opens. ### [ClearPath Scholarship](https://sgoguide.com/products/scholarship) The complete scholarship administration platform: a branded family application portal, geography-specific 300% AMI income verification, a weighted rubric that scores every applicant, a review console built for hundreds of files, and compliant scholarship disbursement. ### [ClearPath Shield](https://sgoguide.com/products/shield) Real-time compliance monitoring with a tamper-evident record underneath: continuous 90/10 tracking with live alerts, a cryptographically hash-chained audit log, one-click audit evidence packages, refund and chargeback integrity, payout reconciliation, and state reporting — built for the audit you hope never comes. ### [ClearPath Insights](https://sgoguide.com/products/insights) A real-time reporting and impact analytics platform that aggregates data across your entire SGO operation — producing board dashboards, donor impact reports, state regulatory submissions, and IRS documentation from a single source. ### [ClearPath Pledge](https://sgoguide.com/products/pledge) Pre-launch pledge drives that build your January 1 donor base months in advance: supporters commit today — anywhere from just an email address to a fully secured, multi-year pledge — and ClearPath processes every gift automatically the moment Section 25F activates. ### ClearPath Partner Schools — program status **Coming soon — not yet accepting schools.** The SGO that partner schools will join is being stood up ahead of January 1, 2027, when the federal credit begins. Schools can add themselves to the early-access list today at no cost and no commitment; onboarding runs in order of interest before the first qualifying gifts. Forming your own SGO, by contrast, is available today. Mechanically: the SGO vets and approves each partner school; the school gets a branded giving page, link, QR code and embeddable widget; donors may name the school as their preferred school (advisory only — Section 25F prohibits earmarking a gift to a school or student and the SGO's committee keeps full discretion, awarding on need and eligibility); the school confirms student enrollment for families who name it through a one-click school portal; and scholarship tuition for awarded students is paid straight to the school. The SGO's own costs come from its operating allowance (the ≤10% side of the 90/10 test for the state account the gift landed in), never from scholarships. SGOs running ClearPath get the self-serve school application page, vetting workflow, per-school gift ledger, a preferred-school pool on the review queue and award modal, and the per-state 90/10 report and exports. ### ClearPath Advance — pricing and boundaries Essentials is free for approved partner schools. Pro is $199 per school per month, or $1,990 billed annually ([Advance pricing](https://sgoguide.com/products/advance/pricing)). Advance Network is custom-priced for SGOs operating a group of schools and adds a cross-school command center, a school recruitment CRM, template and brand governance, managed campaigns, compliance oversight, and benchmarking ([Advance for SGOs](https://sgoguide.com/products/advance/for-sgos)). The materials library is public at [https://sgoguide.com/products/advance/templates](https://sgoguide.com/products/advance/templates). The Advance subscription is paid from the school's own operating budget. It is not deducted from donations and is not counted against the ≤10% operating allowance that federal law caps SGO administration at — unlike the platform fee and the SGO's administrative share, which both live inside that cap. Advance works in two modes. In **network mode** the school's SGO runs on ClearPath, so gifts attribute themselves back to the exact piece that earned them and consented donors appear in the school's CRM automatically. In **external mode** the school's SGO is someone else's: campaigns, templates, printed materials, and tracked links all work identically and the links point at that SGO's own giving page, but gift results must be imported by spreadsheet because the gift data is not visible to this platform. Advance deliberately does not offer paid raffles. The IRS treats payment for a raffle ticket as consideration rather than a charitable contribution, so it earns no Section 25F credit, and paid charitable raffles are unlawful or heavily licensed in many states. Free-entry prize drawings with a genuine alternative method of entry, plus matching and participation challenges, ship instead — these keep every gift fully credit-eligible. --- ## [Start Your Own SGO, Have Us Run It, or Join One](https://sgoguide.com/start-or-join-an-sgo) Two independent questions decide this: whose SGO is it, and who does the operating work. That grid has three answers SGO Guide sells. Most Scholarship Granting Organizations on the platform are formed, governed, and run by independent nonprofits who license the software: their legal entity, their board, their scholarship committee, their brand on the receipts. Some of those nonprofits own the SGO but hire SGO Guide's team to operate it (ClearPath Managed). And SGO Guide is standing up certified SGOs of its own, which a school will be able to join as a partner school without forming anything — that program is coming soon and not open yet, though schools can join the early-access list today. **Model A — your SGO, you run it (open today).** Strengths: your board sets eligibility rules, award sizes and priorities; your brand on giving pages, receipts, donor portal and the family application; the administrative share of each gift is your organization's revenue; you choose which states to operate in; you own the donor relationship and data. Trade-offs: months to first gift (formation, IRS recognition, state certification, segregated accounts); a real board, governance and annual audit; a staff member who owns 90/10 accounting and per-state reporting; hiring for a role with no experienced candidates before 2027; the legal and financial responsibility. Probably wrong for an organization that will not staff a back office (Model B is the same SGO without the hiring), or a single school, which cannot lawfully form an SGO for its own families. **Model B — your SGO, we run it: ClearPath Managed (open today, [https://sgoguide.com/products/managed](https://sgoguide.com/products/managed)).** You form the nonprofit and seat the board exactly as in Model A; the entity, the brand and the scholarship policy are yours. What changes is who does the work: SGO Guide's team processes gifts and issues receipts, takes applications, verifies income against 300% of the applicant's own area median, prepares the docket, moves the money through the three disbursement channels, keeps the per-state 90/10 books, files the state reports, and maintains the audit evidence package continuously. Strengths: your name on the entity, receipts, portal and tax documents, identical to Model A; your board still writes the eligibility rules and your committee still decides every award; no hiring and no coverage gap; named operations staff with defined turnaround times and a monthly board close pack; full platform access and export for your staff throughout; a documented path to bringing operations in-house later, since the entity, donors and history are already yours. Trade-offs: you still have to form and certify the entity — Managed removes the staffing, not the months; a board, an independent scholarship committee and an annual audit remain your obligations; the administrative share of each gift pays SGO Guide's team instead of funding your own; legal and financial responsibility for the SGO stays with you (SGO Guide is a service provider, not an indemnity). **The hard boundary: SGO Guide never votes on an award in a managed engagement.** Section 25F requires awards to be made at arm's length by the organization itself, so the docket is prepared by the managed team and decided by the client's own independent committee. Probably wrong for an organization that wants the administrative share as its own revenue, or one that already employs the development and compliance staff. **Model C — our SGO, we run it: partner schools (COMING SOON — not open to schools yet; early-access list is live).** Strengths: days to onboard at $0 to start; no board, committee, compliance officer or audit; scholarship tuition paid straight to your school; your school's brand on your own giving page; no legal entity to unwind if it doesn't work. Trade-offs: the SGO's committee makes every award decision and donor preferences are advisory only (Section 25F forbids earmarking); you do not set eligibility rules, award sizes or timelines; the receipt and the legal entity belong to the SGO; the administrative share of every gift belongs to the SGO, not to your school; and it is not available yet, so a school that needs to act now has only Models A and B. Probably wrong for a diocese, network or foundation that wants to set scholarship policy across many schools and keep the administrative revenue. **How the fees work in all three models.** At least 90% of qualified contributions must reach students; every fee is paid from the operating allowance on the other side of that line — the ≤10% Section 25F permits for administration. Two parties share that allowance: the platform and the SGO's own administration. In a managed engagement the managed fee occupies the administration share that would otherwise pay the client's own staff; in the partner-school model the whole allowance stays with the SGO and the school pays nothing. The platform sets its own fee and the share it passes down to the SGO, which can never allocate more than it was given. Configurations that would breach the cap are blocked rather than flagged after the fact, and the 90/10 report counts the platform fee and operating releases together against the same per-state cap. **Deciding.** Lean toward running your own if you represent several schools (a diocese, network, district or state association), already have a foundation or development staff, have or will hire someone who owns donors, applications and compliance as their actual job, expect volume that makes the administrative share worth having, or want the day-to-day of the program to be yours. Lean toward a managed engagement if you want the SGO to be yours — entity, policy, donor relationships — but will not build a back office to get it; if your board will govern but not become the employer of a compliance team; if you already have the donors and lack the capacity to receipt, verify, disburse and report on them; or if you want to be operating in the first giving year without betting it on a hire you have not made. Lean toward joining if you are one school, can wait for the program to open, want families served in the first year the credit exists, would rather raise money than own a nonprofit that raises money, or want to test community response before committing to anything. Models A and B produce an identical legal entity, so an organization split between them can form now and decide who staffs it later. Starting as a partner school does not prevent forming your own SGO afterward — the donor relationships come with you. Note that Models A and B can be started today; Model C is coming soon, and the action available now is joining the early-access list. --- ## [Use Cases](https://sgoguide.com/use-cases) Eleven use cases in two groups: who you are (organization types) and how you'll operate (footprint and committee structures). ### [Diocese or Christian School Network](https://sgoguide.com/use-cases#diocese) A Catholic diocese with 15 schools across a metro area wants to create an SGO to fund scholarships for low and middle-income families across its school network. The scale creates compliance complexity that a single-school operation would never face. - **Multi-school distribution compliance**: Federal law requires that scholarship awards reach 10 or more students who do not all attend the same school. At 15 campuses, this requirement is easy to meet numerically — but tracking it across a large, distributed network requires infrastructure. Which students at which campuses received scholarships this cycle? Are awards distributed with arm's-length process documentation for each campus? - **Earmarking risk in parish communities**: When parishioners donate expecting their contribution to benefit students at "their" parish school, that expectation creates earmarking risk. Federal law is explicit: scholarships cannot be awarded to specific named students, and awards must not be conditioned on the donor's preferences. This tension between donor intent and federal compliance is one of the most common legal pitfalls in faith-community SGO operations. - **State opt-in and approval complexity**: The diocese may operate schools across county lines or even across state lines. Each state has its own opt-in status, approval process, and ongoing reporting requirements. Navigating multi-state SGO operations requires state-by-state regulatory strategy, not a single filing. - **Scale of applicant processing**: Across 15 schools, the applicant pool for scholarship consideration could run into the thousands annually. Income verification, documentation collection, eligibility screening, and award decision support at that scale requires dedicated infrastructure — not spreadsheets. How SGO Guide helps: SGO Guide handles the entire operational backend for the diocesan SGO: state registration in each applicable jurisdiction, a branded donor portal with full earmarking compliance built in, applicant screening and income verification at scale, award decision support tools for the diocesan scholarship committee, and multi-school compliance tracking across all 15 campuses. Diocese administrators focus on ministry and pastoral priorities. We handle the regulatory and operational infrastructure. ### [Independent Faith-Based Organization](https://sgoguide.com/use-cases#faith-org) A large evangelical church or statewide faith-based nonprofit wants to create an SGO serving Christian after-school academic enrichment programs across multiple school districts. The organization has a clear mission and a committed donor base — but no prior experience with federal education tax credit programs. - **Qualifying expense definition for enrichment programs**: Coverdell ESA definitions include tutoring, academic enrichment, and supplemental educational materials — but the line between qualifying enrichment and non-qualifying extracurricular programming requires careful analysis. What makes a Christian after-school program's curriculum qualify? How are tutoring components documented separately from ministry components? These questions require legal and regulatory clarity upfront, not discovery during an IRS inquiry. - **Building a donor base from zero**: Unlike a diocesan SGO that can draw on established parish giving relationships, a standalone faith-based organization starting an SGO is building donor awareness and infrastructure simultaneously. The donor management platform, the outreach messaging, the tax credit explanation, and the receipt infrastructure must all be in place and correct before the first donation is accepted. - **Income verification across a dispersed geography**: Statewide operations mean that 300% of area median gross income calculations vary significantly by geography. A household income that qualifies in a rural county may not qualify in a metropolitan area. Income verification must be calibrated to the applicant's specific location — not a statewide average. - **State approval in potentially multiple jurisdictions**: A statewide organization serving multiple school districts may find that its donor base or program footprint spans more than one state's SGO framework. Each state has its own approval process. The organization needs to understand which states are relevant, which have opted in, and what each requires. How SGO Guide helps: SGO Guide structures the organization for federal compliance before the first donor is approached, defines qualifying expense categories precisely against Coverdell ESA standards, deploys the income verification engine across the full service geography with county-level AMI calibration, and provides the complete platform from day one. The organization focuses on its faith mission and community relationships; we handle the regulatory infrastructure and operational systems. ### [Private School Consortium](https://sgoguide.com/use-cases#consortium) A group of independent private schools in a metro area — not religiously affiliated — want to pool resources and create a shared SGO rather than each running their own. The economics of shared administration are compelling. The governance complexity of shared infrastructure across competing institutions is real. - **Governance across competing institutions**: Independent schools that compete for the same students have legitimate interests in how a shared SGO allocates scholarship funds. Who controls award decisions? How are funds distributed across participating schools? What happens if one school's applicant pool is much larger than another's? These governance questions must be resolved in the SGO's founding documents — and the answers must be consistent with federal arm's-length award requirements. - **Fair allocation without earmarking**: Each participating school's leadership will want scholarship funds to benefit their students. But the no-earmarking rule prohibits conditioning awards on which school the student attends or which school the donor prefers. The consortium structure must be designed so that fair distribution is achieved through arm's-length processes, not through allocation formulas that effectively earmark funds to specific institutions. - **Shared donor management with distinct donor bases**: Each participating school likely has its own donor relationships. The shared SGO needs a donor management platform that can handle donations from any school's community while preventing donor-specific earmarking and enforcing per-donor credit limits across the consolidated donor pool. - **Cost-sharing and equitable administration**: Schools with more students, more applicants, or larger scholarship amounts impose higher administrative costs. The cost-sharing model among participating schools must be designed before operations begin, and it must align incentives toward collective benefit rather than individual school optimization. How SGO Guide helps: SGO Guide designs the consortium governance model from the ground up, structures the shared platform so participating schools benefit collectively while the award process remains strictly independent, and manages the full compliance infrastructure under a unified system. The participating schools share costs at a fraction of what standalone infrastructure would cost each, and benefit from the combined donor base and administrative scale. ### [Community or Civic Organization](https://sgoguide.com/use-cases#community) A community foundation or civic nonprofit serving a specific underserved neighborhood wants to launch an SGO focused on income-eligible students in that geography. The organization's strength is in community relationships and family trust — not regulatory compliance or donor management infrastructure. - **Limited administrative staff**: Community organizations rarely have the staffing to manage the operational complexity of a compliant SGO in addition to their existing programs. Adding federal compliance requirements, state reporting, income verification, and donor management to a lean team creates either compliance risk or program delivery risk — typically both. - **No existing donor base for the SGO program**: Community organizations are often experienced at grant-seeking and local fundraising, but the SGO model requires building individual donor relationships specifically around the tax credit mechanism. This is a different donor acquisition strategy than traditional nonprofit development. - **Income verification complexity in mixed-income areas**: In many urban neighborhoods, household incomes vary significantly across short distances. The 300% AMI threshold is calibrated to metro area data, which may not reflect the specific geography the organization serves. Accurate income verification requires a system that applies the correct AMI figure to each applicant's specific location. - **Reaching families who don't know the program exists**: Income-eligible families who would qualify for scholarships — and students who would benefit — need to be aware that the SGO exists and that they may qualify. Community outreach for scholarship applications is a function the organization is well-positioned to lead, but it requires the application infrastructure to be in place and working before outreach begins. How SGO Guide helps: This is the case ClearPath Managed exists for. The SGO stays the community organization's own — its entity, its board, its name on every receipt, and its committee deciding every award — while our team runs the operation: state registration, the full donor platform, applicant eligibility screening, income verification with county-level AMI calibration, all compliance monitoring, and state reporting. The organization brings the community trust and relationships; we bring the operational and regulatory infrastructure that allows those relationships to result in scholarships, without the organization having to hire a back office to get there. ### [School District–Adjacent Educational Nonprofit](https://sgoguide.com/use-cases#public-school) A nonprofit closely aligned with a public school district wants to create an SGO that funds academic tutoring and enrichment programs for public school students, using the program's allowance for qualified expenses at public schools. This is structurally the most complex use case in the Section 25F program, and it requires getting the setup right from the start. - **Most SGO infrastructure assumes private school context**: The program was designed primarily with private school tuition in mind. Most compliance frameworks, expense verification processes, and state approval criteria are oriented around private school operations. A public school–focused SGO must navigate systems designed for a different context. - **Maintaining legal independence from the district**: A nonprofit "closely aligned" with a district creates independence questions that must be resolved in the SGO's founding documents. Federal law requires that the SGO operate independently, with arm's-length award decisions. If the organization's leadership or governance structure creates the appearance of district control, state approval may be denied or federal compliance may be questioned. - **Qualifying expense definition for public school contexts**: The Coverdell ESA expense categories that anchor Section 25F — tutoring, enrichment, academic materials — apply in public school contexts, but the line between qualifying educational expenses and general school support must be drawn precisely. Scholarships cannot simply supplement the district's ordinary educational offerings; they must fund expenses that are separately identified, documented, and qualified. - **Arm's-length award compliance in a tight-knit community**: When the SGO serves students in a specific school district, and when the nonprofit's leadership is drawn from that community, maintaining genuinely arm's-length award decisions requires structural safeguards. The earmarking risk is highest when donors, recipients, and the organization's leadership are all from the same small community. How SGO Guide helps: SGO Guide advises on the organizational structure that maintains proper legal independence from the district, maps qualifying expense definitions specifically for public school enrichment contexts with the specificity the IRS requires, builds in structural safeguards for arm's-length award compliance, and handles all ongoing compliance monitoring. This use case benefits most from getting the formation structure right at the outset — remediation after the fact is significantly more difficult and costly. ### [SGO Operating in One State](https://sgoguide.com/use-cases#single-state) Most SGOs will operate in exactly one state: one state listing, one segregated account, one scholarship committee. It is the shape the statute was designed around — and its compliance obligations are the foundation every other structure builds on. - **State approval and the annual listing trail**: States elect into the program year by year, and an SGO's approval is a recurring event, not a one-time filing. The organization needs evidence of its listing for each program year — because the credit's availability to its donors depends on it. - **The 90/10 math on a small revenue base**: At least 90% of scholarship contributions must go out as scholarships, leaving at most 10% for administration. On a small account, that allowance is tight: an account holding $80,000 can release at most $8,000 toward operating costs — which is why separate operating gifts matter from day one. - **A donor base bigger than the state line**: Donor eligibility does not depend on where the donor lives — a donor in any state can give to a listed SGO and claim the federal credit, as long as the scholarships fund students in the SGO's state. Single-state SGOs that only fundraise locally leave the out-of-state alumni, family, and diaspora networks on the table. How SGO Guide helps: ClearPath runs a single-state SGO on the same rails as a multi-state one — with one active state program. The 90/10 test is tracked on the state account with over-cap releases blocked outright, qualified scholarship gifts and operating gifts run as separate gift types so administration is funded without touching the 90%, annual state listings are recorded as an evidence trail, and the audit package is generated from day-one records. ### [One Entity Operating in Multiple States](https://sgoguide.com/use-cases#multi-state) A single 501(c)(3) can be listed by several participating states. But there is no national pool: donors designate a state at the moment of giving, each dollar is locked to that state's segregated account, and the 90/10 test runs separately inside every account. - **No national pool — designation at the moment of giving**: Every qualified contribution must be designated to a state when it is made, and it stays in that state's segregated account for its entire life. Money never moves between state accounts, which means fundraising, awarding, and reporting all happen state by state. - **Per-account 90/10 with no cross-subsidy**: Each state account must independently send at least 90% of its contents out as scholarships to that state's students. A large account in one state cannot carry a small account in another — the test never aggregates. That makes thin-state accounts an economics question, not just a compliance one: an account too small to cover its own administration from the 10% does not work. - **Entity-level obligations across every covered state**: The audit is entity-level — one audit, furnished to each covered state — and the board, conflict-of-interest process, and donor records stay unified. But each state's listing must be evidenced annually, and each state program has its own lifecycle from prospective to registered to active. How SGO Guide helps: ClearPath models the multistate structure natively instead of bolting states onto a single-state system. Donors designate a state at the moment of giving, every dollar is tracked in its state's segregated account, the 90/10 cap is enforced per account with over-cap releases blocked, applications route to the student's resident state's program, and reporting produces per-state worksheets for the audit package plus an entity-wide roll-up for the board. ### [One Scholarship Committee for Every State](https://sgoguide.com/use-cases#national-committee) Nothing in the statute requires a committee per state. A multistate SGO can run one standing scholarship committee that decides awards for every state — as long as the awards are documented per state, with separate dockets, separate minutes, and separate priority waterfalls. - **The family cost of a committee seat**: Committee members and their immediate families are expected to be disqualified from receiving scholarships from the SGO — and under the conservative reading, that disqualification runs organization-wide, in every state the entity serves. Whether it is org-wide or per-state is an open regulatory question; until it is answered, design for the conservative reading. - **No national ranking**: The committee cannot rank all applicants across states and fund down the list. The priority waterfall — returning recipients first, then siblings of recipients — runs inside each state's applicant pool, and awards in each state are constrained by that state's account balance. A stronger first-time applicant in one state must never displace a returning recipient in another. - **Per-state documentation from one meeting**: One committee voting across many states still needs state-segregated records: separate dockets, separate minutes, separate tallies, and a separate multi-school check for each state. Done well, this audits better than many committees would — done casually, it collapses into exactly the commingling the structure forbids. How SGO Guide helps: ClearPath's committee model defaults to exactly this structure: members with no state restriction form the national committee and see every state's docket. Board resolutions carry a per-state docket record with separate minutes and tallies, each state's priority waterfall runs inside its own applicant pool, awards are funded only from that state's account, and the board sees a national roll-up across all of it. ### [Central Office with Per-State Committees](https://sgoguide.com/use-cases#state-committees) Some multistate SGOs want local decision-makers: a central office running donors, compliance, and reporting, with a separate scholarship committee deciding awards in each state. The structure is permitted — and the platform supports it — but it should be chosen with clear eyes. - **Keeping each committee inside its own docket**: A state committee's authority has to stop at its state's docket: its members should see and decide only their own state's applications, and its awards can only draw on that state's account. Enforcing that boundary through process documents alone is fragile — it needs to be enforced where the decisions are recorded. - **The disqualification caveat**: Under the conservative reading of the disqualified-person rule, a committee member's family is disqualified from awards everywhere the entity operates — not just in that member's state. Per-state committees multiply conflict-of-interest processes and training cycles without shrinking the disqualification footprint, unless regulators land on state-by-state analysis. - **Consistent arm's-length documentation across committees**: Every committee must produce the same quality of arm's-length evidence: documented process, independence from donors, and a clean record of who decided what. With many committees, consistency is the audit risk — one weak state's records color the whole entity's file. How SGO Guide helps: ClearPath scopes committee membership per state: a member scoped to a state program sees only that state's applications and dockets, in a reviewer or board-voter capacity. Each state committee gets its own docket with separate minutes, tallies, and priority waterfall; awards are funded only from that state's account; and the central office keeps entity-wide visibility through the national roll-up and a unified audit package. ### [Hybrid: National Committee with Regional Screeners](https://sgoguide.com/use-cases#hybrid-screeners) A multistate SGO often wants regional people close to its families handling intake — verifying income against the area median threshold, confirming enrollment, establishing priority status — while one national committee makes the award decisions. The line between those two roles is a compliance line, not just an org-chart line. - **Keeping screening ministerial**: Screening work must stay purely rules-based, with zero discretion over who wins. If screeners exercise judgment about outcomes, they risk being treated as selection committee members themselves — bringing their families into the disqualified-person net and muddying the arm's-length record. - **Mixed membership, clean records**: A hybrid roster mixes unrestricted national deciders with state-scoped local staff. The records have to show who verified, who decided, and in which capacity — for every state, every cycle. - **The same per-state docket discipline**: However intake is organized, the deciding still happens on state-segregated dockets with separate minutes, priority waterfalls, and account constraints. Regional screening does not relax any of it. How SGO Guide helps: ClearPath makes the screening-vs-deciding line structural: the screener capacity is enforced as ministerial — screeners verify eligibility but cannot record award decisions or vote, and the platform tells them so if they try. Scoped screeners work their states' intake, unrestricted members form the deciding committee, and every action lands in the capacity-labeled record the audit needs. ### [Existing State Scholarship Organization Adding the Federal Credit](https://sgoguide.com/use-cases#state-program-operator) Organizations already operating under a state tax-credit scholarship program — in states like Arizona, Pennsylvania, or Florida — are natural candidates for the federal program. But Section 25F is a parallel program with its own rules, not an upgrade to the state one. - **A parallel program, not a grandfathered one**: Experience with a state program earns no exemption: the federal program requires its own state listing, its own income threshold (300% of area median income), its own qualified-expense framework (Coverdell categories), and its own no-earmarking and distribution rules. The two programs' requirements overlap but do not match. - **Routing donors between two credits**: A donor facing both a state credit and the federal credit needs a routing answer: which gift goes where, and in what order. The federal credit's $1,700 cap makes it the natural first dollar for most individual donors — but the interplay with each state's credit rules is state-specific strategy work. - **Two books that cannot blur**: Federal qualified contributions live in a segregated account with the 90/10 test; state-program funds live under the state program's rules. Receipts, accounting, and reporting have to keep the programs distinct — a donor's federal receipt is not a state receipt, and vice versa. How SGO Guide helps: ClearPath runs the federal program as its own clean book alongside your existing state program: federal qualified contributions are designated, segregated, and receipted under the federal rules, operating gifts stay separate, and the 90/10 cap is enforced on the federal account. ClearPath Advisory works the routing strategy — which donors, which credit, which order — against your state's specific rules. --- ## [What Is a Scholarship Granting Organization?](https://sgoguide.com/resources/what-is-an-sgo) ### [The basic structure](https://sgoguide.com/resources/what-is-an-sgo#structure) A Scholarship Granting Organization is a nonprofit that raises money from individual donors and uses it to award scholarships to income-eligible students for qualified educational expenses. The organization sits between the donor and the student: it receives donations, verifies that students qualify, makes scholarship award decisions through an independent process, and disburses funds to cover qualified expenses. What makes an SGO different from an ordinary scholarship nonprofit is the federal tax credit attached to donations — the Education Freedom Tax Credit, codified at Section 25F (the IRS calls it the Federal Scholarship Tax Credit). Donors who contribute to a qualifying SGO receive a non-refundable federal income tax credit of up to $1,700 per year ($3,400 for married couples filing jointly). The credit directly reduces the donor's federal tax liability — dollar for dollar — rather than merely reducing taxable income as a deduction would. This distinction matters enormously for donor economics. A charitable deduction at a 24% tax bracket reduces a donor's taxes by 24 cents per dollar donated. A tax credit reduces taxes by a full dollar per dollar credited. At the $1,700 maximum, a donor in any tax bracket receives the same $1,700 reduction in federal taxes owed. ### [Who can start an SGO](https://sgoguide.com/resources/what-is-an-sgo#who-can-start) Any organization that meets the federal structural requirements and is approved by a state that has opted into the program can operate as an SGO. In practice, the organizations forming SGOs fall into a few common categories: **Dioceses and Catholic school networks** that want to fund scholarships across their school network. These organizations have existing donor relationships built on decades of parish giving, and they serve a defined community with strong affinity. **Evangelical churches and faith-based nonprofits** that want to fund scholarships for students at schools aligned with their mission, or for students participating in qualifying educational enrichment programs. **Private school consortiums** — groups of independent schools that pool administrative resources to create a shared SGO rather than each running their own. **Community foundations and civic nonprofits** focused on income-eligible students in specific geographic communities, often urban neighborhoods or rural areas with concentrated educational need. **Public school–adjacent nonprofits** that want to use the program's allowance for qualifying enrichment programs — tutoring, academic enrichment, and supplemental educational materials — to serve public school students. ### [What students qualify](https://sgoguide.com/resources/what-is-an-sgo#students) Students are eligible for scholarships from an SGO if their household income is at or below 300% of the area median gross income for the area where they live. Area median income is a geographic figure — it varies significantly between a high-cost metropolitan area and a rural county. A household income that falls within the 300% threshold in rural Mississippi may not qualify in metropolitan California. The income calculation is based on the household's total gross income from all sources. The verification process requires that the SGO collect documentation supporting the income claim before making an award. Beyond income eligibility, the statute creates a priority system for award decisions. Students who received a scholarship in a prior year — returning scholarship recipients — are prioritized in subsequent award cycles. Siblings of current or prior scholarship recipients receive the same priority. ### [What the scholarships can pay for](https://sgoguide.com/resources/what-is-an-sgo#expenses) Section 25F defines qualified expenses by reference to the Coverdell Education Savings Account expense categories under Section 530(b)(4) of the IRC. These categories include: - **Tuition and fees** at qualifying educational institutions (private K-12 schools, home study programs, and qualifying public school supplemental programs) - **Academic tutoring** provided by a tutor or tutoring organization - **Books, supplies, and equipment** required for enrollment or attendance - **Educational software and online programs** for academic instruction - **Special needs services** for students requiring individualized educational support These categories apply in both private school and public school contexts, though the application in public school contexts requires careful analysis of which expenses are genuinely supplemental versus ordinary school expenses. ### [What makes SGO compliance complex](https://sgoguide.com/resources/what-is-an-sgo#complexity) The Section 25F program looks simple in outline: donors give, students receive scholarships. The compliance requirements that make it operationally complex are the conditions attached to each step. **The no-earmarking rule** means that donors cannot direct their contributions to specific students or specific schools. In faith community contexts — where a parishioner might expect their giving to benefit their parish school — this creates real tension between donor expectations and federal compliance requirements. **The arm's-length award process** means that scholarship decisions must be made by an independent process that cannot be influenced by donor preferences. This requires documented committee processes, independence between award decision-makers and donor relationships, and distribution of scholarships across multiple schools. **The 90/10 spending ratio** means that at least 90% of the SGO's annual revenues must be spent on qualified scholarships, leaving a maximum of 10% for administrative and fundraising costs. For small or early-stage programs, this constraint is real and requires deliberate planning. **State approval** means that the SGO must be formally approved by a state that has opted into the program. Without state approval, no donor in that state can claim the federal tax credit. **IRS-compliant tax credit receipts** are different from standard charitable contribution receipts. The specific information required on a Section 25F receipt has not yet been fully specified in IRS guidance, which means SGOs need to design their receipt systems based on the statutory language and update them as guidance issues. --- ## [The OBBBA & Section 25F Explained](https://sgoguide.com/resources/obbba-explained) ### [What the OBBBA did](https://sgoguide.com/resources/obbba-explained#what-the-obbba-did) First, the names — because coverage of this program is inconsistent. The Education Freedom Tax Credit (EFTC), the Federal Scholarship Tax Credit (FSTC, the IRS's official label), the Educational Choice for Children Act (ECCA, the congressional bill name), and Section 25F (the statutory citation) all refer to the same program. This page uses the statutory cite; a full guide to the four names lives at sgoguide.com/resources/education-freedom-tax-credit. The One Big Beautiful Bill Act, enacted in 2025, made significant changes to federal tax law. Among those changes was the creation of Section 25F of the Internal Revenue Code — a new federal tax credit for individual taxpayers who make qualifying contributions to state-approved Scholarship Granting Organizations. Section 25F is effective January 1, 2027. This means that the first qualifying donations — and the first claims for the federal tax credit — can occur in tax year 2027, filed with returns due in 2028. But because state approval processes and organizational formation take time, organizations that want to accept qualified donations on January 1, 2027 need to have completed formation and state approval before that date. The creation of a federal scholarship tax credit is a significant development in education policy. For the first time, there is a federal financial mechanism — not a state-level program — that provides tax relief specifically for donations to organizations funding private and supplemental education. This nationalized what had previously been a patchwork of state-level scholarship tax credit programs. ### [The federal credit structure](https://sgoguide.com/resources/obbba-explained#the-federal-credit-structure) The Section 25F credit is a non-refundable personal income tax credit. It reduces federal income tax liability dollar-for-dollar, up to the statutory maximum. Key terms: **Maximum credit amount:** $1,700 per taxpayer per year. For married couples filing jointly, each spouse may claim up to $1,700, for a combined maximum of $3,400. This is the credit against federal taxes owed — not a deduction from income. **Non-refundable:** The credit can reduce a taxpayer's federal income tax liability to zero but cannot create a refund. A taxpayer with $500 in federal income tax liability and $1,700 in potential credit can only use $500 of the credit for that year. The remaining $1,200 is not forfeited — Section 25F carries unused credit forward for up to five succeeding tax years. **Interaction with deductions:** A taxpayer who claims the Section 25F credit for a qualifying donation generally cannot also claim a charitable deduction for the same amount under Section 170. The statutory framework is intended to prevent double benefit from the same contribution. **Qualifying contributions:** Only donations to SGOs that have been approved by a state that has opted into the program qualify for the federal credit. An SGO that has completed federal compliance requirements but has not yet received state approval — or that operates in a state that has not opted in — cannot offer donors the Section 25F credit. ### [The state opt-in requirement](https://sgoguide.com/resources/obbba-explained#the-state-opt-in-requirement) The state opt-in requirement is one of the most important structural features of the Section 25F program and one of the most frequently misunderstood. The federal tax credit is available only for contributions to SGOs on the certified list of a state that has elected to participate. This means the program is federally created but state-administered. A state that chooses not to opt in effectively excludes its SGOs from participating in the federal credit program. States opt in by making a formal election with the IRS — submitted by the governor or another entity designated under state law — together with an annual certified list of the qualifying SGOs located in that state. Legislation is not required to elect: some states participated by executive order, and three arrived after their legislatures overrode gubernatorial vetoes. Many states have also enacted legislation that: - Formally establishes the state's participation in the federal SGO tax credit program - Creates a state approval process for SGOs seeking to operate in the state - Specifies any state-level requirements beyond the federal minimums - Establishes annual reporting requirements for approved SGOs The content and process of opt-in legislation varies significantly by state. States with pre-existing school choice programs and scholarship tax credit frameworks have adapted those frameworks to incorporate Section 25F. States without pre-existing infrastructure have needed to build approval processes from scratch. Thirty states appear on the IRS participating-state list for 2027, as of that list's July 24, 2026 revision. They arrived by different routes — executive order in some states, statute in others, and legislative overrides of gubernatorial vetoes in Kansas, Kentucky, and North Carolina. New York's governor announced an intent to participate in May 2026 but has not filed an election, and Michigan's has declined to commit pending federal guidance; six states have declined outright. Appearing on that list is not the same as being able to approve SGOs. No state has submitted its certified list of qualifying SGOs yet: the IRS deferred the deadline and the procedure for doing so to future guidance, expected with the proposed regulations Treasury has committed to by the end of September 2026. Until then, no SGO is federally listed anywhere. The political dynamics of school choice mean the opted-in universe is likely to grow, but participation is elected annually and is not guaranteed. ### [Why the program exists: the policy context](https://sgoguide.com/resources/obbba-explained#why-the-program-exists-the-policy-context) The Section 25F program reflects a long-running policy debate about the role of private and supplemental education — and about who should bear the cost of expanding access to those options for families who cannot afford them. Prior to the OBBBA, school choice policy was primarily a state matter. Many states had enacted scholarship tax credit programs, education savings account programs, and various forms of publicly funded vouchers. The design, eligibility rules, and scale of these programs varied enormously. A child in Florida had access to one of the most expansive scholarship programs in the country; a child in a state without school choice legislation had access to none. The Section 25F federal credit does not federalize school choice in the sense of mandating what any student must or can do. It creates a federal financial incentive — the tax credit — that increases the effective value of donations to qualifying organizations in participating states. The policy judgment embedded in the program is that the federal government should help facilitate private scholarship funding, while leaving the educational choices themselves to states, localities, families, and organizations. For organizations considering an SGO, the policy context matters primarily because the regulatory environment is still forming. The IRS is still finalizing regulations under Section 25F. States are still enacting opt-in legislation and building approval frameworks. The first operational year of the program is 2027 — and organizations that are operational in 2027 will be navigating a still-developing regulatory landscape. ### [What the statute requires of SGOs](https://sgoguide.com/resources/obbba-explained#what-the-statute-requires-of-sgos) Section 25F imposes specific structural and operational requirements on qualifying SGOs. These requirements are set at the federal level and are not waivable by states. **501(c)(3) status with primary SGO mission.** The SGO must be a Section 501(c)(3) organization whose primary mission is to provide scholarships to eligible students. This primary mission requirement has real consequences: organizations with broad educational missions may need to amend their governing documents, and organizations that pursue other charitable activities alongside scholarship programs need to ensure their primary mission remains scholarship-focused. **State approval.** As described above, the SGO must appear on the certified list of a state that has elected to participate. Getting onto that list is on the critical path to accepting qualified donations — and no state has published one yet. **Multi-student, multi-school distribution.** Scholarships must be awarded to ten or more students who do not all attend the same school. This requirement reflects the policy intent that SGOs serve a diverse student population across multiple schools — not function as a subsidy mechanism for a single institution. **No earmarking.** Donors cannot direct their contributions to specific students or specific schools. Award decisions must be made through an independent process that is not conditioned on donor preferences. This requirement is explicit in the statute and is one of the most operationally significant compliance requirements. **90/10 spending ratio.** At least 90% of the SGO's annual revenues must be spent on qualified scholarships. The remaining 10% may be used for administrative and fundraising costs. This constraint requires careful operational planning, particularly for early-stage programs that are building to scale. **IRS-compliant receipts.** The SGO must provide donors with receipts that meet the requirements for claiming the Section 25F credit. The specific content requirements for qualifying receipts have not yet been fully specified in IRS guidance — a regulatory gap that SGOs need to monitor. ### [The regulatory gaps to understand](https://sgoguide.com/resources/obbba-explained#the-regulatory-gaps-to-understand) Section 25F was enacted in 2025. The IRS has not yet issued final regulations interpreting it. This means there are genuine areas of regulatory uncertainty that affect formation and operational decisions. The most significant areas of uncertainty include: **Income verification methodology.** The statute uses the phrase "area median gross income" — a term that is not identical to the HUD area median income figures commonly used in housing programs. Until the IRS provides guidance, SGOs must make a documented methodology choice about which data source to use. **Qualified expense line-drawing.** Coverdell ESA expense categories provide the statutory framework for what qualifies, but the application in specific contexts — faith-based enrichment programs, public school supplemental services, multi-campus private school arrangements — requires case-by-case analysis that final regulations will eventually provide. **Receipt content requirements.** The specific information required on a Section 25F tax credit receipt differs from charitable contribution receipt requirements under Section 170. Until the IRS specifies receipt content, SGOs are designing their receipt systems based on statutory language and analogous state program guidance. **Multi-state operation rules.** The statute is primarily designed around SGOs operating in a single state. Multi-state operations create questions about approval requirements, reporting obligations, and the geographic scope of donor eligibility that final regulations will need to address. Organizations that begin formation before final regulations issue — which is the only viable path to 2027 operational status — should document their methodology decisions carefully and maintain the flexibility to update their systems as guidance issues. --- ## [The Education Freedom Tax Credit, Explained](https://sgoguide.com/resources/education-freedom-tax-credit) ### [One program, four names](https://sgoguide.com/resources/education-freedom-tax-credit#four-names) The Education Freedom Tax Credit (EFTC), the Federal Scholarship Tax Credit (FSTC), the Educational Choice for Children Act (ECCA), and Section 25F are four names for the same federal program — a dollar-for-dollar tax credit of up to $1,700 per year for donations to scholarship granting organizations, effective January 1, 2027. Who uses which name: - **Education Freedom Tax Credit (EFTC)** — the common public name. Treasury's own announcements, press coverage, and school-choice advocacy organizations use it. - **Federal Scholarship Tax Credit (FSTC)** — the IRS's official label. IRS pages, forms guidance, and the participating-state list use this name. - **Educational Choice for Children Act (ECCA)** — the congressional bill name for the legislation before it was enacted. - **Section 25F** — the statutory citation: where the program lives in the Internal Revenue Code. Tax professionals and legal analysis cite it this way. If you have read about any one of these, you have read about all of them. There is one credit, one set of rules, and one effective date. ### [What the credit is](https://sgoguide.com/resources/education-freedom-tax-credit#what-the-credit-is) The credit is a non-refundable federal income tax credit for individual taxpayers who donate cash to a state-approved Scholarship Granting Organization (SGO). - **Amount:** up to $1,700 per taxpayer per year — $3,400 for married couples filing jointly. - **Dollar-for-dollar:** the credit reduces federal taxes owed directly. A $1,700 contribution costs a qualifying donor $0 after the credit, in any tax bracket — unlike a deduction, whose value depends on the donor's marginal rate. - **Effective date:** January 1, 2027. The first creditable donations happen in tax year 2027, claimed on returns filed in 2028. - **State opt-in:** the credit is only available for contributions to SGOs approved by a state that has elected into the program. States elect annually. - **Where donors live doesn't matter:** eligibility turns on where the SGO is listed and where the student resides — not the donor's home state. A donor in a non-participating state can contribute to an SGO listed in a participating state and claim the credit. The money flows to K-12 scholarships for students whose household income is at or below 300% of area median gross income, covering tuition and other qualified educational expenses. ### [Where each name comes from](https://sgoguide.com/resources/education-freedom-tax-credit#where-the-names-come-from) The program began in Congress as the **Educational Choice for Children Act (ECCA)**. In 2025 its substance was enacted as part of the One Big Beautiful Bill Act (OBBBA), which codified the credit at **Section 25F** of the Internal Revenue Code. After enactment, the IRS adopted **Federal Scholarship Tax Credit (FSTC)** as the program's official administrative label — that is the name on the IRS's program pages and its list of participating states. Meanwhile, Treasury announcements and most press coverage popularized **Education Freedom Tax Credit (EFTC)**, which has become the name most people encounter first. The result is a naming split that tracks the audience: advocacy and press say EFTC, the IRS says FSTC, Congress-watchers say ECCA, and tax professionals cite §25F. None of the names marks a different version of the program. ### [Which name to use](https://sgoguide.com/resources/education-freedom-tax-credit#which-name-to-use) For everyday conversation and fundraising, **Education Freedom Tax Credit** is the name most donors and families will recognize. When you are working with IRS materials — the participating-state list, filing guidance, receipts — look for **Federal Scholarship Tax Credit (FSTC)**. In legal documents, formation paperwork, and compliance analysis, the statutory cite **Section 25F** is the precise reference. SGO Guide's reference content generally uses the statutory cite for precision, glossing the common names on each page. Whichever name you search, the rules are identical: the same $1,700 cap, the same state opt-in requirement, the same January 1, 2027 start. --- ## [SGO Glossary](https://sgoguide.com/resources/sgo-glossary) ### [Scholarship Granting Organization (SGO)](https://sgoguide.com/resources/sgo-glossary#sgo) A 501(c)(3) nonprofit that accepts donations from individual taxpayers and awards those funds as scholarships to income-eligible K-12 students. Under Section 25F, donors to a state-approved SGO receive a dollar-for-dollar federal income tax credit. An SGO sits between donor and student: it receives contributions, verifies student eligibility, makes award decisions through an independent process, and disburses funds for qualified expenses. ### [Section 25F](https://sgoguide.com/resources/sgo-glossary#section-25f) (also: Federal Scholarship Tax Credit (FSTC) · Education Freedom Tax Credit (EFTC) · Educational Choice for Children Act (ECCA)) The section of the Internal Revenue Code, enacted as part of the One Big Beautiful Bill Act, that creates the federal scholarship tax credit. The IRS's official label for the program is the Federal Scholarship Tax Credit (FSTC); press coverage and advocacy usually call it the Education Freedom Tax Credit (EFTC); the congressional bill name was the Educational Choice for Children Act (ECCA). It defines the donor credit, the structural requirements SGOs must meet, student income eligibility, and the state opt-in mechanism. The program takes effect January 1, 2027, and the IRS has not yet issued final regulations. ### [One Big Beautiful Bill Act (OBBBA)](https://sgoguide.com/resources/sgo-glossary#obbba) The federal legislation that enacted Section 25F, creating the first nationwide scholarship tax credit program. Before the OBBBA, tax-credit scholarship programs existed only at the state level, in states such as Arizona, Pennsylvania, and Florida. ### [Federal scholarship tax credit](https://sgoguide.com/resources/sgo-glossary#scholarship-tax-credit) (also: Education Freedom Tax Credit (EFTC)) The non-refundable federal income tax credit donors receive for contributions to a state-approved SGO: up to $1,700 per year per taxpayer, or $3,400 for married couples filing jointly. The credit reduces federal tax liability dollar-for-dollar, unlike a deduction, which only reduces taxable income. Non-refundable means it cannot create a refund; credit beyond a donor's liability carries forward for up to five years. ### [Educational Choice for Children Act (ECCA)](https://sgoguide.com/resources/sgo-glossary#ecca) The congressional bill name for the legislation that became the federal scholarship tax credit. When the provision was enacted through the One Big Beautiful Bill Act, it was codified as Section 25F of the Internal Revenue Code — so ECCA, the Education Freedom Tax Credit (EFTC), the Federal Scholarship Tax Credit (FSTC), and Section 25F all refer to the same program. ### [Tax credit vs. tax deduction](https://sgoguide.com/resources/sgo-glossary#credit-vs-deduction) A deduction reduces taxable income, so its value depends on the donor's tax bracket — a 24%-bracket donor saves 24 cents per dollar deducted. A credit reduces taxes owed directly: one dollar of credit is one dollar less tax. At the $1,700 Section 25F maximum, a donor in any bracket receives the same $1,700 reduction in federal taxes owed. ### [State opt-in](https://sgoguide.com/resources/sgo-glossary#state-opt-in) (also: Advance election) The mechanism by which the Section 25F program activates in a state: a formal annual election submitted to the IRS by the governor (or another entity designated under state law), together with a certified list of the qualifying SGOs located in that state. Some states have paired the election with authorizing legislation, and several opted in through legislative overrides of gubernatorial vetoes. Without the election, no SGO can be listed in that state regardless of how well-structured it is federally. ### [State approval](https://sgoguide.com/resources/sgo-glossary#state-approval) The formal approval an SGO must receive from an opted-in state before donors can claim the federal credit for contributions to it. Approval processes vary by state — many run through the state Department of Revenue or Department of Education, with typical timelines of four to eight weeks where processes are established. ### [No-earmarking rule](https://sgoguide.com/resources/sgo-glossary#no-earmarking) The federal prohibition on donors directing their contributions to specific students, schools, or communities. It covers direct earmarking (naming a student), structural earmarking (allocating funds by school in proportion to each school community's donations), and implicit conditioning (informal understandings about who will benefit). Award decisions must be genuinely independent of donor identity and preferences. ### [Arm's-length award process](https://sgoguide.com/resources/sgo-glossary#arms-length) The requirement that scholarship decisions be made through an independent, documented process insulated from donor influence — typically an award committee with documented criteria, independence between decision-makers and donor relationships, and distribution of awards across multiple schools. ### [90/10 rule](https://sgoguide.com/resources/sgo-glossary#90-10-rule) (also: 90/10 spending requirement) The requirement that at least 90% of an SGO's annual revenues be spent on qualified scholarships, leaving at most 10% for all administrative and fundraising costs combined. The ratio is tested against each year's revenues independently — a shortfall in one year cannot be made up in the next, and violations can lead to state suspension or revocation of approved status. ### [300% of area median income (AMI)](https://sgoguide.com/resources/sgo-glossary#300-ami) The student eligibility ceiling: a student qualifies for SGO scholarships if household gross income is at or below 300% of the area median gross income where they live. Because AMI is geographic, the threshold differs significantly between high-cost metros and rural counties — the same household income may qualify in one area and not another. ### [Qualified expenses](https://sgoguide.com/resources/sgo-glossary#qualified-expenses) What SGO scholarships may pay for. Section 25F adopts the Coverdell Education Savings Account categories under IRC §530(b)(4): tuition and fees at qualifying institutions, academic tutoring, books, supplies, and equipment required for enrollment, educational software for academic instruction, and special needs services. ### [Multi-student, multi-school distribution requirement](https://sgoguide.com/resources/sgo-glossary#multi-school-distribution) The structural requirement that an SGO award scholarships to ten or more students who do not all attend the same school, per award cycle. Nine awards fall short of the numerical minimum; ten awards concentrated at a single school violate the distribution component even though the count is met. ### [Primary mission test](https://sgoguide.com/resources/sgo-glossary#primary-mission) The requirement that an SGO be a 501(c)(3) organized and operated with a primary mission of providing scholarships to eligible students. A broad educational mission — 'promoting education in the community' — may not qualify without amending governing documents; the IRS looks at both documents and actual operations. ### [Returning-student priority](https://sgoguide.com/resources/sgo-glossary#returning-student-priority) (also: Sibling priority) The statutory priority system for award decisions: students who received a scholarship in a prior year are prioritized in subsequent cycles, and siblings of current or prior recipients receive the same priority. ### [Direct-to-school disbursement](https://sgoguide.com/resources/sgo-glossary#direct-to-school-ach) (also: Bulk school payout) A scholarship disbursement channel in which the SGO pays tuition directly to the school — typically as one bulk remittance covering every approved student at that school, released once the school confirms enrollment. Because funds never pass through the family, no receipt collection is needed — making it the cleanest channel for tuition from a compliance standpoint. ### [Amazon Business PunchOut](https://sgoguide.com/resources/sgo-glossary#amazon-business-punchout) (also: cXML PunchOut) A procurement integration in which SGO staff shop for a student's books, supplies, or technology on the SGO's own Amazon Business account. The cart is returned to the SGO's platform as a disbursement request against the student's award; on approval the order is placed on the SGO's account and shipped to the SGO or the school. Funds never reach the family and every line item is logged. ### [Check to a provider](https://sgoguide.com/resources/sgo-glossary#reimbursement-disbursement) A disbursement channel for a tutor or service provider that is neither a school nor available on Amazon Business: the SGO issues a check to the provider (never to the family) after the normal request and approval. Used for edge-case expenses the other channels don't cover; paying families and collecting receipts at scale is the most common failure mode in unstructured scholarship programs. ### [Education Savings Account (ESA)](https://sgoguide.com/resources/sgo-glossary#esa) A state school-choice mechanism in which the state deposits public funds into accounts parents control and spend on approved educational expenses. Distinct from the SGO model, which is funded by private donations incentivized through tax credits rather than direct state appropriations. ### [School voucher](https://sgoguide.com/resources/sgo-glossary#voucher) A state program that pays public funds directly toward private school tuition for eligible students. Unlike vouchers, the Section 25F model routes private donations through nonprofit SGOs, with donors compensated by a federal tax credit. ### [Tax-credit scholarship program](https://sgoguide.com/resources/sgo-glossary#tax-credit-scholarship) The general model — predating Section 25F at the state level — in which donors receive tax credits for contributions to scholarship organizations. State programs such as Pennsylvania's EITC/OSTC and Arizona's individual credit programs built the infrastructure many states are now adapting for the federal program. ### [SGO compliance calendar](https://sgoguide.com/resources/sgo-glossary#compliance-calendar) The recurring set of obligations an operating SGO must track: real-time controls (earmarking screens, credit-cap enforcement), monthly reconciliation, quarterly 90/10 monitoring, and annual state reporting. Missing a state reporting deadline can jeopardize approved status. ### [Safe harbor (90% test)](https://sgoguide.com/resources/sgo-glossary#safe-harbor) The measurement approach previewed by Treasury in June 2026 for the Section 25F 90% spending requirement. An organization whose activities are largely scholarship-granting may measure income for the test by the amount held in its Section 25F segregated account — contributions plus earnings — rather than by total organizational receipts. For a multistate SGO, the safe harbor must be satisfied separately for each state account. 'Largely scholarship-granting' has not yet been defined. ### [Segregated state account](https://sgoguide.com/resources/sgo-glossary#segregated-state-account) The separate account a multistate SGO must maintain for each state on whose list it appears. Qualified contributions are designated by the donor to a state, held in that state's account, and may fund only scholarships for students who reside there. The 90/10 test runs per account, and money never moves between state accounts — there is no national pool. ### [General operating gift](https://sgoguide.com/resources/sgo-glossary#operating-gift) A contribution to an SGO's general funds rather than its Section 25F segregated accounts. The donor takes an ordinary charitable deduction instead of the federal credit, and — under the previewed safe harbor — the gift sits outside the 90% test's denominator, so it can fund staff, marketing, platform, and audit costs freely. Operating gifts must be kept clearly separate from qualified contributions. ### [Disqualified person](https://sgoguide.com/resources/sgo-glossary#disqualified-person) A person who may not receive scholarships from an SGO, determined under rules similar to the private-foundation framework of Section 4946. Treasury expects the regulations to treat members of the SGO's selection committee — and their immediate families — as disqualified with respect to that SGO, along with substantial contributors. Whether disqualification applies organization-wide or state-by-state for multistate SGOs is unresolved. ### [Substantial contributor](https://sgoguide.com/resources/sgo-glossary#substantial-contributor) A donor whose cumulative giving makes them a disqualified person, barred from receiving scholarships. Treasury is considering defining the term for Section 25F as anyone contributing more than 2% of total contributions the SGO has received since inception — without the $5,000 floor used in the private-foundation rules. In a new SGO's first year, that threshold can be crossed with a single large gift, disqualifying the donor's own family. ### [Unique donor number](https://sgoguide.com/resources/sgo-glossary#unique-donor-number) An identifier each SGO must issue to each donor under an IRS-provided method, included on the donor's written acknowledgment. The SGO reports contribution data to the IRS using the number, the taxpayer reports it on their federal return, and the IRS matches the two — enabling credit verification without SGOs collecting Social Security numbers. Previewed in Treasury's June 2026 guidance; no analogue exists in state programs. --- ## [Section 25F State Opt-In Status](https://sgoguide.com/resources/state-tracker) Machine-readable JSON: [https://sgoguide.com/api/data/state-tracker](https://sgoguide.com/api/data/state-tracker). Per-state guide pages listed below. "Last reviewed" is the month the entry was last checked. - **Alabama** (AL) — Opted In. Governor signed an executive order to participate on January 16, 2026. Advance election for 2027 confirmed on the IRS participating-state list. Last reviewed 2026-07. Guide: [Alabama state guide](https://sgoguide.com/states/alabama) - **Alaska** (AK) — Opted In. Advance election for 2027 confirmed on the IRS participating-state list. Last reviewed 2026-07. Guide: [Alaska state guide](https://sgoguide.com/states/alaska) - **Arizona** (AZ) — Declined. Governor vetoed opt-in legislation on January 16, 2026, and vetoed further opt-in bills through May 2026. Arizona's existing state tax-credit scholarship programs operate independently of the federal program. Last reviewed 2026-07. Guide: [Arizona state guide](https://sgoguide.com/states/arizona) - **Arkansas** (AR) — Opted In. Advance election for 2027 confirmed on the IRS participating-state list. Last reviewed 2026-07. Guide: [Arkansas state guide](https://sgoguide.com/states/arkansas) - **California** (CA) — No Action. No advance election filed and no opt-in legislation introduced. Last reviewed 2026-07. Guide: [California state guide](https://sgoguide.com/states/california) - **Colorado** (CO) — Opted In. Governor indicated participation in early 2026; advance election for 2027 confirmed on the IRS participating-state list. Last reviewed 2026-07. Guide: [Colorado state guide](https://sgoguide.com/states/colorado) - **Connecticut** (CT) — No Action. No advance election filed and no formal action announced. Last reviewed 2026-07. Guide: [Connecticut state guide](https://sgoguide.com/states/connecticut) - **Delaware** (DE) — No Action. No advance election filed and no formal action announced. Last reviewed 2026-07. Guide: [Delaware state guide](https://sgoguide.com/states/delaware) - **Florida** (FL) — Opted In. Advance election for 2027 confirmed on the IRS participating-state list. Florida's extensive school-choice scholarship infrastructure predates the federal program. Last reviewed 2026-07. Guide: [Florida state guide](https://sgoguide.com/states/florida) - **Georgia** (GA) — Opted In. Governor submitted the advance election on January 20, 2026. Confirmed on the IRS participating-state list for 2027. Last reviewed 2026-07. Guide: [Georgia state guide](https://sgoguide.com/states/georgia) - **Hawaii** (HI) — Declined. Governor has stated the state will not participate. Last reviewed 2026-07. Guide: [Hawaii state guide](https://sgoguide.com/states/hawaii) - **Idaho** (ID) — Opted In. Advance election for 2027 confirmed on the IRS participating-state list. Last reviewed 2026-07. Guide: [Idaho state guide](https://sgoguide.com/states/idaho) - **Illinois** (IL) — No Action. No advance election filed and no formal action announced. Last reviewed 2026-07. Guide: [Illinois state guide](https://sgoguide.com/states/illinois) - **Indiana** (IN) — Opted In. Advance election for 2027 confirmed on the IRS participating-state list. Indiana operates a long-standing state scholarship tax credit program with existing SGO infrastructure. Last reviewed 2026-07. Guide: [Indiana state guide](https://sgoguide.com/states/indiana) - **Iowa** (IA) — Opted In. Governor indicated participation in early 2026; advance election for 2027 confirmed on the IRS participating-state list. Last reviewed 2026-07. Guide: [Iowa state guide](https://sgoguide.com/states/iowa) - **Kansas** (KS) — Opted In. Opted in via legislative override of the governor's veto of Senate Bill 361 (April 2026). Confirmed on the IRS participating-state list for 2027. Last reviewed 2026-07. Guide: [Kansas state guide](https://sgoguide.com/states/kansas) - **Kentucky** (KY) — Opted In. Opted in via legislative override of the governor's veto of House Bill 1 (March 2026). Confirmed on the IRS participating-state list for 2027. Last reviewed 2026-07. Guide: [Kentucky state guide](https://sgoguide.com/states/kentucky) - **Louisiana** (LA) — Opted In. Governor indicated participation in early 2026; advance election for 2027 confirmed on the IRS participating-state list. Last reviewed 2026-07. Guide: [Louisiana state guide](https://sgoguide.com/states/louisiana) - **Maine** (ME) — No Action. No advance election filed and no formal action announced. Last reviewed 2026-07. Guide: [Maine state guide](https://sgoguide.com/states/maine) - **Maryland** (MD) — No Action. No advance election filed and no formal action announced. Last reviewed 2026-07. Guide: [Maryland state guide](https://sgoguide.com/states/maryland) - **Massachusetts** (MA) — No Action. No advance election filed and no formal action announced. Last reviewed 2026-07. Guide: [Massachusetts state guide](https://sgoguide.com/states/massachusetts) - **Michigan** (MI) — Studying. Governor has declined to commit pending federal guidance, and the State Board of Education voted in May 2026 to urge non-participation. The next realistic decision point follows the November 2026 gubernatorial election; states may elect annually, so 2028 participation remains possible. Last reviewed 2026-07. Guide: [Michigan state guide](https://sgoguide.com/states/michigan) - **Minnesota** (MN) — Declined. Governor has stated the state will not participate. Last reviewed 2026-07. Guide: [Minnesota state guide](https://sgoguide.com/states/minnesota) - **Mississippi** (MS) — Opted In. Governor submitted the advance election on January 19, 2026. Confirmed on the IRS participating-state list for 2027. Last reviewed 2026-07. Guide: [Mississippi state guide](https://sgoguide.com/states/mississippi) - **Missouri** (MO) — Opted In. Advance election for 2027 confirmed on the IRS participating-state list. Last reviewed 2026-07. Guide: [Missouri state guide](https://sgoguide.com/states/missouri) - **Montana** (MT) — Opted In. Advance election for 2027 confirmed on the IRS participating-state list. Last reviewed 2026-07. Guide: [Montana state guide](https://sgoguide.com/states/montana) - **Nebraska** (NE) — Opted In. Governor signed an executive order to participate on September 29, 2025 — among the first states to commit. Confirmed on the IRS participating-state list for 2027. Last reviewed 2026-07. Guide: [Nebraska state guide](https://sgoguide.com/states/nebraska) - **Nevada** (NV) — Opted In. Advance election for 2027 confirmed on the IRS participating-state list. Last reviewed 2026-07. Guide: [Nevada state guide](https://sgoguide.com/states/nevada) - **New Hampshire** (NH) — Opted In. Advance election for 2027 confirmed on the IRS participating-state list. New Hampshire's Education Freedom Account program provides existing school-choice infrastructure. Last reviewed 2026-07. Guide: [New Hampshire state guide](https://sgoguide.com/states/new-hampshire) - **New Jersey** (NJ) — No Action. No advance election filed and no formal action announced. Last reviewed 2026-07. Guide: [New Jersey state guide](https://sgoguide.com/states/new-jersey) - **New Mexico** (NM) — Declined. Governor has stated the state will not participate. Last reviewed 2026-07. Guide: [New Mexico state guide](https://sgoguide.com/states/new-mexico) - **New York** (NY) — Studying. Governor has stated intent to participate pending federal regulations. An intent statement is not an official election; no advance election has been filed. Last reviewed 2026-07. Guide: [New York state guide](https://sgoguide.com/states/new-york) - **North Carolina** (NC) — Opted In. Governor vetoed opt-in legislation in August 2025; the legislature overrode the veto of House Bill 87 in June 2026. Confirmed on the IRS participating-state list for 2027. The Opportunity Scholarship program provides an existing administrative model. Last reviewed 2026-07. Guide: [North Carolina state guide](https://sgoguide.com/states/north-carolina) - **North Dakota** (ND) — Opted In. Advance election for 2027 confirmed on the IRS participating-state list. Last reviewed 2026-07. Guide: [North Dakota state guide](https://sgoguide.com/states/north-dakota) - **Ohio** (OH) — Opted In. Advance election for 2027 confirmed on the IRS participating-state list. Ohio operates existing state scholarship tax credit programs. Last reviewed 2026-07. Guide: [Ohio state guide](https://sgoguide.com/states/ohio) - **Oklahoma** (OK) — Opted In. Advance election for 2027 confirmed on the IRS participating-state list. Oklahoma's Parental Choice Tax Credit program predates the federal program. Last reviewed 2026-07. Guide: [Oklahoma state guide](https://sgoguide.com/states/oklahoma) - **Oregon** (OR) — Declined. Governor announced in June 2026, after reviewing Treasury's regulatory preview, that the state will not participate. Last reviewed 2026-07. Guide: [Oregon state guide](https://sgoguide.com/states/oregon) - **Pennsylvania** (PA) — No Action. No Section 25F election has been made. Pennsylvania's EITC and OSTC tax-credit programs operate independently of the federal program. Last reviewed 2026-07. Guide: [Pennsylvania state guide](https://sgoguide.com/states/pennsylvania) - **Rhode Island** (RI) — No Action. No advance election filed and no formal action announced. Last reviewed 2026-07. Guide: [Rhode Island state guide](https://sgoguide.com/states/rhode-island) - **South Carolina** (SC) — Opted In. Advance election for 2027 confirmed on the IRS participating-state list. Last reviewed 2026-07. Guide: [South Carolina state guide](https://sgoguide.com/states/south-carolina) - **South Dakota** (SD) — Opted In. Governor indicated participation in early 2026; advance election for 2027 confirmed on the IRS participating-state list. Last reviewed 2026-07. Guide: [South Dakota state guide](https://sgoguide.com/states/south-dakota) - **Tennessee** (TN) — Opted In. Governor indicated participation in early 2026; advance election for 2027 confirmed on the IRS participating-state list. Tennessee's Education Savings Account program predates the federal program. Last reviewed 2026-07. Guide: [Tennessee state guide](https://sgoguide.com/states/tennessee) - **Texas** (TX) — Opted In. Governor indicated participation in early 2026; advance election for 2027 confirmed on the IRS participating-state list. Last reviewed 2026-07. Guide: [Texas state guide](https://sgoguide.com/states/texas) - **Utah** (UT) — Opted In. Advance election for 2027 confirmed on the IRS participating-state list. Utah's Carson Smith Scholarship program provides existing special-needs scholarship infrastructure. Last reviewed 2026-07. Guide: [Utah state guide](https://sgoguide.com/states/utah) - **Vermont** (VT) — No Action. No advance election filed and no formal action announced. Last reviewed 2026-07. Guide: [Vermont state guide](https://sgoguide.com/states/vermont) - **Virginia** (VA) — Opted In. Among the first movers: the governor submitted the advance election (Form 15714) on January 9, 2026, with an initial list of eight eligible SGOs. Confirmed on the IRS participating-state list for 2027. Last reviewed 2026-07. Guide: [Virginia state guide](https://sgoguide.com/states/virginia) - **Washington** (WA) — No Action. No advance election filed and no formal action announced. Last reviewed 2026-07. Guide: [Washington state guide](https://sgoguide.com/states/washington) - **West Virginia** (WV) — Opted In. Advance election for 2027 confirmed on the IRS participating-state list. West Virginia's Hope Scholarship program provides existing infrastructure. Last reviewed 2026-07. Guide: [West Virginia state guide](https://sgoguide.com/states/west-virginia) - **Wisconsin** (WI) — Declined. Governor vetoed Section 25F opt-in legislation (Assembly Bill 602, March 2026) and has stated opposition to participation. Wisconsin's parental choice programs operate independently of the federal program. Last reviewed 2026-07. Guide: [Wisconsin state guide](https://sgoguide.com/states/wisconsin) - **Wyoming** (WY) — Opted In. Advance election for 2027 confirmed on the IRS participating-state list. Last reviewed 2026-07. Guide: [Wyoming state guide](https://sgoguide.com/states/wyoming) --- ## [Blog](https://sgoguide.com/blog) All posts in full, newest first. RSS: [https://sgoguide.com/feed.xml](https://sgoguide.com/feed.xml) --- ### Qualified Contributions vs. Operating Gifts: The Two-Gift Structure That Funds an SGO Canonical URL: [https://sgoguide.com/blog/sgo-qualified-contributions-vs-operating-gifts](https://sgoguide.com/blog/sgo-qualified-contributions-vs-operating-gifts) Published: 2026-08-31 · Category: How-To · 13 min read Every SGO business plan reaches the same sentence and stalls: who pays for the staff? The arithmetic that produces the stall is simple. At least 90% of what sits in a Section 25F segregated account has to go out as scholarships, which leaves at most 10% to run the organization on. Raise $200,000 in a state and the entire operating budget for that state is $20,000 — software, audit, insurance, payment processing, and whatever fraction of a person administers the program. Most organizations do the multiplication, conclude the program only works at scale, and put the plan down. The conclusion is wrong, and it is wrong because the 10% is not the only money available. It is only the money that comes *out of the accounts*. There are two entirely separate gift instruments in this program. Nearly every conversation collapses them into one, and the collapse is what makes an SGO look unfundable. ## The Two Instruments, Side by Side | | Qualified contribution | Operating gift | |---|---|---| | **Statutory home** | Section 25F | Section 170, the ordinary charitable rules | | **Donor gets** | A dollar-for-dollar federal tax **credit**, up to $1,700 per taxpayer per year | A charitable **deduction**, if the donor itemizes | | **What can be given** | Cash only | Cash, appreciated securities, a donor-advised fund grant, anything a charity can normally accept | | **Where it lands** | The state-specific segregated account | General operating funds | | **What it can fund** | Scholarships, plus up to a 10% release for operations | Anything the organization lawfully does | | **Counts in the 90/10 test** | Yes — it *is* the denominator | No. It never enters the account | Read the last row twice, because it is the whole point. Under [the safe harbor Treasury previewed in June 2026](/blog/section-25f-safe-harbor-90-percent-test), income for the 90% test is measured by what the segregated account holds. Money that never enters the account is not in the denominator. Spending it does not move the ratio, does not consume the 10%, and does not reduce by one dollar what reaches students. An SGO funded entirely on qualified contributions has a $20,000 budget on $200,000 raised. The same SGO, with $60,000 in operating support from sources that never touch the accounts, has an $80,000 budget — and still sends 90% of every qualified contribution to students. Nothing was taken from anyone. A second instrument was used. ## Why Overhead Belongs Outside the Accounts Three reasons, in ascending order of how much they matter. **The allowance is small and already spoken for.** Payment processing alone can claim a quarter of it on card rails — [the fee arithmetic is its own post](/blog/sgo-credit-card-fees-10-percent) — before audit, insurance, or software. There is not room in 10% for a salary at most realistic scales. **The cap binds per state account, so thin states cannot carry themselves.** Because [the 90/10 test is a withdrawal cap rather than an expense rule](/blog/sgo-90-10-withdrawal-cap-not-expense-rule), a state holding $80,000 can release $8,000 and not a dollar more, however much the organization spends serving it. A big state cannot subsidize a small one through the accounts. Operating money has no such geography. **Year one is structurally broken, and only outside money fixes it.** Formation, IRS recognition, state listing, systems, and the first campaign are all spent *before* the first qualified contribution arrives. A partial first year cannot absorb them inside 10% of a number that is still near zero. Notice 2025-70 asked whether the regulations should provide start-up relief or multi-year smoothing; that question is still [on the open list](/blog/education-freedom-tax-credit-regulations-open-questions). Model as though the answer is no, and the launch has to be funded from operating money — because it does. There is also a fundraising consequence worth naming. Any campaign that does not return better than 10:1 in the same state cannot be paid for from the accounts at all. Put donor acquisition on the operating side and that constraint disappears — you are spending money that was never in the denominator. ## Making the Ask: One Donor, Two Gifts The instinctive objection is that asking the same person twice is a harder ask. In practice it is an easier one, because the two gifts feel completely different to the person writing them. The qualified contribution is close to free. A donor who owes federal tax gives $1,700, claims a $1,700 credit, and is out nothing — the gift redirects tax they were going to pay anyway. That is not a generosity conversation; it is a redirection conversation, and it converts at rates ordinary fundraising does not. The operating gift is the real gift. It costs the donor money. But it is asked *after* they have already seen their scholarship dollars cost them nothing, which is the most favorable moment a development office is ever going to get. The sequence that works is the obvious one: lead with the credit, because it is the remarkable thing and it is free. Then make the smaller, honest ask — the credit sends money to students, and something has to keep the lights on so it can keep happening. A donor who has just been shown a $1,700 gift that costs them nothing is unusually receptive to a $250 gift that costs them $250. Two things to keep straight in the ask. The credit is **non-refundable**, so a donor with no federal tax liability gets nothing from the qualified contribution this year, though it carries forward five years. And the operating gift is deductible only if the donor itemizes, which most do not. Neither is a reason to skip either ask — they are reasons not to promise an outcome you cannot deliver. ## The Part That Breaks: Receipting and Books This is where organizations get into trouble, and it is entirely avoidable if the separation is built before the first gift rather than reconstructed afterward. **Two receipts, two formats.** A qualified contribution gets a Section 25F acknowledgment carrying the IRS-method unique donor number the credit is matched against. An operating gift gets an ordinary Section 170 contemporaneous written acknowledgment. They are not interchangeable, and a Section 170 letter will not support a credit claim. If your system can only produce one kind of receipt, it cannot run a two-gift program. **Two ledgers, never commingled.** The statute requires the SGO to prevent commingling of qualified contributions with other amounts by maintaining separate accounts used exclusively for them. Operating gifts must land somewhere else from the moment they arrive — not be swept later. **The intake has to capture intent at the moment of the gift.** Whether a gift is a qualified contribution or operating support is a decision the donor makes when giving, not one an administrator makes at month end. A giving form that cannot ask the question produces gifts nobody can correctly receipt. **Do not let a rejected gift silently become the wrong instrument.** Someone will attempt an appreciated-stock gift or a donor-advised fund grant to the scholarship account. Neither can be a qualified contribution — the credit runs to the individual taxpayer, and the contribution must be cash. The right handling is to route it to operating support and say so plainly. The wrong handling is to accept it into the segregated account, which puts a non-qualifying amount in the denominator of the 90% test. That last point has an upside most organizations miss. The DAF balances and appreciated securities that are *useless* for the credit are perfectly good operating money — and they are frequently the largest gifts a donor is capable of making. ## Where Operating Money Actually Comes From Individual operating gifts are one source and rarely the largest. The others, roughly in order of how reliable they are: - **A parent or affiliated organization.** If the SGO was formed as a dedicated affiliate — which [the safe harbor strongly rewards](/blog/section-25f-safe-harbor-90-percent-test) — the parent's dues, reserves, and program revenue can support it without ever entering the accounts. For an association or a diocese, this is usually the answer. - **Foundation grants for operations.** Ordinary grantmaking. A funder who will not underwrite scholarships directly will often underwrite the infrastructure that moves them. - **Corporate sponsorship.** Subject to the usual unrelated-business-income care around substantial return benefits, but conventional. - **Partner-school fees, where the model includes them.** Worth naming precisely: a partner fee is paid *from* the operating allowance, not from the 90%. It is a use of the 10%, not a second source outside it. ## Four Cautions **"Largely scholarship-granting" is undefined, and the safe harbor depends on it.** The safe harbor is available to organizations whose activities are largely scholarship-granting. Treasury has not said what "largely" means. A two-gift structure does not endanger that on its own — raising operating money to run a scholarship program is scholarship-granting activity — but an organization that grows a large non-scholarship program alongside it is betting on a definition that does not exist yet. **No quid pro quo, in either direction.** An operating gift cannot buy anything, and it especially cannot buy influence over awards. A donor who gives operating support does not thereby get a say in who receives a scholarship, and nothing about the two-gift structure loosens the earmarking prohibition. **Operating donors can still become disqualified persons.** Substantial-contributor status is measured against the organization, and it is not obvious that operating gifts are excluded from that calculation. A major operating donor may therefore acquire [disqualified-person status](/blog/sgo-selection-committee-disqualified-persons) that reaches their own family's eligibility for awards. Ask counsel before soliciting a very large operating gift from a family with children in your schools. **Everything here rests on a preview, not a regulation.** The safe harbor that makes the denominator argument work was previewed on June 9, 2026. Proposed regulations are due by the end of September 2026. The structure described here is defensible under the previewed rules and would survive most plausible refinements, but nothing in this program is settled yet. ## The Takeaway An SGO that funds itself only from the 10% is a small organization by construction, and its first year is close to impossible. An SGO that runs two gift instruments — qualified contributions that become scholarships, operating support that pays for the machine that delivers them — has an ordinary nonprofit budget attached to an extraordinary fundraising offer. The structural work is not difficult, but it has to be done before the first gift: two receipt formats, two ledgers, an intake that captures intent, and a development plan that asks for both. If you are still deciding whether to form the entity at all, the [formation guide](/how-to-start-an-sgo) covers the sequence; if you are deciding what has to be running on day one, [the software has to do both](/sgo-software) or you will be reconstructing records under audit. --- ### Can You Use an Existing 501(c)(3) as Your SGO — and Just Register It in Every State? Canonical URL: [https://sgoguide.com/blog/existing-501c3-as-your-sgo](https://sgoguide.com/blog/existing-501c3-as-your-sgo) Published: 2026-08-30 · Category: Strategy · 19 min read A board chair, a diocesan CFO, and a family foundation director have all asked us the same question this summer, in almost the same words: we already have a 501(c)(3). It has been running for years. It has a board, an EIN, a determination letter, an audit history, and a donor file. Can we just use that as our SGO and register it in every state? The question deserves two answers, because it is really two questions, and they point in different directions. **On the law, yes.** Nothing in Section 25F requires a new entity. There is no formation-date test, no clause limiting the program to organizations created after the One Big Beautiful Bill Act, and no requirement that the organization be new to scholarship work. An existing charity that meets the requirements is a scholarship granting organization exactly as much as one incorporated last week. Using an established charity is not a workaround, and nobody should treat it as one. **On the fit, usually no** — and the reason is one sentence in Treasury's June 2026 preview about how the 90 percent test gets measured. That sentence turns "we already have a charity" from an asset into the obstacle for most organizations that ask. The second half of the question — register it in every state — is a separate misunderstanding, with its own arithmetic and its own price tag. What follows is drawn from the statutory text, [IRS Notice 2025-70](https://www.irs.gov/pub/irs-drop/n-25-70.pdf), and [Treasury's June 9, 2026 guidance preview](https://home.treasury.gov/system/files/136/Preview-of-Forthcoming-Guidance.pdf). One thing to hold onto throughout: **the proposed regulations are not out yet.** Treasury has said they will issue no later than the end of September 2026, and several of the questions that decide this exact issue are still on the open list. Nothing here is legal advice. ## What Section 25F Actually Requires of an Organization Section 25F(c)(5) sets four conditions. The organization must: - be described in Section 501(c)(3), be exempt from tax under Section 501(a), and **not be a private foundation**; - prevent the co-mingling of qualified contributions with other amounts by maintaining one or more separate accounts used exclusively for qualified contributions; - satisfy each of the requirements of Section 25F(d); and - appear on the list a covered state submits for the applicable year under Section 25F(g). Section 25F(d) supplies the operating rules: scholarships to ten or more students who do not all attend the same school; not less than 90 percent of the income of the organization spent on scholarships for eligible students; no scholarships for anything other than qualified elementary or secondary education expenses under the Coverdell framework; priority for students awarded a scholarship the previous school year and then for their siblings; no earmarking or setting aside of contributions on behalf of any particular student; verification of annual household income and family size against [300 percent of area median gross income](/blog/sgo-income-eligibility-300-percent-ami); and no awards to disqualified persons, determined under rules similar to Section 4946. Read that list again and notice what is absent. There is no purpose clause. The statute never says an SGO must be organized and operated exclusively to grant scholarships. Several published summaries say it does; the statutory requirements enumerated in Notice 2025-70 do not. Your fifteen-year-old charity is not disqualified by its history, its name, or its other programs. What does the work instead is the 90 percent test. Everything turns on how it is measured. ## The Test That Decides It: Ninety Percent of What? Notice 2025-70 said Treasury anticipated that the forthcoming regulations would provide that the income of the organization includes **all** income of the organization, including unrelated business income, and is not limited to the qualified contributions segregated in the separate account. Read that way, essentially no diversified nonprofit could ever be an SGO — and Treasury asked in the same breath whether that interpretation posed practical challenges. The June preview softened it, but only for one kind of organization. In the Deputy Assistant Secretary's words: the proposed rules will generally measure the 90 percent spending requirement against the organization's total receipts, unreduced by expenses — but if the organization's activities are largely scholarship-granting activities, the organization could use a safe harbor under which income of the organization is measured by the amount held in a Section 25F segregated account, including qualified contributions and earnings. So there are two rules. The default measures 90 percent against **total receipts**. The safe harbor measures it against the segregated account, and you only reach the safe harbor if your activities are largely scholarship-granting. That condition is the whole ballgame for an existing charity, so put numbers on it. Say your organization took in $4 million last year: $2.6 million in program service revenue, $1.2 million in contributions, and $200,000 from a thrift store. In its first Section 25F year it raises $500,000 in qualified contributions. Under the default rule, income for the test is roughly $4.5 million, and the organization must spend at least $4.05 million on Section 25F scholarships for eligible students. It has $500,000 in the account. It fails by a factor of eight, and no bookkeeping fixes it, because the test measures receipts rather than the scholarship program. The safe harbor is the only escape, and the safe harbor is precisely the thing a multi-program charity cannot claim. A parish with a scholarship fund is not largely scholarship-granting. Neither is a school with an endowment, a camp with a tuition assistance program, a pregnancy center that also gives book stipends, or a community foundation carrying a hundred donor-advised funds. **Here is the practical test.** If someone reading your Form 990 cold would describe your organization as a scholarship organization, converting it is worth analyzing. If they would describe it as something else that also has a scholarship program, the entity is the problem, and the answer is a new entity rather than an amendment to this one. How much "largely" means has not been defined. It sits on our [open-questions list](/blog/education-freedom-tax-credit-regulations-open-questions) for the September regulations, and it is the number to watch if your organization is anywhere near the line. The fuller treatment of the safe harbor is [here](/blog/section-25f-safe-harbor-90-percent-test), and the mechanics of the spending cap itself are in [the 90/10 rule](/blog/understanding-the-90-10-rule). ## Private Foundation Status Is the Other Hard Stop Section 25F(c)(5)(A) excludes private foundations, and there is no cure inside the program. This catches more organizations than people expect: classic grantmaking foundations, family foundations that already run a scholarship program, and private operating foundations, which are still private foundations for this purpose. The good news is that this one is cheap to check, and you should check it the way your state will. Notice 2025-70 tells states that policies and procedures including consideration of whether the organization is identified as an exempt organization with 501(c)(3) status, and not a private foundation, in the [IRS Exempt Organizations Business Master File Extract](https://www.irs.gov/charities-non-profits/exempt-organizations-business-master-file-extract-eo-bmf) would be sufficient for this requirement. That is the record a revenue department will pull. Go look at your own entry before you build a plan on top of it, because what your determination letter says in a drawer matters less than what the IRS file says today. If your organization is a private foundation, terminating that status under Section 507 is a multi-year project with its own tax consequences. In practice, the foundation funds the formation of a separate public charity instead — which is a normal, well-trodden structure, not a compromise. One adjacent classification is worth naming. A **supporting organization** under Section 509(a)(3) is not a private foundation, so it clears this bar — but one that exists to support a single school runs straight into the ten-students, more-than-one-school rule, which is the same wall [a single school hits](/blog/single-school-start-its-own-sgo). ## Your Governing Documents Have to Require Compliance This is the requirement that most surprises boards, and it is the one that makes "just use the existing charity" more than a filing exercise. Notice 2025-70 describes what a state must certify under penalties of perjury. Among the items: that the state has adopted, and is complying with, policies and procedures designed to enable it to make its own independent determination that each organization on the list **is required by the organization's organizational documents or bylaws to satisfy**, and is operating in a manner that satisfies, each of the requirements of Section 25F(c)(5). Two words in that sentence do the damage. Not "is able to" satisfy. Not "intends to." **Is required by** its own articles or bylaws. And states may not rely on self-certification by the SGO — the Notice says so directly. Most existing charities' governing documents are silent on all of it. Silence is a fixable problem: you amend, the board adopts, and you are done. What is not always fixable is a governing document that says something incompatible. We have seen all of these in real articles and bylaws: - scholarships restricted to students of a named school, which conflicts with the ten-students, more-than-one-school requirement; - awards limited to members of a congregation, a parish, or an association's member families, which produces the same concentration by another route; - preferences for descendants of the founder or for children of employees, which collides with the disqualified-person rules; - awards decided by the full board or by the executive director, where the program needs a selection committee that can be screened for conflicts; - purposes drawn so narrowly that scholarship-granting is arguably outside them, which is a state corporate-law problem before it is ever a tax problem. Notice 2025-70 also anticipates that the regulations would not prohibit an SGO from imposing additional governing provisions beyond the Section 25F requirements — **unless such a provision would conflict with the ability of the SGO to satisfy those requirements.** That is the standard your existing documents get read against. A charity that was carefully drafted twenty years ago to serve one community may be carefully drafted into ineligibility. Amending articles is a state filing plus a board vote, and in most cases no new IRS determination letter is needed or available — the IRS generally stopped issuing updated determination letters for changes in activities, and the change gets reported on your next Form 990. That is a modest process. The hard part is the board conversation about what you are agreeing to stop being able to promise. ## A Long Donor History Is a Long Disqualified-Person List Section 25F(d)(2)(B) prohibits awards to disqualified persons under rules similar to Section 4946, which pulls in substantial contributors as defined in Section 507(d)(2): a person who contributed more than $5,000, where that amount is more than 2 percent of total contributions received by the organization from its inception through the close of the taxable year in which the contribution was received. For an existing charity this cuts both ways, and the direction is not the one people assume. **The good news:** the denominator is contributions from inception. A charity with twenty years of fundraising has a very large denominator, so relatively few donors clear 2 percent. A brand-new SGO has the opposite problem — its first significant donor is almost automatically a substantial contributor, and therefore that donor's family cannot receive scholarships from the organization. **The bad news:** you have to be able to prove it. The test looks back to inception, which means your records have to support a 2 percent calculation across the organization's entire life. Charities that migrated CRMs in 2014 and left the old data behind often cannot reconstruct that. And Treasury has asked whether it should **drop the $5,000 floor** for Section 25F purposes and define substantial contributor as anyone above 2 percent, full stop. If that lands, the arithmetic changes for every organization on the day the rules issue. Then add the other category. Treasury expects the regulations to provide that a member of the SGO's selection committee, or a member of that person's immediate family, is a disqualified person with respect to that SGO. In an established organization with a long-serving, deeply networked board, that list is longer than a new organization's, and it is drawn from exactly the families most invested in the program. We covered the committee design problem [in its own post](/blog/sgo-selection-committee-disqualified-persons). One narrow relief valve exists: under Section 507(d)(2), a person can cease to be treated as a substantial contributor after a ten-year period with no contributions, no service as a manager, and contributions the Secretary determines to be insignificant relative to another contributor's. It is real but rarely the answer for anyone currently involved. ## Restricted Funds and Donor Intent Do Not Convert The last item is not tax law at all, and it is the one that most often gets skipped. An established charity generally carries restricted gifts, board-designated funds, and sometimes a true endowment. None of that money becomes Section 25F money because the board voted to become an SGO. Restrictions run with the gift, and the fiduciary duty to honor donor intent runs with them. Modifying or releasing a restriction is a court process in most states, with narrow administrative alternatives under UPMIFA — typically limited to small, old funds, and usually requiring advance notice to the state attorney general. There is also the honest version of the "is this okay?" question, and it deserves a direct answer. Converting an existing charity is entirely legitimate. What is not legitimate is converting one in order to keep doing exactly what you were doing while collecting a federal credit for it. If your organization has always funded one school's families and the plan is to keep funding one school's families, the entity change does not solve anything — the ten-students, more-than-one-school requirement and the earmarking prohibition still bind, and they bind on outcomes, not intentions. And if a meaningful part of your existing base gave for a different purpose, the board owes them a conversation before the mission moves, not after. ## The Other Half: "Register It in Every State" Now the second question, which conflates three separate things. **There are not fifty states to register in.** Section 25F counts the fifty states and the District of Columbia, but only a state that voluntarily elects to participate has a list to be on. As of the IRS participating-state list dated July 24, 2026, **thirty states** had filed an advance election for 2027. Six have declined outright, two are studying it, and twelve have taken no action. You cannot register as an SGO in a state that has not elected, because there is nothing to register for. And elections are annual — the set changes year to year, in both directions. Current status is on [our state tracker](/resources/state-tracker), sourced against [the IRS list](https://www.irs.gov/government-entities/federal-state-local-governments/federal-scholarship-tax-credit-fstc). **"Located in" is the actual test, and it is not free.** Treasury previewed that an SGO will be treated as located in a state if it is authorized to do business in that state and complies with generally applicable state charitable-organization rules, including rules for transparency, accountability, and fraud prevention — with the important protection that states may not impose SGO-specific requirements more restrictive than Section 25F itself. No office and no staff are required. What is required is the ordinary out-of-state charity compliance stack, and per state that typically means a foreign qualification with the secretary of state, a registered agent, an annual or biennial report, and charitable solicitation registration with annual renewal. Roughly forty jurisdictions require charitable solicitation registration before you fundraise there; the states usually listed as requiring none are Delaware, Idaho, Indiana, Iowa, Montana, Nebraska, South Dakota, Utah, Vermont, and Wyoming. Foreign qualification fees commonly run $100 to $300, with outliers from roughly $50 to $750; registered agent service runs about $100 to $200 per state per year; and several states require audited or reviewed financials above a revenue threshold as part of charitable registration, on top of the [entity-level Section 25F audit](/blog/treasury-june-2026-section-25f-preview). Across thirty states that is a real recurring number, and none of it buys a single scholarship. Note also that what "authorized to do business" actually requires — full foreign qualification, or charitable registration alone — is itself unsettled until the proposed regulations define it. **Being located in a state still does not put you on its list.** This is the step people miss entirely. The state has to verify you against every Section 25F(c)(5) requirement and include you on the list it sends the IRS, and the Notice is explicit that self-certification by the SGO is not sufficient for that purpose. Most states have not published how any of that will work. Nebraska's revenue department, one of the more forthcoming, says plainly that it will post SGO forms and procedures once they are established, [which will be after the final federal guidance has been published](https://revenue.nebraska.gov/internal-revenue-code-ss-25f-qualified-elementary-and-secondary-education-scholarships-information). That is the timing crux for anyone planning a conversion. **No SGO is federally listed anywhere yet**, in any state, because no state has submitted a certified list. Thirty states have said they intend to participate; none has yet published the door you walk through. ## Register Where Your Students Are, Not Where Your Donors Are The instinct behind "register everywhere" is usually about fundraising reach, and that instinct is aimed at the wrong variable. Nothing in Section 25F requires a donor to live in a participating state. Eligibility for the credit turns on where the SGO is listed and where the student resides. A donor in a state that never opts in can give to an SGO listed elsewhere, claim the full federal credit, and fund that state's students. We laid out that asymmetry [here](/blog/sgo-donor-state-asymmetry). So a national donor base does not require a national listing footprint. Your listing footprint should be determined by where your students are, because that is what the state accounts are for — and adding states you cannot fill is the expensive version of a fundraising strategy you already have. ## The Per-State Math Punishes Breadth The final argument against a wide footprint is arithmetic, and it is the one that ends most of these conversations. Section 25F(c)(3) requires a qualified contribution to fund scholarships for eligible students solely within the state in which the organization is listed. Donors designate a state at the moment of giving; that dollar is locked to that state's segregated account for its entire life. And the safe harbor for the 90 percent test, per the June preview, must be satisfied **separately for each state-specific segregated account.** There is no cross-subsidy. Each account releases at most 10 percent for everything that is not a scholarship. An account holding $80,000 can release $8,000 — which will not cover that state's share of registration, agent fees, verification labor, and the state report, let alone anything else. Opening a thin state is not merely inefficient; the arithmetic does not close. [The full multistate structure is here](/blog/multistate-sgo-one-entity-state-accounts), and why the 10 percent behaves as a withdrawal cap rather than an expense budget is [here](/blog/sgo-90-10-withdrawal-cap-not-expense-rule). The one genuine economy of scale runs the other way and is worth knowing: the annual financial and programmatic audit is an **entity-level** obligation, furnished to each state on whose list you appear. One audit, many states. That is a strong argument for one multistate entity over a constellation of single-state ones — but it is not an argument for adding states that cannot sustain their own accounts. ## When an Existing Charity Is the Right Vehicle Three profiles genuinely work, and if you are one of them the conversion analysis is worth the legal fees. **You already operate a state tax-credit scholarship program.** Arizona STOs, Indiana SGOs, Florida and Georgia scholarship organizations, Pennsylvania EITC organizations: you are already largely scholarship-granting, you already verify income, and you already disburse against enrollment. You are the best candidate in the program. Be aware that the federal program is parallel rather than an upgrade — there is no grandfathering onto a federal list, some state programs permit school designations that Section 25F prohibits, and Section 25F(b)(2) reduces the federal credit by any state credit allowed for the same contribution. [We wrote that transition up separately](/blog/state-scholarship-programs-meet-federal-credit). **You are a dedicated scholarship fund with a broad award pool.** A community scholarship foundation that already awards across many schools may need governing-document amendments, a segregated account, a committee rebuild, and new verification workflows — but the entity itself is sound. **Your organization is scholarships and almost nothing else.** If the other programs are genuinely incidental, run the total-receipts arithmetic honestly, and if it clears with room, take it to counsel. For everyone else, the honest read is that the existing charity is not a shortcut. It is a set of constraints — a purpose statement, a donor history, a restricted-fund ledger, and a revenue mix — that you would not choose if you were starting today. ## The Structure That Works for Everyone Else The pattern the safe harbor pushes almost every diversified organization toward is a **separate, dedicated 501(c)(3) whose activities are scholarship-granting and essentially nothing else**, affiliated with the parent by overlapping but not identical governance. It gets you a clean total-receipts denominator, so the safe harbor is available. It gets you articles written for Section 25F from the first draft rather than amended toward it. It gets you a segregated-account structure that does not have to be carved out of an existing chart of accounts. It keeps restricted funds and legacy donor intent where they belong. And it gives the parent organization's other programs room to keep operating without dragging the scholarship entity's 90 percent test around behind them. It costs a formation, a board, a bank account, and a second annual filing set — usually less than an amendment project that may not survive the September rules. The [step-by-step formation sequence is here](/how-to-start-an-sgo); if you have not settled whether the SGO should be yours at all, start with [the form-or-join framework](/blog/form-your-own-sgo-or-partner-with-existing) or with [joining an SGO that already runs](/blog/single-school-join-an-sgo). ## What the End of September Could Still Change **Treasury has said the proposed regulations will issue no later than the end of September 2026, and that states, SGOs, and taxpayers will be able to rely on them for tax year 2027.** Until then everything above is the statute plus a preview, and the preview items were expressly described as subject to ongoing legal review. Several open questions bear directly on whether an existing charity works: - **How much is "largely" scholarship-granting?** No threshold has been proposed. If your organization is close to the line, this single number decides your structure. - **Will there be startup or smoothing relief for the 90 percent test?** Notice 2025-70 asked whether the regulations should address fluctuations in income and expenses, including first-year startup costs or smoothing the calculation over several years. That Treasury asked tells you it knows year one is hard. - **What is a substantial contributor?** If the $5,000 floor is dropped in favor of a flat 2 percent, every disqualified-person list gets longer, and long-established charities have to run the calculation against their entire history. - **Do the operational tests run per state or in aggregate?** Notice 2025-70 asked this about the ten-students rule, the 90 percent test, the expense limits, the priority rules, the earmarking prohibition, income verification, and self-dealing. The answers change committee design and footprint strategy. - **What does "authorized to do business" require?** The difference between full foreign qualification and charitable registration alone is thousands of dollars a year across a wide footprint. - **And most directly on point:** Notice 2025-70 includes a request for comments on other fact patterns, noting that Treasury is aware of organizations operating in other ways that may wish to qualify as SGOs — including fundraising organizations that distribute to other organizations rather than awarding scholarships themselves, and organizations operating under state tax credit programs whose structures are not expressly addressed. Treasury asked whether such organizations could satisfy all of the Section 25F(c)(5) requirements. That is the government saying, in writing, that the existing-organization question is open. If your plan depends on any of those answers, do the preparatory work now and hold the irreversible step. ## What to Do Between Now and Then Work that pays off no matter how the regulations land: - **Pull your EO Business Master File entry** and confirm your 501(c)(3) status and, critically, that you are not classified as a private foundation. This is the record your state will check. - **Run the total-receipts arithmetic** on last year's actuals: total receipts unreduced by expenses, times 0.9, against the scholarship volume you can realistically award. If the gap is large, you have your answer and it is a new entity. - **Read your articles and bylaws against the Section 25F(c)(5) list** and mark every provision that conflicts. Bring that markup to counsel rather than a general question. - **Test whether you can produce a contributions-from-inception total.** If you cannot, start reconstructing now; it will not get easier. - **Inventory restricted and board-designated funds** and identify anything that cannot follow a scholarship mission. - **Decide your footprint on student density, not donor geography** — and check which of your target states have actually elected. - **Do not file an amendment, a foreign qualification, or a charitable registration you do not already need** until the proposed regulations are out. Registrations renew annually and are the easiest cost to incur prematurely. - **Get on your state revenue department's notification list** for SGO certification. Most states will publish procedures only after the federal rules issue, and those windows will be short. The compliance rhythm you would be signing up for is laid out in [the SGO compliance calendar](/blog/sgo-compliance-calendar), and it is worth reading before you decide the existing charity's staff can absorb it. ## Not Legal Advice — and Not Final Rules Two things to be clear about. **This is not legal or tax advice.** It is a reading of the statute, one IRS notice, and a set of publicly previewed regulatory intentions. Whether your particular organization can serve as an SGO depends on its classification, its governing documents, its revenue mix, its restricted funds, its donor history, and the law of its state — none of which we know. Take this analysis to your own counsel and accountant, and give them the markup and the arithmetic rather than the question. **The rules are not final.** Treasury's proposed regulations are expected no later than the end of September 2026. Several of the questions that determine whether an existing 501(c)(3) can be converted are explicitly on Treasury's open list — including one request for comments aimed squarely at organizations that already exist and want in. Anyone telling you today that your existing charity definitely qualifies, or definitely does not, is ahead of the record. Which is exactly why this is worth a conversation rather than a checklist. **We track this daily, we will publish a full analysis within days of the proposed regulations landing, and we would rather walk you through your specific facts than have you guess.** If you are weighing whether to convert an existing 501(c)(3), form a dedicated entity, or join an SGO that already operates — [reach out](/contact). Tell us what the organization is, what it takes in, and which states your students live in, and we will walk you through what the current rules say, what is still open, and what we would wait on. The newsletter signup below is the fastest way to get the September analysis the day it publishes. --- ### Will Michigan Opt Into the Education Freedom Tax Credit? What Michigan Schools Should Do Now Canonical URL: [https://sgoguide.com/blog/will-michigan-opt-in-education-freedom-tax-credit](https://sgoguide.com/blog/will-michigan-opt-in-education-freedom-tax-credit) Published: 2026-08-30 · Category: State News · 13 min read Michigan's status on our [state tracker](/resources/state-tracker) is **Studying**, and that is the correct word — not declined, not pending, not no action. It is also the word that makes Michigan the hardest state in the country to plan around, because "studying" gives a school board no date to work backward from. This post supplies the dates. There are two of them, they are closer than most Michigan administrators think, and the work that has to happen before either one arrives starts now. The Education Freedom Tax Credit (EFTC), the Federal Scholarship Tax Credit (FSTC), the Educational Choice for Children Act (ECCA), and Section 25F are four names for the same federal program — a dollar-for-dollar tax credit of up to $1,700 per year for donations to scholarship granting organizations, effective January 1, 2027. ## Where Michigan Actually Stands Michigan is not on the [IRS participating-state list](https://www.irs.gov/government-entities/federal-state-local-governments/federal-scholarship-tax-credit-fstc). Thirty states filed an advance election for 2027 as of that list's July 24, 2026 revision; Michigan is not among them, and no election has been filed since. Three things are true at once, and they are frequently blended into a single wrong summary: - **The governor has not committed.** The stated position has been that Michigan is waiting to see the federal guidance before deciding — a posture, not a refusal. Michigan has not joined the six states that declined outright. - **The State Board of Education voted in May 2026 to urge non-participation.** That vote is real and it is politically significant, but it is advisory. The board does not hold the pen. - **Nobody except the governor, or a designee under state law, can hold the pen.** Participation is an election filed with the IRS on Form 15714. It is not a bill, not a board resolution, and not a ballot question. That last point is the one Michigan school leaders most often get wrong, because Michigan's education politics run through the legislature and the board. [Several of the thirty participating states never passed an opt-in bill at all](/blog/state-opt-in-status-mid-2026) — some elected by executive order, and three got in when a legislature overrode a governor's veto. If you have been watching Lansing for a bill, you have been watching the wrong instrument. ## Decision Point One: The Window That Closes January 1, 2027 Here is the part that has not been widely reported in Michigan. Elections under the Education Freedom Tax Credit are annual. The statutory default is that a participating state's certified list of scholarship granting organizations is due by January 1 of the applicable year, or as soon as practicable in the program's first year. The advance election on Form 15714 was the mechanism the IRS opened on January 1, 2026 for states wanting to be counted early for 2027 — but in [Notice 2025-70](https://www.irs.gov/pub/irs-drop/n-25-70.pdf) the agency was explicit that "the deadline and procedure for perfecting the Advance Election by submitting the State SGO list will be provided in future guidance." Which means the question of whether a state that skipped the advance-election window can still elect for 2027, and by when, is genuinely open. It is one of [the questions the September proposed regulations have to answer](/blog/education-freedom-tax-credit-regulations-open-questions). The practical shape of that for Michigan: the current governor is in office through December 31, 2026, and is term-limited. If a late election for 2027 is permitted, this administration is the only one that can make it. That is a narrow, lightly discussed window between the November election and the end of the year — the lame-duck period — and it is the only path by which Michigan students see federal scholarship dollars in 2027. Treat it as unlikely. Do not treat it as closed. ## Decision Point Two: November 3, and Why It Means 2028 The second decision point is the gubernatorial election, and it is a clean binary in a way most policy questions are not. The Republican nominee, U.S. Rep. John James, has said that on day one of the administration Michigan would opt into the federal tax credit scholarship program. The Democratic nominee, Secretary of State Jocelyn Benson, declined to answer the question directly when asked, framing the aim instead as strengthening the public education system, and has been described as opposed to public dollars supporting private education. The Democratic primary opponent who lost in August was flatly against it. So the arithmetic: - **A new governor is seated in January 2027** — after the January 1 marker for the 2027 program year. Even a genuine day-one signature would therefore be an election for **calendar year 2028**, not 2027. - **2028 participation means scholarships for the 2028–29 school year**, with donors claiming the credit on returns filed in 2029. - **A Michigan SGO would need to be listed on the state's certified list during 2027**, months before students see a dollar. There is a third path, and it should be assessed honestly rather than hoped at: a legislature can route around a governor. Kentucky, Kansas, and North Carolina all joined that way. In Michigan, overriding a veto requires two-thirds of the members elected to and serving in each chamber — a threshold Michigan has not produced on a contested partisan question in modern practice, and both chambers are on the same November ballot. Plan as if this path does not exist; be pleased if it does. ## The Constitutional Question Michigan Will Argue About No other state has this argument in quite the same form, and every Michigan board meeting on this topic reaches it within twenty minutes. Article VIII, Section 2 of Michigan's 1963 Constitution is the strictest provision of its kind in the country. It prohibits any "payment, credit, tax benefit, exemption or deductions, tuition voucher, subsidy, grant or loan of public monies or property" provided "directly or indirectly" to support attendance at a nonpublic school. It reaches all nonpublic schools, not only religious ones, and it expressly reaches indirect tax benefits — which is why Michigan families get no state tax deduction for K-12 use of a 529 account while families in most states do. The argument that the provision does not block an election runs like this: no state money moves. The credit is federal, claimed against federal tax liability. The contribution goes from a private individual to a private 501(c)(3), which awards scholarships that families spend at schools of their own choosing. The state's role is a signature on a federal form and the publication of a list. There is no state payment, no state credit, and no state appropriation to be found anywhere in the chain — a point Michigan participation advocates have made in exactly those terms. There is a revenue version of the same argument that is worth having on hand, because it answers the budget question rather than the legal one. **An election costs the Michigan treasury nothing.** Michigan's individual income tax begins with federal adjusted gross income. A federal tax *credit* is applied after adjusted gross income is computed — it reduces a filer's federal tax bill and leaves the Michigan return untouched. Whatever else is true, opting in does not reduce Michigan's own income tax collections by a dollar. The honest counterweight: opponents do not principally argue that the state loses tax revenue. They argue that the program functions as a voucher by another route, and that enrollment shifts have downstream costs for public school funding. That is a policy argument, not a constitutional one, and it is the argument that will actually be had. Nobody should represent the constitutional question as settled. No Michigan court has ruled on an Education Freedom Tax Credit election, and a Michigan election would very likely be argued — in the legislature at minimum, plausibly in court. But note what the question governs and what it does not: it governs whether *Michigan* participates. It has no bearing on whether a Michigan resident may claim the credit. ## What Is Already True, Regardless of Any of This Michigan taxpayers can claim the full federal credit in 2027, right now, without Michigan doing anything. Donor eligibility turns on where the SGO is listed and where the student resides — [not on where the donor lives](/blog/sgo-donor-state-asymmetry). A Michigan resident may contribute to an SGO listed in any of the thirty participating states, designate that state, and claim up to $1,700 ($3,400 for a married couple filing jointly, as two individuals). The uncomfortable corollary is the whole Michigan story in one sentence: **those dollars fund students in Iowa, Ohio, or Tennessee, not in Michigan.** Until Michigan is a covered state, Michigan is a net exporter of scholarship money — Michigan taxpayers get the credit, and other states' children get the scholarships. That is not a talking point; it is an arithmetic exhibit. Michigan files roughly 4.8 million individual returns, and [each 1% of a state's filers giving at the cap is about $17 per filer per year in scholarship funding](/blog/how-much-scholarship-money-federal-credit-your-state) — on Michigan's base, roughly $80 million annually per percentage point of participation, currently exportable only. A 2027 tax year in which Michigan residents claim credits that fund out-of-state students will be the single most persuasive document anyone brings to Lansing in 2027. ## The Timeline That Forces the Decision Now Here is why "wait and see" is not a neutral position for a Michigan school or network. Suppose the most favorable realistic case: a governor elected in November signs an election in January 2027 for the 2028 program year. Michigan then has to build a listing process and publish a certified list of SGOs, which will close well before January 1, 2028. Working backward from a certified list that closes in the second half of 2027: - **Incorporation and governing documents** — a nonprofit corporation with a scholarship-granting purpose, bylaws, an independent board, a conflict-of-interest policy, and a written no-earmarking policy. - **IRS recognition** — a Form 1023 determination, on the IRS's timeline rather than yours. This is the long pole and it does not compress. - **Michigan charitable solicitation registration** — required before you fundraise, separate from the federal work. - **Program design** — [the arm's-length award process](/blog/compliant-scholarship-award-process), [income verification against 300% of area median income](/blog/sgo-income-eligibility-300-percent-ami), the priority rules, and [disbursement design against the tuition calendar](/blog/scholarship-disbursement-compliance-guide). - **Then, and only then, the state listing** — an application to a process that does not exist yet, at a deadline nobody has published. That sequence [runs nine to fifteen months](/how-to-start-an-sgo) when it goes well. Start it after Michigan opts in and you will miss the first covered year — which, for a family choosing a school, means missing an entire enrollment cycle. An organization that begins now and finds Michigan still out in 2028 has lost the cost of formation and gained a working entity. An organization that waits and finds Michigan in has lost the first year entirely. The asymmetry is not close. ## What Michigan Schools and Networks Should Do This Fall **If you are a Michigan diocese, Christian school association, classical network, or independent school planning to found or join an SGO:** - **Do the formation groundwork on the assumption of a 2028 covered year.** Entity, board, policies, and the IRS filing are all state-agnostic. None of that work is wasted if Michigan stays out, and all of it is unrecoverable time if you wait. [ClearPath Launch](/products/launch) exists for exactly this sequence. - **Organize the demand now, in writing.** A state-conditional pledge campaign — commitments that only process if and when Michigan elects — converts a policy argument into a number. Walking into a legislative office with "our families would use this" is an opinion; walking in with signed conditional commitments from named Michigan households is evidence. [ClearPath Pledge](/products/pledge) is built for that. - **Educate your donors on the export asymmetry.** Michigan donors who want to give in 2027 can, today, through an SGO listed elsewhere. Some will find that satisfying and some will not — but every donor who understands it becomes an informed advocate for Michigan's election, and the giving habit and receipt infrastructure are in place either way. - **Decide whether the SGO should be yours at all.** [Forming and operating are two different questions](/blog/starting-an-sgo-who-will-run-it), and for a single school with one campus the multi-school distribution requirement is [a genuine structural problem](/blog/faith-communities-section-25f-compliance), not a technicality. A Michigan network — a diocese, an association, a consortium of independent schools — clears it by construction. [Start here](/start-or-join-an-sgo) if that question is unsettled. **If you are advocating:** the strongest available arguments are the two in this post — that an election costs the state treasury nothing because Michigan's income tax starts from federal AGI, and that Michigan residents are already claiming credits that fund other states' children. Both are checkable. Neither requires anyone to change their view of school choice. ## What We Will Update, and When This page changes on three dates: when the September proposed regulations settle whether a late 2027 election is possible, on November 4 when the race is decided, and in January 2027 when a new administration takes office and the 2028 question becomes live. The [Michigan state page](/states/michigan) carries the current status between updates, and the [full fifty-state tracker](/resources/state-tracker) is re-verified against the IRS list with both dates stamped on it. **A note on currency.** This reflects Michigan's status as of the IRS participating-state list dated July 24, 2026, and reporting through August 2026. State positions change, candidate positions change, and the federal listing procedure is not final — verify with counsel before making formation decisions. --- ### Starting an SGO: Who Is Actually Going to Run It? Canonical URL: [https://sgoguide.com/blog/starting-an-sgo-who-will-run-it](https://sgoguide.com/blog/starting-an-sgo-who-will-run-it) Published: 2026-08-29 · Category: Strategy · 14 min read Every organization that looks seriously at the federal scholarship tax credit ends up in the same meeting. Somebody has read enough to know the credit is real, believes their families would use it, and asks what it would take to start a Scholarship Granting Organization. The answer they get is almost always about **formation** — incorporation, the IRS, state registration, seating a board. That is a real project, and we have [written the whole sequence down](/how-to-start-an-sgo). But formation is a project with an end date, and it is the easy half. The half nobody costs out is the one that begins the day after: somebody has to run the thing, every week, indefinitely. This post is about that half. It is also about a distinction that opens up an option most organizations never consider, because they collapse two separate questions into one. The Education Freedom Tax Credit (EFTC), the Federal Scholarship Tax Credit (FSTC), the Educational Choice for Children Act (ECCA), and Section 25F are four names for the same federal program — a dollar-for-dollar tax credit of up to $1,700 per year for donations to scholarship granting organizations, effective January 1, 2027. ## The Two Questions People Ask As One "Should we start our own SGO?" is not one question. It is two, and they have different answers. **Whose SGO is it?** Who holds the 501(c)(3), sits on the board, writes the eligibility rules, and has their name on the receipt a donor files with their tax return. **Who does the operating work?** Who receipts the gifts, screens the applications, verifies the incomes, prepares the docket, moves the money, keeps the books, and files the reports. Almost everyone answers these together — "it's ours, so we run it" or "we can't run it, so it can't be ours" — and in doing so eliminates the middle option before it is ever on the table. There are three combinations that actually exist: - **Your SGO, you run it.** You own the entity and staff the operation. - **Your SGO, somebody else runs it.** You own the entity; the operating work is done by a team you hire rather than employ. - **Somebody else's SGO, they run it.** You do not own an SGO at all. A school joins one that already exists. Which of those is right for you depends on facts about your organization, not on which one sounds most serious. We compare all three in detail, including where the answer is "not us," at [Start or Join an SGO](/start-or-join-an-sgo). What follows is the part that decides it: what the job actually is. ## The Job Nobody Writes Down Here is the operating work, stated plainly. Not the compliance framework in the abstract — the things a person has to do, and when. **On every gift.** A qualified contribution has to be cash — card, ACH, check, wire, or currency. Appreciated stock does not qualify. A donor-advised fund grant does not earn the credit, because the credit runs to an individual taxpayer. Each gift is designated to a state at the moment it is made, tracked against that donor's $1,700 annual cap ($3,400 filing jointly), and receipted with the unique donor number the program uses instead of a Social Security number. If the receipt is wrong, the donor's credit is at risk, and you will hear about it in April. **On every applicant.** Household income has to be verified against 300% of the area median — [the area where that family actually lives](/blog/sgo-income-eligibility-300-percent-ami), not a national figure, which means the same income qualifies in one county and does not in the next one over. Somebody collects the documents, reads them, applies the household-size adjustment, and writes down why the determination came out the way it did. **On every award.** Decisions must be made at arm's length by an independent committee, against a written policy, with conflicts screened — and committee members' own families are [disqualified from receiving scholarships](/blog/sgo-selection-committee-disqualified-persons) from that SGO. No gift may be earmarked to a school or a student, so a donor's preference is an input the committee may weigh and can never be an instruction it follows. Awards have to reach ten or more students who do not all attend the same school. Somebody assembles that docket, staffs the meeting, and keeps the minutes. **On every dollar out.** Tuition goes to a school; other qualified expenses go out on a restricted instrument or come back as a [receipt-verified reimbursement](/blog/scholarship-disbursement-compliance-guide). Each release is reconciled, dual-controlled, and drawn from the same state's segregated account the gift landed in. Money designated to one state never funds a student in another. **Every month.** The 90/10 test runs per state account. At least 90% of qualified contributions must reach students, and the operating side is a **withdrawal cap, not an expense budget** — a distinction that surprises nearly everyone the first time, and which we unpack in [The 90/10 Rule Is a Withdrawal Cap, Not an Expense Rule](/blog/sgo-90-10-withdrawal-cap-not-expense-rule). Processing fees come out of the same side of the line, which is why [card fees are a compliance question and not just a finance one](/blog/sgo-credit-card-fees-10-percent). **Every year.** State annual reports, in every state you are listed in. An audit from year one. Records retention. A [compliance calendar](/blog/sgo-compliance-calendar) with real deadlines on it. And then the part that never appears in any framework: a parent calls in March wanting to understand why she was denied. A donor's card fails on December 30 and the credit is a calendar-year credit. A school changes its bank details and somebody has to notice before the wire goes. A family's documents arrive as photographs of a phone screen. This is not exotic work. It is just work, and it does not stop. ## Three Things That Make It Harder Than It Looks **It is continuous, not seasonal.** Development offices are built around seasons — an annual fund, a gala, a year-end push. Scholarship administration has no off-season. Gifts arrive in July. Applications close, and then appeals open. The 90/10 test has to hold on every day of the year, not on December 31. **The role has no veterans.** The credit takes effect January 1, 2027. Nobody on earth has five years of experience administering it, because the statute is younger than that. An organization deciding to staff its own operation is not choosing between a good hire and a great one. It is choosing between an unproven hire and no hire — in the first year of a program, which is exactly when mistakes are cheapest to make and most expensive to explain. **Failure here is quiet.** Nothing about a half-staffed SGO looks like a crisis. Receipts go out a few weeks late. One income verification gets taken on faith because the family is obviously eligible. A release nudges an account past the cap and nobody runs the number until quarter end. A state report gets assembled from a spreadsheet that was never reconciled against the bank. None of that triggers an alarm. All of it surfaces in an examination, at once, eighteen months later. ## Option One: Own It and Run It You form the nonprofit, seat the board and the scholarship committee, and operate the program with your own staff on software built for it. **What it buys you.** Your board writes the eligibility criteria — who qualifies, what a priority is, how large an award is. Your brand is on the giving pages, the receipts, the family application and the tax documents. You choose which states to operate in and when to expand. And the administrative share of every gift is your organization's revenue rather than a vendor's. **What it costs you.** Months before the first gift. A board that genuinely meets and a committee independent enough to survive the disqualified-person rules — which, in a small and tightly connected community, is harder to seat than it sounds. And a person whose job includes the 90/10 report and the state filing, every year, forever. **Who it is for.** An organization that represents several schools, already has development staff or a foundation, has a real view about who should receive a scholarship, and can name the person who will own compliance on Monday morning. ## Option Two: Own It, and Have Someone Else Run It This is the option the collapsed question hides. You form the nonprofit and seat the board exactly as above. The entity is yours, the policy is yours, the brand is yours, and your committee decides every award. What changes is who does the desk work. That is what [ClearPath Managed](/products/managed) is: gift processing and receipts, application intake, income verification, docket preparation, disbursement, per-state 90/10 bookkeeping, state reports, and an audit package maintained continuously rather than assembled in a panic — done by a team that does this for other programs too, with your organization's name on everything a donor or a family sees. **The line that does not move.** We prepare the docket. Your committee decides. Section 25F requires awards to be made at arm's length by the granting organization itself, so no service provider can vote on a scholarship, and any arrangement that implies otherwise is one an auditor will unwind. Governance is not the part you are outsourcing. The desk work is. **What it actually costs.** The same thing running it yourself costs, pointed at a different payroll. The managed fee comes out of the operating allowance — the same share that would otherwise pay your administrator, your audit prep and your systems. You are not paying extra. You are paying somebody else. Which is exactly why the arithmetic flips with scale. On $2 million of annual giving, the operating allowance is up to $200,000, and that can fund a real internal team; the case for keeping it in-house gets strong. On $200,000 of giving it is up to $20,000, which does not fund one competent full-time person anywhere in the country — and pretending otherwise is how programs end up out of compliance. (Remember that the allowance is a ceiling on withdrawals, not a budget you are handed, and the platform and processing fees live under the same ceiling.) **What you give up.** The administrative share stops being institutional revenue and becomes a cost. And your team does not build the tacit feel for the program that comes from doing the work — an organization whose staff have never processed a disbursement knows its own operation less well. Both are real trade-offs. Neither is permanent: the entity, the donors and the history are yours the whole time, so bringing operations in-house later is a change of who logs in, not a migration. **Who it is for.** An organization with the donors, the mission and a functioning board, that is not going to build a back office to get a scholarship program — and that would rather be an owner than an employer. ## Option Three: Join an SGO That Already Runs The third option is not owning an SGO at all. A school joins one that already exists and is already certified, as a partner school: a branded giving page and QR code, donors able to name your school as their preferred school, and one recurring job — confirming that a student is actually enrolled, which is the one thing no SGO can verify from the outside. Every obligation stays with the SGO. For a single campus this is usually not the lesser option; it is the only workable one. An SGO's awards have to reach ten or more students who do not all attend the same school. The bar is not ten schools — but an entity formed to fund one campus cannot lawfully award only to that campus, and no committee running that close to the line will read as arm's length. We laid out the structural argument at [why one school should join rather than form](/single-school). If you are choosing between SGOs to join, [twelve questions worth asking](/blog/how-to-choose-an-sgo-for-your-school) will tell you more than any brochure. **Status, plainly:** our own [ClearPath Partner Schools](/products/partner-schools) program is not open yet. We are standing the SGO up ahead of the January 1, 2027 start of the credit, and schools can join the early-access list at no cost and no commitment. Forming your own SGO — with your staff or with ours — is something you can begin today. ## Four Questions That Settle It Skip the feature comparison. Answer these in order. **1. Does your organization have a view about who should get a scholarship that a general-purpose SGO could not implement?** "Low-income families in our county" is implementable by anybody. "Students across our diocese, weighted by parish participation and assessed by our own aid office" is not. A specific answer means the SGO needs to be yours. **2. What will you realistically raise in year one?** Not the ambition — the bottoms-up number from donors you can name. The fixed costs of forming and auditing an SGO land very differently against $2 million than against $80,000. Our [state-by-state market math](/blog/how-much-scholarship-money-federal-credit-your-state) is a reasonable sanity check on the ceiling. **3. Can you name the person who owns compliance on Monday morning?** Not a consultant for the launch. A person on staff whose job description includes the 90/10 report and the state filing, every year. **4. Do you need the administrative share to be revenue, or can it be a cost?** If the program's economics only work when the allowance funds your own staff, you need to run it. If it can be an expense like any other, that constraint disappears. Now notice how they resolve. **Questions 1 and 2 decide whether the SGO should be yours. Questions 3 and 4 decide who runs it.** Answer them in that order and the path falls out on its own: - Yes to 1 and 2, yes to 3 and 4: form it and run it. - Yes to 1 and 2, no to 3 or 4: form it and have it operated for you. - No to 1 and 2: join one, and put your energy into raising money instead of administering it. ## The Mistake That Costs the Most It is not picking the wrong option. It is answering question 3 first and letting it decide question 1. Organizations do this constantly. Somebody says "we don't have anyone who could run this," everyone nods, and the SGO conversation ends there — even when the answers to questions 1 and 2 were both an emphatic yes, and the organization had exactly the donor base and the mission specificity that justify owning one. A staffing constraint gets treated as a verdict on ownership, and a program that should have existed does not. The reverse mistake is rarer but more expensive: forming an entity, discovering the program raises $60,000, and carrying a board, an audit and a compliance function against it indefinitely. Both come from the same error, which is treating "should this be ours" and "who does the work" as one question with one answer. ## What to Do Before January The credit's start date does not move, and formation takes [four to six months](/how-to-start-an-sgo) from decision to first qualified contribution. From here, the fast end of that range gets you live for the first giving year. The slow end does not. That timing has a practical consequence worth being blunt about: if you are leaning toward owning an SGO, the formation work is identical whether you or somebody else ends up operating it. So form the entity now and settle the staffing question in parallel. The months are the constraint; the org chart is not. - **Check your state.** You can only accept qualified contributions in a state that has opted in. Current status is on [our state tracker](/resources/state-tracker), sourced against the IRS participating-state list. - **Answer the four questions above with your board**, in that order, and write the answers down. - **If the SGO should be yours,** start formation now — [ClearPath Launch](/products/launch) does the filing work — and decide the staffing question while the paperwork runs. - **If it should be yours but you will not staff it,** [ClearPath Managed](/products/managed) is the detail: what we do, what never leaves your board, and how the handover back to your own team works if you want it later. - **If you are one school,** get on the [partner-school early-access list](/products/partner-schools) and spend the next four months building the donor list you will use either way. The comparison across all three, dimension by dimension and with an explicit "probably not you if" for each, lives at [Start or Join an SGO](/start-or-join-an-sgo). The shorter version of the argument is in [Three Ways In](/blog/two-ways-in-start-an-sgo-or-join-as-a-partner-school). Whichever one you pick, the destination is the same: a family that can afford the school that fits their child. The only question this post is asking is who is going to do the work between here and there — and whether you have honestly answered it, or quietly assumed it away. --- ### The Nine Questions the September Education Freedom Tax Credit Regulations Must Answer Canonical URL: [https://sgoguide.com/blog/education-freedom-tax-credit-regulations-open-questions](https://sgoguide.com/blog/education-freedom-tax-credit-regulations-open-questions) Published: 2026-08-28 · Category: Regulatory Updates · 14 min read Treasury has committed to issuing proposed regulations under the Education Freedom Tax Credit (Section 25F) by the end of September 2026. Between [the June 9, 2026 guidance preview](/blog/treasury-june-2026-section-25f-preview) and that filing, there is a set of questions that are genuinely unresolved — not questions where the answer is obvious and the paperwork is pending, but questions where two defensible answers exist and the choice changes what an SGO has to build. We track nine of them. This post is the working list: the question, what the statute and the preview establish, what remains open, and — the part that matters if you are standing up an organization this fall — how to design so that either answer leaves you compliant. Everything below describes **previewed, not final** rules. Nothing here is settled until the proposed regulations are published, and proposed regulations are themselves not final. ## 1. Do Payment Processing Fees Count Against the 10%? **What is established.** At least 90% of an SGO's income has to go to qualified scholarships, leaving an administrative allowance of up to 10%. The federal credit caps at $1,700 per donor per year, which makes this a small-gift program by design. **What is open.** Whether credit card interchange is an administrative expense competing inside that 10%, or whether a contribution can be recorded net of the processing cost. On card rails at typical rates, [processing can consume roughly a quarter of the entire administrative allowance](/blog/sgo-credit-card-fees-10-percent) — the difference between an SGO that can afford staff and one that cannot. **How to build for either answer.** Default to ACH. Offer donors the option to cover the processing fee. Record gross and net separately from the first transaction so that whichever measurement the regulations adopt, you can produce the number without reconstructing a year of history. ## 2. How Are Shared Expenses Allocated Across State Accounts? **What is established.** A multistate SGO holds a segregated account per covered state, and [the 90/10 test runs on each account independently](/blog/multistate-sgo-one-entity-state-accounts). Income allocation is mechanical: the donor designates a state, and the dollar lands in that state's account. **What is open.** Expense allocation is not mechanical and the guidance is silent. An audit fee, a compliance officer's salary, and a software subscription serve every state at once. Pro rata by contributions? By awards? By applicant volume? Direct tracing where possible and pro rata for the rest? **How to build for either answer.** Adopt a written methodology before the first expense, not after — a documented, consistently applied allocation is defensible under any of the plausible rules, and an undocumented one is defensible under none. Record the rationale contemporaneously and keep direct-cost tracing wherever the cost genuinely belongs to one state. ## 3. Does the Disqualified-Person Rule Run Entity-Wide or Per State? **What is established.** Scholarship committee members and their immediate families are expected to be disqualified from receiving scholarships from the SGO they serve. **What is open.** Whether that disqualification runs across the whole organization or only within the state account the member's committee decides. For a single-state SGO the question is academic. For [a multistate entity running one committee across many dockets](/blog/sgo-selection-committee-disqualified-persons), it is the difference between a modest ask of a volunteer and a significant one. **How to build for either answer.** Assume entity-wide, and say so to every committee candidate before they accept the seat. Recruiting on the narrower assumption and then widening it is how an organization loses a committee member in its first award cycle. ## 4. What Is the Scope of the Ten-Student, More-Than-One-School Test? **What is established.** An SGO must award scholarships to ten or more students who do not all attend the same school. It is a distribution requirement, not a diversity quota — the threshold is ten students, not ten schools. **What is open.** Whether the test is measured on the entity as a whole or on each state account. An SGO listed in eight states with a large program in one and a thin program in another passes easily at the entity level and could fail at the account level in the thin state. **How to build for either answer.** Design each state account to clear the test on its own. This is one of several reasons a [thin state account is often not worth opening](/blog/multistate-sgo-one-entity-state-accounts) — a state you cannot staff to ten students at more than one school is a state that may not be viable regardless of which reading prevails. ## 5. Per-State or Aggregate — for Every Other Test Too **What is established.** The 90/10 test is per account. That much the preview settled, and it settled it in the strictest direction: no cross-subsidy, so a large state account cannot carry a small one. **What is open.** Whether the same per-account logic extends to the rest of the compliance surface — the priority rules, the distribution test above, the treatment of carryover funds between years. **How to build for either answer.** Run every test at the account level in your own reporting, even where the entity-level reading might be available. Reporting more granularly than required costs nothing; discovering that you reported less granularly than required costs a restatement. ## 6. Is There Any Relief for Startup Costs? **What is established.** [The 90/10 rule is a withdrawal cap, not an expense rule](/blog/sgo-90-10-withdrawal-cap-not-expense-rule) — it governs what may leave the state account, up to 10% of what came in. **What is open.** Whether a first-year or partial-year organization gets any smoothing. A new SGO's costs are front-loaded — formation, legal, systems, the first audit — while contributions arrive late in the year. A partial first year can produce a cost base that 10% of a partial year's receipts cannot absorb. Notice 2025-70 raised the question. It did not answer it. **How to build for either answer.** Budget as though no relief comes, and [fund the launch from outside the scholarship accounts](/blog/sgo-operating-budget-year-one) — ordinary charitable operating support, association dues, or sponsoring-organization funding, none of which is constrained by the 10% cap. An SGO that needs first-year relief to survive has a structural problem that relief would only postpone. ## 7. How Wide Is "Substantial Contributor"? **What is established.** A 2% substantial-contributor concept carries into the SGO context, restricting benefits flowing back to major donors. **What is open.** Its precise scope — measured against what base, over what period, and with what consequence for a donor whose child is in the applicant pool. In a program capped at $1,700 per donor, the 2% threshold binds at a surprisingly small organization: on a $200,000 state account, 2% is $4,000, which is two married couples giving at the cap. **How to build for either answer.** Screen the applicant pool against the donor file every cycle, document the check, and keep the screening ministerial and separate from the deciding. Small accounts should expect this to bind and should design the conflict process accordingly rather than treating it as a large-organization problem. ## 8. What Happens to an Undesignated Gift? **What is established.** A donor designates the state their contribution serves, and the dollar is locked to that state's account. The designation is what makes the certification chain work. **What is open.** What an SGO does with a gift that arrives without one — a check in the mail, a lapsed form field, a donor who genuinely does not care. Is it curable by contacting the donor? Is it disqualified? Does it fall to a default? **How to build for either answer.** Make designation a required field on every rail you accept, including paper. Hold undesignated funds in suspense rather than assigning them, and cure by contacting the donor in writing. Never assign a designation on the donor's behalf — a corrected gift is a fixable problem, an SGO-assigned designation is a certification problem. ## 9. What Does "Largely Scholarship-Granting" Mean? **What is established.** This is the most consequential open term in the program. The previewed safe harbor measures the 90% test against the segregated scholarship account rather than the organization's total receipts — but the safe harbor is available only to organizations whose activities are *largely* scholarship-granting. [Without it, the test runs against total receipts](/blog/section-25f-safe-harbor-90-percent-test), which is structurally impossible for a diversified nonprofit. **What is open.** The threshold. A majority of activities? A supermajority? Measured by revenue, expenses, staff time, or program count? **How to build for either answer.** This is the question that most often decides whether you need a separate entity, and the conservative answer is nearly always the right one: a school association with dues, conferences, and member services should hold its scholarship program in [a dedicated affiliate](/blog/consortium-sgo-independent-christian-schools); a diocese should [not make the diocese itself the SGO](/blog/diocese-sgo-playbook). An organization that already does nothing but grant scholarships — [an existing state scholarship organization, for instance](/blog/state-scholarship-programs-meet-federal-credit) — is the case the safe harbor was written for and will likely clear it as-is. ## The Tenth Question, Which Is Not About SGOs At All There is one more open item, and it belongs to states rather than organizations: **the listing procedure itself.** Thirty states have filed an advance election for 2027. Not one has published a certified list of SGOs, because the procedure for doing so does not exist. Notice 2025-70 said plainly that "the deadline and procedure for perfecting the Advance Election by submitting the State SGO list will be provided in future guidance." Two consequences follow, and both are larger than they look: - **There is no federally listed SGO anywhere in the United States today**, and there cannot be one until states begin publishing lists. Treat any claim to the contrary accordingly. - **Whether a state that skipped the advance-election window can still elect for 2027, and by when, is unresolved** — which is why [Michigan's lame-duck window is a real question rather than a closed one](/blog/will-michigan-opt-in-education-freedom-tax-credit). ## What to Do Between Now and the Filing The temptation is to wait for the regulations before starting. That is backwards, because none of the nine questions above touch the work that takes the longest. Incorporation, the IRS determination, board recruitment, the conflict-of-interest policy, the written no-earmarking policy, charitable registration, the award criteria, and the verification workflow are all unaffected by every question on this list. [That sequence runs nine to fifteen months](/how-to-start-an-sgo). The regulations will change how you allocate an audit fee across state accounts — not whether you need a board. What the open questions should change is your *design posture*: build to the stricter reading of each one, record the numbers both ways where measurement is contested, and write down your methodology before the first transaction rather than reconstructing it under audit. We will rewrite this post as an answered-and-unanswered scorecard when the proposed regulations are published, and revisit every claim in the surrounding cluster at the same time. Until then, the [compliance calendar](/blog/sgo-compliance-calendar) covers what is already settled, and [the OBBBA explainer](/resources/obbba-explained) covers the statutory requirements that no regulation is going to move. **A note on currency.** This reflects guidance available as of late August 2026, including Notice 2025-70 and the June 9, 2026 preview. Every rule described as previewed is subject to change in the proposed regulations — verify with counsel before making structural decisions. --- ### State Opt-In Status: 30 States Are In for 2027 Canonical URL: [https://sgoguide.com/blog/state-opt-in-status-mid-2026](https://sgoguide.com/blog/state-opt-in-status-mid-2026) Published: 2026-08-26 · Category: State News · 9 min read The IRS refreshed its participating-state list on July 24, 2026. **Thirty states** have now filed an advance election to participate in the federal scholarship tax credit for 2027 — up from twenty-seven when the agency [announced the tally in June](https://www.irs.gov/newsroom/more-than-half-the-us-states-signed-up-to-participate-in-the-federal-scholarship-tax-credit-program-enacted-under-the-one-big-beautiful-bill). That is more than half the country, and it is the number worth quoting. But the headline count answers a narrower question than most people think it does, and the gap between "my state opted in" and "our SGO can be listed there" is the part that actually governs what an organization should be doing this fall. This post is the successor to our [Spring 2026 status update](/blog/state-opt-in-tracker-what-we-know). The live version of this data — filterable, embeddable, and available as JSON — lives on the [state opt-in tracker](/resources/state-tracker). ## The Thirty States on the IRS List As of the list's July 24, 2026 revision, these states have filed an advance election for 2027: - **Alabama, Alaska, Arkansas, Colorado, Florida, Georgia** - **Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana** - **Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire** - **North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota** - **Tennessee, Texas, Utah, Virginia, West Virginia, Wyoming** The authoritative source is the IRS's own [Federal Scholarship Tax Credit page](https://www.irs.gov/government-entities/federal-state-local-governments/federal-scholarship-tax-credit-fstc), which is where we verify our tracker. Every other list, including ours, is a copy. ## What Changed Since June: Three Veto Overrides Landed The three states added between the June and July lists were Kansas, Kentucky, and North Carolina — and they are precisely the three states where a legislature overrode a governor's veto. - **Kentucky** — override of House Bill 1, March 2026 - **Kansas** — override of Senate Bill 361, April 2026 - **North Carolina** — override of the veto of House Bill 87, June 2026 That pattern is worth understanding, because it corrects a common misreading of how states get in. Section 25F does not require a state to pass a law. It requires an **election**, filed with the IRS on Form 15714 by the governor *or another individual or entity designated under state law*. Some states elected by executive order — Alabama's governor signed one in January 2026. Others enacted authorizing legislation first. And in these three, the legislature used state law to route around a veto. If you have been tracking this by watching for bills, you have been watching the wrong instrument. Several of the thirty never passed a §25F opt-in bill at all. ## The Part the Count Does Not Tell You: No SGO Is Listed Anywhere Here is the correction that matters most for anyone planning a launch. Being on the IRS participating-state list is **not** the same as being a state where a Scholarship Granting Organization can get approved. Two separate things have to happen, and only the first one has happened anywhere: - The state files its advance election. Thirty states have done this. - The state submits a certified list of the qualifying SGOs located in it. **No state has done this.** The reason is that the rules for the second step do not exist yet. In [Notice 2025-70](https://www.irs.gov/pub/irs-drop/n-25-70.pdf), the IRS was explicit: "The deadline and procedure for perfecting the Advance Election by submitting the State SGO list will be provided in future guidance." Treasury has committed to proposed regulations by the end of September 2026. The statutory default is that a state's list is due by January 1 of the applicable year, or as soon as practicable for the program's first year — but the mechanics are still open. So when you hear that an organization is "an approved SGO in thirty states," treat it the way you would treat a restaurant advertising a Michelin star in a country that has not published a guide. There is no federally listed SGO in the United States today. There cannot be one until states start publishing lists, and states cannot publish lists until the procedure exists. Our [SGO directory](/find) is empty for exactly this reason, and will stay empty until those lists start appearing. ## The Announced-But-Not-Filed Column New York is the state most often miscounted, and it is worth being careful about. Governor Hochul announced in May 2026 that New York intends to participate, pending the federal regulations. That is a real signal — it made New York the second Democratic-led state to move toward the program — but an intent statement is not an election, and New York does not appear on the July 24 IRS list. Our tracker keeps it out of the opted-in column for that reason. You can read the full note on the [New York state page](/states/new-york). The practical difference is not academic. A donor cannot claim the credit for a 2027 gift to a New York SGO unless New York files, *and* New York publishes a list that includes that organization. Announcements do not get you there. ## Who Has Said No Six states have declined outright: **Arizona, Hawaii, Minnesota, New Mexico, Oregon, and Wisconsin.** Arizona and Wisconsin are the ones that surprise people, because both run large, long-established state-level scholarship tax credit programs. Those programs are unaffected — they operate independently of the federal credit — but their existence did not translate into federal participation. In both states the path ran into a gubernatorial veto. The important caveat: **states elect annually.** A "no" for 2027 is a one-year answer, not a permanent one, and a state that declined this cycle can elect for 2028 without undoing anything. ## The Twelve That Have Not Acted **California, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, New Jersey, Pennsylvania, Rhode Island, Vermont, and Washington** have neither filed an election nor taken formal public action. Look at that list and notice the concentration. Pennsylvania, Illinois, California, and New Jersey are among the largest private-school populations in the country. Their absence from the 2027 list does not stop their residents from claiming the credit — a donor's own state of residence is irrelevant to eligibility, as we covered in [the donor state asymmetry](/blog/sgo-donor-state-asymmetry). It stops their *students* from receiving the scholarships. Credits claimed by residents of these twelve states in 2027 will fund students somewhere else. That asymmetry is the single most effective argument available to advocates in holdout states, and it is why the 2027 tax year is likely to be the most persuasive lobbying document anyone produces. ## Why November Matters More Than Any Bill Because elections are annual and are made by governors (or their designees), the November 3, 2026 gubernatorial races are the most consequential event on this calendar. New governors are seated in January 2027, in time to elect for 2028. Michigan is the clearest case. Its governor has declined to commit pending federal guidance, and the State Board of Education voted in May 2026 to urge non-participation — but the next realistic decision point follows the election, not a legislative session. The [Michigan state page](/states/michigan) tracks it. Expect the participating-state count to move twice more before the program starts: once as remaining 2027 elections trickle in ahead of whatever deadline the September regulations set, and again in the first quarter of 2027 as new administrations decide about 2028. ## What This Means for Your Organization **If you are in one of the thirty.** The federal work is the work: 501(c)(3) status with a primary SGO mission, governing documents, the no-earmarking policy, an arm's-length award process, the 90/10 discipline, and awards to ten or more students who do not all attend the same school. None of that depends on your state's process, all of it takes months, and the organizations that finish it now will be the ones able to file the day their state opens its listing process. Waiting for the regulations to start is a way of guaranteeing you are not ready. **If you are in a holdout state.** Two things are true at once: your students cannot receive federal scholarship money in 2027, and your donors can still claim the credit by giving to an SGO listed elsewhere. That is a bridge, not a permanent design. The organized version of readiness is a state-conditional pledge campaign — commitments that only process if and when your state elects — which gives you a real number to bring to your statehouse instead of an argument. [ClearPath Pledge](/products/pledge) exists for that. ## How to Track This Yourself We re-verify the full fifty-state table against the IRS list and stamp both dates on the [tracker page](/resources/state-tracker), so you can see how fresh the data is rather than guessing. The whole dataset is free to reuse: - The [tracker](/resources/state-tracker) — filterable, with per-state notes and review dates - A [machine-readable JSON feed](/api/data/state-tracker) — CORS-enabled, free to cite with attribution - An embeddable map for newsrooms and advocacy sites - A [guide page for every state](/states), with what the status means for donors, families, and founders If you are weighing formation, the status of your state is one input among several — [the OBBBA explainer](/resources/obbba-explained) covers the federal requirements that apply no matter where you sit. **A note on currency.** This reflects the IRS participating-state list dated July 24, 2026. State status changes, and nothing here is legal advice or a definitive statement of any state's position — verify with counsel before making formation decisions. --- ### Can a Single School Join an SGO? Yes — and Here Is Exactly How It Works Canonical URL: [https://sgoguide.com/blog/single-school-join-an-sgo](https://sgoguide.com/blog/single-school-join-an-sgo) Published: 2026-08-25 · Category: How-To · 12 min read A single-campus school reading about the federal scholarship tax credit runs into a wall within about ten minutes, and it is usually the same wall: everything written about scholarship granting organizations assumes a network. A diocese. An association. A statewide organization with thirty member schools. Your school has one campus, one head of school, one business manager who is already doing three jobs, and a community of families who would use this money tomorrow. The good news is that the path built for exactly your situation is also the simplest one in the program, and it does not require you to form anything. The rest of this post is what it actually involves. The Education Freedom Tax Credit (EFTC), the Federal Scholarship Tax Credit (FSTC), the Educational Choice for Children Act (ECCA), and Section 25F are four names for the same federal program — a dollar-for-dollar tax credit of up to $1,700 per year for donations to scholarship granting organizations, effective January 1, 2027. ## Why One Campus Is the Hardest Case Before the mechanics, the reason this question has a structural answer rather than a preference-based one. The Education Freedom Tax Credit requires a scholarship granting organization to award scholarships to **ten or more students who do not all attend the same school**. The threshold is ten students, not ten schools — but an SGO whose awards all land at one campus does not satisfy it. On top of that, no donor may earmark a contribution to a particular school or student, and the prohibition reaches structural earmarking as well as explicit requests: if the only outreach is to one school's community, the only applicants will be from that school, and the awards will concentrate there regardless of what anyone said when the gift was made. Put those two rules together and you get the sentence every single-campus school eventually has to absorb: **an SGO cannot exist to fund your students.** Not because of a technicality that clever drafting can route around, but because the program was designed to fund income-eligible students generally rather than to be a tuition-assistance mechanism for one institution. A school with one campus has three honest options: join an SGO that already operates, join with peer schools to form one together, or form its own and genuinely open it to students beyond your community. This post covers the first. [The consortium route is here](/blog/consortium-sgo-independent-christian-schools), and [the honest version of forming your own is here](/blog/single-school-start-its-own-sgo). ## What "Joining" Actually Means Joining an SGO as a partner school is not a merger, an affiliation, or a legal entanglement. It is closer to being an approved vendor relationship running in reverse: you are vetted, you are listed, and your families become eligible applicants. Mechanically: - **You are vetted and approved** by the SGO — that you are a school within the statute's definition, that you are in a participating state, and that you can confirm enrollment. - **You get a giving page carrying your school's name and brand**, plus a QR code and usually an embeddable widget for your own site and newsletters. - **Your donors give through that page**, name your school as their preferred school, and receive the same federal credit they would receive giving anywhere else — up to $1,700, or $3,400 for a married couple filing jointly as two individuals. Nothing about the credit depends on who runs the SGO. - **Your families apply** to the SGO through a link you can put in your admissions and financial aid materials. - **The SGO's committee decides awards** on published criteria, at arm's length from your school. - **Scholarship funds are disbursed** — commonly directly to the school against confirmed enrollment, which means the money arrives as tuition rather than as a check a family has to route to you. You do not form an entity. You do not seat a board. You do not open segregated bank accounts, run a 90/10 test, file state reports, or commission an annual audit. Every one of those obligations belongs to the SGO, and that is the entire point of the arrangement. ## What Your School Actually Does — the Honest Annual Job The recurring work is real but small, and it lands on people you already employ. **Promote it.** The program is participation-scaled: the credit caps at $1,700 per donor, so a school's outcome is determined by how many households give, not by how large any gift is. That makes your parent newsletter, your annual fund letter, your alumni list, and the announcement at the fall parent meeting the highest-leverage channels available — and they cost nothing, which matters because [paid acquisition is effectively unfundable inside the program's economics](/blog/sgo-90-10-withdrawal-cap-not-expense-rule). **Confirm enrollment.** This is the one job only you can do, and it is the linchpin of a compliant disbursement: the SGO cannot know from the outside whether a student is actually enrolled and attending. Expect a short confirmation per recipient per term. **Help families with the application.** Income verification against [300% of area median income](/blog/sgo-income-eligibility-300-percent-ami) requires documents — paystubs, returns, or transcripts — and the families most likely to qualify are often the ones least comfortable assembling them. A financial aid office that walks families through it converts far more applications than one that forwards a link. **Cooperate with disbursement.** Someone in your business office reconciles scholarship payments against student accounts on the SGO's calendar rather than yours. Ask about that calendar before you sign, because [disbursement timing against the tuition year](/blog/scholarship-disbursement-compliance-guide) is what families actually experience. That is the job. It is a real addition to a business office's year, and it is roughly two orders of magnitude smaller than operating an SGO. ## The Three Things You Can Never Promise Say these out loud, early, to your board and your top donors — in the same conversation where you introduce the program, not in February when someone is upset. **You cannot promise a donor their gift funds your students.** No donor anywhere may earmark a contribution to a school or a student. This is federal law and it applies identically whether you join an SGO or form one, so it is not a reason to prefer one path over the other. **You cannot promise a family an award.** The committee decides on published criteria, applying the statutory priority for continuing recipients and their siblings. Your head of school has no vote and should not appear to. **You cannot promise a proportional return.** A school whose community gives generously in a year where its families are less income-eligible than another school's may receive fewer awards than its giving would suggest. There is no mechanism that ties awards to fundraising, and any SGO that implies otherwise is describing a violation. What you *can* say is more useful than it first sounds: donors may name your school as their **preferred** school, that preference is visible to the committee alongside the applicants from your school who applied, and your community's giving materially increases the pool that your families are applying into. Preference is real and it is honest — it simply is not a designation. The reason to be blunt about this at the start is that donors who understand the rule up front accept it readily. Donors who discover it after giving feel misled, and they are right to. ## What It Costs The economics for a joining school run in your favor, and the structure of the fee matters more than its size. Joining should cost nothing to start — no setup fee, no subscription, no minimum. The SGO carries certification, compliance, receipting, and the annual audit out of the administrative allowance the program permits. Where a partner fee exists, it compensates you for the enrollment confirmation only you can perform, and **it must come from the SGO's operating allowance, never from the 90% owed to students.** For reference, our own program pays 3% by default on gifts that named the school, from the operating side, on a visible running ledger. Use that as a benchmark rather than a target: a materially higher fee is not automatically a better deal, because every point comes out of the same 10% that funds the compliance work protecting your families' awards. A fee paid out of the 90% is not a bargain — it is a compliance problem you are being paid to participate in. ## When Joining Is the Wrong Answer For intellectual honesty, the cases where a single school should not join: - **You need to control the criteria.** If your program only works with eligibility rules an existing SGO will not adopt, the criteria have to be yours, which means the entity has to be yours. - **You are not really one school.** A school that operates several campuses, or a church with a school and an enrichment program, may already clear the multi-school rule and should read [the consortium and network structures](/blog/consortium-sgo-independent-christian-schools) instead. - **You have the scale and the development office already.** Above roughly $1–2 million in expected annual contributions, [the administrative allowance begins to fund a real operation](/blog/sgo-operating-budget-year-one), and owning the SGO starts to make economic sense. - **Your state has not elected to participate.** Joining does not fix this: your students cannot receive Education Freedom Tax Credit scholarships until your state is a covered state, though your donors can still claim the credit by giving to an SGO listed elsewhere. Check the [state tracker](/resources/state-tracker), and if you are in a holdout state, [the Michigan post lays out the posture](/blog/will-michigan-opt-in-education-freedom-tax-credit) that applies anywhere. ## What to Do This Fall - **Confirm your state's participation status** on the [tracker](/resources/state-tracker). This determines whether your families can receive awards in the first covered year. - **Run diligence on the SGO you are considering.** [Twelve questions and four documents to request](/blog/how-to-choose-an-sgo-for-your-school) — per-state listing status, how preferred-school designation is actually handled, which pool the partner fee is paid from, disbursement channel and timing, and what work lands on your staff. - **Decide who owns this internally.** Advancement usually owns promotion; the business office usually owns confirmation and reconciliation. Name both before you sign. - **Brief your board once, properly.** Cover the three things you cannot promise and the fact that the compliance obligations stay with the SGO. If your board's question is whether participation subjects your school to federal regulation, [that answer has its own post](/blog/education-freedom-tax-credit-federal-strings-schools). - **Write the parent communication before launch**, not after the first gift. Lead with the credit, be explicit about preference versus earmarking, and put the application link in the same message. Joining is also not a lock-in. You have not created an entity, signed away anything, or taken on obligations to unwind. A number of schools will use the partner path to prove demand in their community first and form later with real participation numbers in hand — which is a materially better position from which to make that decision than a projection. The full single-school overview, including the current status of our own partner program, is on [the single-school page](/single-school). If you are still weighing join against form, [start here](/start-or-join-an-sgo). **A note on currency.** This reflects statutory requirements and guidance available as of August 2026, including the June 9, 2026 preview. The credit begins January 1, 2027 and the state SGO listing procedure is not final — verify with counsel before signing a partner agreement. --- ### How to Choose the SGO Your School Joins: Twelve Questions Canonical URL: [https://sgoguide.com/blog/how-to-choose-an-sgo-for-your-school](https://sgoguide.com/blog/how-to-choose-an-sgo-for-your-school) Published: 2026-08-23 · Category: How-To · 14 min read Most schools spend weeks on the first decision — form our own Scholarship Granting Organization, or join one that already exists — and about forty minutes on the second one. That is backwards. If you are joining, the SGO you pick will hold your families' scholarship money, decide which of your students get it, put your school's name on a giving page your parents will scan at back-to-school night, and be the organization named on your donors' tax receipts. That is not a vendor selection. It is closer to choosing who administers your financial aid. This post assumes you have already worked through the first decision. (If you have not, [Three Ways In](/blog/two-ways-in-start-an-sgo-or-join-as-a-partner-school) is the honest comparison, and [Start or Join an SGO](/start-or-join-an-sgo) is the side-by-side.) What follows is the diligence: twelve questions, the four documents worth asking for, and the answers that should end the conversation on the spot. ## Why This Matters More Than It Looks Three things go wrong when a school joins the wrong SGO, and none of them are recoverable in the middle of a school year. **The SGO's compliance problem becomes your families' problem.** The obligations of the federal scholarship tax credit — the Education Freedom Tax Credit, or Section 25F, depending on who is naming it — sit with the SGO, which is the point of joining — but if that organization misses its state listing, blows the 90/10 test on a state account, or cannot produce an audit, the awards stop. Your families do not experience that as an SGO problem. They experience it as your school promising tuition help in March and not delivering it in August. **A promise about earmarking becomes your reputation.** Some programs will tell a school, in the room, that the money its donors raise "comes back to your school." The statute prohibits earmarking a contribution to a specific school or student. A school that repeats that promise to its parent community has borrowed a liability from someone else's sales pitch. **Switching mid-program is expensive.** Your donors gave through a specific organization. Your recurring gifts, your QR codes, your printed materials, and your families' applications all point somewhere. Moving them in year two costs you a giving cycle. The good news: everything you need to evaluate is knowable before you sign, and most of it fits on one page. ## 1. Is Your State In — and Is This SGO Actually Listed in It? Start here, because it disqualifies faster than anything else. Two separate facts have to be true. Your state must have opted into the credit, and the SGO must appear on that state's list of approved organizations. Listing is per state and it is not portable: an SGO listed in three states is not thereby listed in yours. And a scholarship can only go to a student who resides in a state where the SGO is listed. Ask for the state's listing reference — the entry, the approval letter, the registry number, whatever your state issues — not a description of one. "We have applied" and "we expect approval shortly" are answers about a schedule, not a status. Get the expected date in writing and check it against your enrollment calendar. Check your own state's posture yourself rather than taking it from the pitch: our [state-by-state tracker](/blog/state-opt-in-tracker-what-we-know) and the [state pages](/states) carry current status, and the [SGO directory](/find) fills in as states complete approvals for 2027. One nuance worth knowing, because it comes up as soon as you start recruiting donors: your **donors** do not have to live in a participating state. Eligibility runs on where the SGO is listed and where the student lives. An alum in a holdout state can fund a student at your school in a participating one. The [donor-state asymmetry](/blog/sgo-donor-state-asymmetry) is one of the few genuinely underused facts in this program. ## 2. Is Scholarship-Granting What the Entity Actually Does? Treasury's previewed safe harbor measures the 90% test against the segregated state account rather than the organization's total receipts — but it attaches conditions, including that the organization be "largely scholarship-granting." A big diversified nonprofit running a small scholarship program on the side has a structurally different risk profile from an entity formed to do this one thing. Ask what the entity is. A standalone 501(c)(3) whose purpose is granting scholarships is the clean answer. A scholarship program housed inside an organization with a large unrelated budget is not disqualifying, but it is a question you want asked and answered now rather than by an examiner in 2029. The mechanics are in [The Section 25F Safe Harbor](/blog/section-25f-safe-harbor-90-percent-test). ## 3. Who Sits on the Committee, and Can You Read the Award Policy? Awards must be made at arm's length. The SGO's committee — not its donors, not its partner schools, not its executive director alone — decides. So the composition and the written policy are the product you are actually buying. Ask four things. Who is on the scholarship committee, and what makes them independent? How does the SGO handle the disqualified-person rules, which are expected to bar committee members' own families from receiving scholarships from that SGO? Are applications reviewed blind, and is that documented? And can you read the award policy — eligibility, award sizes, sibling treatment, renewal handling, the application calendar? That last one is the tell. An SGO that can email you its written award policy on the day you ask has run this through governance. One that describes the policy verbally has not written it down yet, which means it does not exist. Background is in [Selection Committees and Disqualified Persons](/blog/sgo-selection-committee-disqualified-persons) and [How to Run a Compliant Award Process](/blog/compliant-scholarship-award-process). Ask about **priority for returning students** specifically. Under the rules as previewed, a student approved in a prior fiscal year is treated differently from a first-time applicant. Your families will renew or not renew based on how that is handled, and you want to know the policy before you recruit them, not after. ## 4. What Exactly Happens to a Donor's Preference for Your School? This is the single most important answer in the whole conversation, and it takes about fifteen seconds to evaluate. The honest version sounds like this: donors may name your school as their **preferred** school; the committee sees those preferred dollars alongside the applicants from your school; the preference is a real and weighted input; it can never bind the award, because the statute prohibits earmarking a contribution to a specific school or student. The version that should end the meeting sounds like this: "the money your donors raise goes to your students." Test it directly. Ask: *"If our community gives $200,000 naming our school, how much of it reaches our students?"* The correct answer is that there is no guarantee, followed by an explanation of how preference is weighted and how the SGO reports back on it. Any specific number offered in response to that question is either a misunderstanding of the statute or a sales practice you do not want attached to your school's name. Then ask the follow-up that separates careful operators from confident ones: **what reporting do we get on preferred dollars versus awards to our students?** A good SGO shows you both numbers and explains the gap. A weak one shows you neither. ## 5. Who Else Is in the Pool? Your students are not applying in isolation. Ask how many partner schools the SGO serves, how big they are, and how the docket works — whether the committee reviews applicants school by school or as one pool. There is no single right answer here. A broad multi-school SGO gives you diversification and, usually, better systems. A small one may give your families a larger relative share and more attention. What you want to avoid is a surprise: joining an SGO where one large school accounts for most of the fundraising and most of the awards, and learning that in year two. Related, and worth asking plainly: is there a school whose relationship to this SGO is different from yours — a founding school, an affiliated network, a diocesan sponsor? Not disqualifying. Just something to know before you decide. ## 6. Where Does Your Fee Come From? Most partner programs pay schools something for the one job only a school can do: confirming that a student is actually enrolled and attending. Ask for the number — but ask harder about the source. The law requires that at least 90% of each state account reach qualified scholarships, and permits up to 10% to be released for operations. **Your fee must be paid out of the operating side.** A partner fee funded from the scholarship 90% is not a better deal; it is a compliance problem you are being paid to participate in. So ask: What is the fee? What is it paid for? When is it paid, and on what schedule? Which pool does it come from? Can we see it accrue on a ledger, or does it arrive as a check with no detail? For reference, our own program pays 3% by default on gifts that named the school, from the SGO's operating allowance, visible on a running ledger. Use that as a benchmark, not a target — a materially higher fee is not automatically better, because every point of it comes out of the same 10% that funds the compliance work protecting your families' awards. The mechanics of that allowance are in [The 90/10 Rule Is a Withdrawal Cap, Not an Expense Rule](/blog/sgo-90-10-withdrawal-cap-not-expense-rule). ## 7. What Rails Do They Run, and Who Absorbs the Processing Fees? An unglamorous question that moves real money. The credit is capped at $1,700 per taxpayer, which makes this a small-gift program by design — and small gifts on card rails are expensive. Processing fees compete for room inside the same 10% operating allowance, where at scale they can consume roughly a quarter of it. Ask what payment rails they run, whether ACH is the default path for larger gifts, whether donors are offered the option to cover fees, and how card costs are accounted for. An SGO that has thought about this has more allowance left to run the program. One that has not will discover the problem in its first big month. See [Do Credit Card Fees Count Against the SGO 10%?](/blog/sgo-credit-card-fees-10-percent). While you are here, confirm the basics of what qualifies, because it shapes what you can ask your community for: a qualified contribution must be **cash** — card, ACH, check, wire. Appreciated stock does not qualify. Donor-advised fund grants do not earn the credit, because the credit runs to the individual taxpayer. Any SGO telling your development office to solicit stock gifts for this program is describing a different program. ## 8. What Reaches the Student, and When? Award letters are not money. Ask how funds actually move and on what calendar. The channels in practice are direct-to-school ACH, a restricted spending instrument, and reimbursement against submitted receipts. Direct-to-school is the cleanest for a school business office; reimbursement puts the float and the paperwork on families. Ask which is default, whether disbursement is per term or per year, how many days elapse between award and funds, and who chases receipts when a family buys a qualified item directly. Then map it onto your tuition calendar. If your first tuition installment is due August 1 and the SGO disburses in October, that gap lands on your business office and on your families — and it is entirely knowable in advance. Detail in the [Scholarship Disbursement Compliance Guide](/blog/scholarship-disbursement-compliance-guide). Also ask what the scholarship can cover beyond tuition. The expense framework is broader than most schools assume, and a family's award may legitimately cover materials, technology, or certain services. If your families will ask — and they will — you want the SGO's actual policy, not your guess. See the [qualified expenses guide](/blog/section-25f-qualified-expenses-guide). ## 9. How Much Work Lands on Your Staff? You are joining precisely to avoid running a regulated program. Verify that. Ask, concretely: What does our school have to do, per family, per year? How is enrollment confirmation delivered — a one-click task in a portal, or a spreadsheet emailed to our registrar in July? Can we import our roster from our SIS, or is it manual entry? Who answers parent questions about applications and awards: your team or ours? What is the response time when a family is stuck in August? The realistic floor is enrollment confirmation plus sharing your giving page with your community. If the answer sounds materially bigger than that — if your admissions office is being asked to assess need, or your business office to reconcile accounts — you are being offered a share of the SGO's job without the SGO's economics. ## 10. How Hard Is Income Verification on Your Families? Eligibility runs against 300% of **area** median income, which means the ceiling in your county is not the ceiling three counties over. Families notice the documentation ask far more than they notice anything else about the program, and a clumsy verification process is the most common reason applications are started and abandoned. Ask which documents the SGO accepts, whether it supports the range of verification methods contemplated in the previewed guidance, how a family with irregular or self-employment income is handled, and what the appeal path is for a household just over the line. Then ask what the family-facing experience looks like — and ask to see it, not hear it described. Background in [The 300% AMI Requirement](/blog/sgo-income-eligibility-300-percent-ami). ## 11. What Do You Keep — Brand, Data, and the Donor Relationship? Be clear-eyed about this one, because there is a real trade and an honest SGO will name it. The legal donor of record is the SGO. The tax receipt carries its name, not yours. That is not a bad deal — it is the deal, and it is exactly what you are being relieved of. What you should still expect: a giving page carrying your school's name, colors, and logo; your own QR code and an embeddable widget for your site; analytics on your page's traffic and gifts; and visibility into which donors named your school, to the extent those donors have consented to be identified to you. Ask whether you can export your list, what happens to the data if the relationship ends, and whether the SGO will co-sign acknowledgment language so your donors hear from you as well as from them. Ask to see a real branded page before you sign, not a mockup. ## 12. What Does Leaving Look Like? Ask the exit questions while everyone is still enthusiastic. Is the agreement exclusive — can your school also partner with another SGO, or accept gifts through more than one? What is the term, and does it auto-renew? What happens to students mid-year if you leave? What happens to recurring donors who set up gifts naming your school? Do you get your data out, and in what format? A clean answer here is a strong signal about everything else. An SGO confident in its program does not need to lock you in for three years. ## Four Documents to Ask For Everything above compresses into a short list of artifacts. Ask for these in one email; the speed and completeness of the reply tells you more than the call did. - **Proof of state listing** for every state your families live in, with the state's own reference. - **The written scholarship award policy**, including committee composition, conflict-of-interest and disqualified-person handling, priority for returning students, and the award calendar. - **The partner school agreement**, with the fee, its source, the payment schedule, the term, exclusivity, and termination. - **The most recent audited financials or, pre-launch, the audit engagement plan**, plus whatever the SGO reports on its 90/10 position by state account. An organization running a real operation can send all four the same week. Note what happens if they cannot. ## Red Flags - Any guarantee, implied or explicit, that your donors' gifts will fund your students. - A specific dollar or percentage answer to "how much comes back to us?" - "We are applying for listing" with no filing date and no state reference. - A partner fee paid out of the 90% that must reach scholarships. - No written award policy, or a committee that cannot be named. - Exclusivity plus a multi-year term plus auto-renewal. - Vagueness about disbursement timing, or a calendar that does not match your tuition cycle. - Card-only rails with no answer on processing fees. - Reluctance to share audit posture or 90/10 reporting. - Solicitation advice involving stock, crypto, or donor-advised funds. - Pressure to sign before your board or counsel has read the agreement. ## Green Flags - Volunteers the earmarking limitation before you ask about it. - Sends the award policy and partner agreement unprompted. - Shows you the family-facing application and the school portal live. - Reports preferred dollars and awards to your students as two separate numbers. - Runs ACH by default and can explain its fee economics. - Publishes or shares its per-state 90/10 position. - Keeps the agreement short, non-exclusive, and terminable. - Says "we don't know yet" about the open regulatory questions, and can tell you which ones they are. That last one deserves emphasis. Meaningful pieces of this program are still unsettled pending regulations. An SGO that projects total certainty about every detail in 2026 is either not reading the guidance or not telling you the truth about it. The operators worth joining can distinguish what the statute requires, what the previewed guidance says, and what is still open — and they run a [compliance calendar](/blog/sgo-compliance-calendar) against all three. ## Running the Process in Two Weeks You do not need a formal RFP. You need the same questions asked of two or three organizations in writing, so the answers are comparable and on the record. Week one: send the twelve questions and the four-document request to your candidates. Check your state's status yourself. Week two: take a call with each, spend it on questions 3, 4, and 8 — award policy, preference handling, disbursement timing — because those are where written answers hide the most. Then hand your board a one-page comparison and a recommendation. If your families span state lines, add one question: how does the SGO handle multiple states? One entity can be listed in many states, but each dollar is locked to the state account it was designated to, the 90/10 test runs per account, and there is no national pool. The [multistate mechanics](/blog/multistate-sgo-one-entity-state-accounts) are worth understanding before you assume a neighboring-state family is covered. ## Where We Sit Full disclosure, since you should apply the same standard to us: SGO Guide builds ClearPath, the software SGOs run on, and we are also standing up certified SGOs that schools will join directly as [ClearPath Partner Schools](/products/partner-schools) — $0 to start, a branded giving page and QR code, a 3% partner fee from the operating allowance for confirming enrollment, and every federal compliance obligation carried by the SGO. That program is not open yet; schools can join the early-access list now, and every question below is one you should still ask us when it is. Ask us all twelve. If a competing SGO answers them better for your school, join that one — a family funded through someone else's SGO is still a family funded. The only wrong answer is spending 2027 undecided. --- ### Three Ways In: Start Your Own SGO, Have Us Run It, or Join One Canonical URL: [https://sgoguide.com/blog/two-ways-in-start-an-sgo-or-join-as-a-partner-school](https://sgoguide.com/blog/two-ways-in-start-an-sgo-or-join-as-a-partner-school) Published: 2026-08-22 · Category: Strategy · 13 min read Every conversation we have about the federal scholarship tax credit reaches the same fork within about ten minutes. Someone — a head of school, a diocesan superintendent, a foundation director — understands the credit, believes their families would benefit, and then asks the real question: **do we have to build one of these ourselves?** No. There are three ways in, and they are genuinely different products for genuinely different organizations. This post is the comparison without the sales gloss, because picking the wrong one wastes a year you do not have before the credit goes live on January 1, 2027. The reason there are three rather than two is that the question people ask as one question is really two: **whose SGO is it**, and **who does the operating work?** Those have different answers, and answering them separately is what opens up the middle path most organizations end up wanting. ## The Three Paths, In One Paragraph Each **Start your own SGO.** You form a 501(c)(3) whose purpose is granting scholarships, get listed by every state you intend to operate in, seat a board and an arm's-length scholarship committee, open segregated state accounts, and run the program. Your name is on the receipts. Your committee writes the eligibility rules. The administrative share of every gift — the up-to-10% Section 25F sets aside for operations — is your organization's revenue. You run it on [ClearPath](/products), our software, but the SGO is yours in every legal and practical sense. **Own the SGO, and have it operated for you.** Identical to the first path in every legal and brand respect — you form the 501(c)(3), you seat the board, your name is on the receipts, your committee writes the eligibility rules and decides every award — except that the operating work is done by somebody else's staff instead of yours. That is [ClearPath Managed](/products/managed): gift processing and receipts, application intake, income verification, docket preparation, disbursement, per-state 90/10 bookkeeping, state reports, and the audit package. The administrative share of each gift pays that team rather than funding your own hires. You can take it in-house whenever you want, because the entity, the donors, and the history were yours the entire time. **Join an SGO as a partner school.** SGO Guide also operates certified SGOs directly. A school joins one as a [ClearPath Partner School](/products/partner-schools): you are vetted and approved, you get a branded giving page, a QR code, and an embeddable widget, donors can name your school as their *preferred* school, and your one recurring job is confirming that a student is actually enrolled. Every Section 25F obligation — state listing, segregated accounts, the 90/10 test, receipts, the annual audit — stays with the SGO. You earn a partner fee (3% by default) on the gifts that named your school. One asymmetry worth stating plainly before you read the rest: **our partner-school program is not open yet.** We are standing the SGO up ahead of the January 1, 2027 start of the credit, and schools can [join the early-access list](/products/partner-schools) at no cost and no commitment. Forming your own SGO — with your staff or with ours — is something you can begin today, and since it takes months, an organization leaning that way should not wait on us. Everything below compares the three models on their merits; the timing is a separate fact to hold alongside it. Same statute, same credit, same families. Very different amount of work. ## What Starting Your Own Actually Buys You Three things, and they are the only three worth forming an entity over. **Control over who gets a scholarship.** This is the big one. Under Section 25F the award decision must be made at arm's length, and donors can never earmark — but the *criteria* are the SGO's to write. Which students are eligible, how a returning student is prioritized, what a sibling is worth, whether a family at 250% of area median income outranks one at 290%, how large an award is. If your organization has a view on any of that, it needs to be the SGO. A partner school does not get a vote on award policy, and no honest partner program can offer one. (The mechanics of doing this compliantly are in [How to Run a Compliant Scholarship Award Process](/blog/compliant-scholarship-award-process).) **Ownership of the donor relationship.** Your donors give because of you — your mission, your track record, your head of school's letter. When they give through your own SGO, the receipt has your name on it, the donor record is yours, and the relationship compounds year over year. When they give through someone else's SGO, the legal donor of record is that SGO. Your school is named on the page and honored in the acknowledgment, but the tax document says someone else. **The administrative share as revenue.** Section 25F permits up to 10% of each state account to be released for operations. In your own SGO, that allowance funds *your* staff, *your* systems, and *your* growth — minus what you spend on software and services. Over a $2 million program, that is real institutional money. It is also the reason the math changes with scale: the cost of forming and auditing an SGO is close to fixed, so it lands very differently against $2 million of annual giving than against $80,000. (What that 10% can and cannot pay for is a subtler question than most people expect — see [The 90/10 Rule Is a Withdrawal Cap, Not an Expense Rule](/blog/sgo-90-10-withdrawal-cap-not-expense-rule).) ## What Starting Your Own Actually Costs Also three things, and they are routinely underestimated. **Time, measured in months.** Entity formation, IRS recognition, state listing in each state you serve, bank and segregated account setup, board recruitment, committee seating, policy adoption. Even run well, this is not a six-week project. An organization starting the conversation in late 2026 and hoping to take gifts in January 2027 is, in most states, already late. **Governance that is real, not nominal.** A board that actually meets. A scholarship committee whose members are independent enough to survive the disqualified-person rules — which, as we covered in [Selection Committees and Disqualified Persons](/blog/sgo-selection-committee-disqualified-persons), disqualify committee members' own families from receiving scholarships from that SGO. In a small, tight community, seating a committee that is both knowledgeable and independent is harder than it sounds. **An operating burden that never ends.** Per-state 90/10 accounting. Income verification against 300% of area median income. State annual reporting. Records retention. An annual audit from year one. Software handles most of the mechanics — that is what ClearPath is — but somebody at your organization still owns the function, answers the auditor, and signs the filing. ## The Middle Path: Own It, Don't Staff It Read those three costs again and notice that only one of them is really about ownership. Time and governance are the price of having your own SGO. The third — an operating burden that never ends — is the price of *doing the work*, and it is the one that can be bought out. That is the whole idea behind a managed engagement. The entity is yours. The board is yours. The scholarship policy is yours, and so is every award decision — that part is not optional and not for sale, because Section 25F requires awards to be made at arm's length by the organization itself. What moves is the desk work: receipting, verifying, disbursing, reconciling, reporting. **Why this matters more in 2027 than it will in 2032.** There is no pool of experienced SGO administrators to hire from. The statute is new; the job did not exist eighteen months ago. An organization that decides to run its own operation is not choosing between a good hire and a great one — it is choosing between an unproven hire and no hire at all, in the first year of a program where the mistakes are cheapest to make and most expensive to explain. Renting a team that already does this for other programs is a defensible answer to that, and so is deciding you would rather learn it yourself. What is not defensible is assuming somebody on staff will absorb it alongside their existing job. **What it costs.** The same thing running it yourself costs, pointed at a different payroll. The managed fee comes out of the ≤10% operating allowance — the same share that would otherwise fund your own administrator, your own audit prep, your own systems. You are not paying extra; you are paying somebody else. Which is exactly why the calculus flips with scale: at $2 million of annual giving, that allowance can fund a real internal team and the argument for keeping it in-house gets strong. At $200,000 it cannot fund one competent full-time person, and pretending otherwise is how programs end up out of compliance. **What you give up.** The administrative share as *institutional revenue* — it pays a vendor instead of your staff. And the tacit knowledge that comes from doing the work: an organization whose team has never processed a disbursement has a thinner feel for its own program. Both are real. Neither is fatal, and neither is permanent. ## What Joining Buys You **Speed and a floor of zero.** Apply, get vetted, get approved, go live. Days, not quarters. No formation cost, no filing fees, no audit line item, no legal retainer. If your board wants to see whether the credit actually moves money in your community before committing to an entity, this is how you find out — with real gifts from real families, not a projection. **No compliance surface of your own.** You are not the one tracking the 90/10 test, reconciling a segregated account, or producing an evidence package. The SGO carries all of it, because the SGO is the regulated party. **A fee for the one job only you can do.** A school knows something no SGO can know from the outside: whether a student is actually enrolled and attending. That confirmation is the linchpin of a compliant disbursement, and partner schools are paid for it — 3% of the gifts that named the school, accrued on a visible ledger, paid from the SGO's operating allowance and never from scholarship dollars. **A brand your community recognizes.** The giving page carries your school's name, colors, and logo. Parents scanning a QR code at back-to-school night see your school, not a stranger's. **An exit that costs nothing.** You did not create a legal entity. If the program does not work for your community, you stop. ## What Joining Costs One thing, stated plainly: **you do not decide who gets the money.** The SGO's committee makes every award. Donor preferences for your school are visible to that committee and are genuinely weighed — the preferred-school pool is a real input — but Section 25F prohibits earmarking, so a preference can never bind the outcome. A donor who gives $1,700 naming your school has not bought a scholarship for your school. Any program that implies otherwise is selling something that will not survive an audit. Two smaller ones follow from it. You do not set eligibility rules, award sizes, or the application calendar. And your economics are a partner fee, not the full administrative share. ## The Three Questions That Usually Settle It Skip the feature comparison and answer these. **1. Does your organization have a view about who should get a scholarship that a general-purpose SGO cannot implement?** "Low-income families in our county" is implementable by anyone. "Students in our diocese, weighted by parish participation and assessed by our own aid office" is not. If your answer is specific, you need your own SGO. **2. What will you realistically raise in year one?** Not the ambition — the bottoms-up number from donors you can name. Under roughly a couple hundred thousand dollars, the fixed cost of formation and audit eats a painful share of a 10% allowance, and joining is usually the better use of the same money. Well above it, the allowance funds a real program and formation pays for itself. Our [state-by-state market math](/blog/how-much-scholarship-money-federal-credit-your-state) is a decent sanity check on the ceiling. **3. Do you have someone who will own compliance on Monday morning?** Not a consultant for the launch — a person on your staff whose job includes the 90/10 report and the state filing, every year. If you cannot name them, you are describing one of the other two paths — and which one depends on your answer to question 1. If your organization has a real view on award criteria, you want your own SGO with somebody else operating it. If it does not, you want to be a partner school. Notice that the three questions do not map one-to-one onto the three paths, and that is the point. Questions 1 and 2 decide whether the SGO should be yours. Question 3 decides who runs it. Answer them in that order and the path falls out. ## The False Choice, and the Order That Usually Works The most common mistake is treating "form our own" as the serious option and "join" as the half-measure. It is the reverse as often as not. A school that joins in January 2027 and funds thirty families that year has done more than a school that spends 2027 in formation and funds none. The second most common mistake is deciding you cannot own an SGO because you cannot staff one. Those are separate questions, and collapsing them into one has probably cost more organizations their own program than any other error in this space. If ownership matters to you and staffing does not exist, form the entity and hire the operation. It is also not a permanent decision in the direction people assume. Joining first and forming later is a normal sequence: you learn what your donor base actually does at the $1,700 cap, you find out whether your families clear the income test, you build the list — and then you form an entity against evidence instead of a spreadsheet. Nothing about being a partner school forecloses forming your own SGO in 2028. What does not work is the reverse: forming an entity, discovering the program raises $60,000, and carrying an audit requirement against it. ## Where to Go From Here If what you actually want to know is what the operating job consists of week to week — the thing that decides question 3 above — that is itemized in [Starting an SGO: Who Is Actually Going to Run It?](/blog/starting-an-sgo-who-will-run-it), along with the scale arithmetic on when an internal team pays for itself. We keep a full side-by-side of all three models — time to first gift, cost to start, who decides scholarships, whose brand donors see, compliance burden, governance, staffing, your share of a gift, and multi-state expansion — with an explicit "probably not you if" for each, at [Start or Join an SGO](/start-or-join-an-sgo). If the middle path is the one you are weighing, [ClearPath Managed](/products/managed) is the detail: what we do, what never leaves your board, and how the handover back to your own staff works. If you already know you are the joining kind, the next question is which SGO — [twelve questions for vetting one](/blog/how-to-choose-an-sgo-for-your-school) — and [ClearPath Partner Schools](/products/partner-schools) has the mechanics and the early-access list, though ours is not accepting schools yet. If you are weighing formation against partnering with an SGO that is not ours, the older and more general [framework for that decision](/blog/form-your-own-sgo-or-partner-with-existing) still holds. One note that applies to every path, because it surprises people: a Section 25F qualified contribution must be **cash** — card, ACH, check, wire, or cash. Appreciated stock does not qualify, and donor-advised fund grants do not earn the credit, because the credit runs to the individual taxpayer. Whichever path you choose, the giving program you are building is a cash program aimed at individuals, clustered at $1,700. Plan the rails accordingly — [starting with the processing fees](/blog/sgo-credit-card-fees-10-percent). All three paths end in the same place: a family that can afford the school that fits their child. Pick the one that gets you there in 2027. --- ### How a Single School Starts Its Own SGO — and the Rule That Decides Whether It Should Canonical URL: [https://sgoguide.com/blog/single-school-start-its-own-sgo](https://sgoguide.com/blog/single-school-start-its-own-sgo) Published: 2026-08-20 · Category: Strategy · 14 min read The meeting goes the same way almost everywhere. Someone has read enough about the federal scholarship tax credit to know it is real, believes the school's families would use it, and asks what it would take to start a scholarship granting organization. Someone else volunteers to look into incorporation. That meeting skips the question that actually decides the project, and it is not a question about formation at all. **A single school can form an SGO.** Incorporation, a board, bylaws, an IRS determination — all available, all achievable, and none of them unusual for a school that has already stood up a foundation or an endowment. The real question is whether the school can *use* the entity the way the room is imagining, and the honest answer is usually no. Here is the rule that governs it, what a legitimate single-school-founded SGO actually looks like, the economics on a small base, and the four structures ranked for a one-campus school. ## The Sentence That Reshapes the Project The Education Freedom Tax Credit (Section 25F) requires a scholarship granting organization to award scholarships to **ten or more students who do not all attend the same school**, and prohibits donors from earmarking contributions to any particular school or student. Read those together slowly, because nearly every misunderstanding in this area comes from reading them separately. The threshold is ten *students*, not ten schools — that part is more forgiving than people expect. But the awards cannot all land at one campus, and the earmarking prohibition reaches **structural** earmarking, not just explicit requests. An SGO that markets only to one school's community, accepts applications only from that community, and awards scholarships only to that school's students has earmarked by construction, even if no donor ever said a word about where their money should go. **The composition of your applicant pool determines compliance, not the language on your donation form.** That is the sentence to bring back to the meeting. So the plan most single schools are actually describing — an entity that raises money from our parents and grandparents and turns it into tuition assistance for our students — is not a compliant use of an SGO. It is a tuition assistance program, which your school is free to run, and for which no federal tax credit is available. ## The Failure Mode: "We'll Open It Up on Paper" The first workaround anyone proposes is to write the eligibility criteria broadly. Any income-eligible student in the county may apply. Technically open, and therefore fine. It is not fine, and the reason is mechanical rather than legal hair-splitting. If the only outreach is the school's newsletter, the parish bulletin, and the head of school's email list, then the only applicants will be the school's own families — and the awards will concentrate at one campus in year one, year two, and every year after. An examiner does not need to prove intent. The award distribution is the evidence. The second workaround is worse: recruiting a token second school so that a handful of awards land elsewhere. That produces a program whose compliance rests on an arrangement everyone involved understands to be cosmetic, documented in your own minutes. If you form an SGO, the outreach plan is not a marketing asset. **It is a compliance artifact**, and it should be written down, budgeted, and executed with the same seriousness as the income verification workflow. ## What a Legitimate Single-School-Founded SGO Looks Like It is entirely possible to do this properly. Schools that do will have built five things: **Genuine outreach beyond your own community.** Neighboring schools, community organizations serving income-eligible families, parish and congregation networks that are not yours, and the local channels through which families who have never heard of your school would learn that scholarships exist. Documented, with dates and reach. **Criteria written for a population, not a campus.** Published before applications open, adopted by the board, and phrased so that a family with no relationship to your school can read them and know whether to apply. **A committee at arm's length from the school.** Not your board of trustees wearing a second hat. [The award committee is the most compliance-sensitive structure in an SGO](/blog/compliant-scholarship-award-process), and in a single-school context the people who know the applicant families best are exactly the people whose participation creates the independence problem. Blind first-pass review, documented recusals, and at least a meaningful minority of members with no tie to your school. **Awards that actually land elsewhere.** Every year. If your distribution is 95% your own campus in year three, you have a program that has not opened, whatever your criteria say. **A written record of all of the above**, contemporaneous, because the annual audit under the Education Freedom Tax Credit is programmatic as well as financial — it examines whether your award process actually followed your written policies. Now sit with the consequence, because it is the part that ends most of these projects and should end them early rather than late: **you will raise money from your community, and some of it will fund students at other schools.** That is not a bug to be engineered around. It is the design. A board that cannot say that sentence to its donors without flinching should not form an SGO. ## The Economics on a Small Base Set the structural question aside and the arithmetic still bites. An SGO may release up to 10% of each state account for administration — [a withdrawal cap, not an expense rule](/blog/sgo-90-10-withdrawal-cap-not-expense-rule). The credit caps at $1,700 per donor, so revenue scales with the number of households you enroll, not with gift size. A school that enrolls 120 households at the cap raises roughly $200,000 and may release roughly $20,000 for the year. Against that $20,000 sit costs that do not shrink because your program is small: an annual independent audit, directors and officers insurance, bookkeeping and the Form 990, charitable registration renewals, software for donor management and income verification and disbursement, payment processing that [competes inside the same 10%](/blog/sgo-credit-card-fees-10-percent), and a human being to do the work every week of the year. That is why the honest threshold for a self-supporting single-entity SGO sits well above what a single campus typically raises in its first years, and why year one is [structurally broken for everyone](/blog/sgo-operating-budget-year-one) — costs land before contributions do. The gap has to be funded from ordinary charitable support outside the scholarship accounts, and someone has to commit to that in writing before you incorporate. ## The Trap That Catches Schools Specifically Two compliance features are far more binding for a single school than for a network, and both should be checked before formation rather than discovered during the first award cycle. **Your donors are your parents.** A substantial-contributor concept applies, restricting benefits flowing back to major donors, and on a small account the threshold binds quickly — 2% of a $200,000 account is $4,000, which is two married couples giving at the cap. In a single-school SGO, those same households very likely have children in the applicant pool. [Screen the applicant pool against the donor file every cycle](/blog/sgo-selection-committee-disqualified-persons), keep the screening ministerial and separate from the deciding, and document it. **Your natural committee members are disqualified.** Committee members and their immediate families are expected to be disqualified from receiving scholarships from that SGO. The parents most willing to serve are the parents whose children would benefit. Recruit on that assumption and say it before anyone accepts a seat. ## The Four Structures, Ranked for One Campus **1. Join an SGO that already operates.** No entity, no board, no audit, no compliance surface. Your school confirms enrollment and helps families apply; the SGO carries everything else. For most single campuses this is the right answer, and [the mechanics are here](/blog/single-school-join-an-sgo). It is also reversible — you can form later with real participation data instead of a projection. **2. Form one jointly with peer schools.** A consortium clears the ten-student, multi-school rule by construction, spreads the entity-level audit across members, and gives the award committee genuine independence from any one campus. The governance is harder than it looks when the members compete for the same families, and [the five decisions are here](/blog/consortium-sgo-independent-christian-schools). **3. Own the SGO, outsource the operation.** The entity is yours — your board, your criteria, your name on the receipt — and the weekly desk work is contracted out. This is the middle path most single schools never consider, because they collapse "whose SGO is it" and "who does the work" into [one question when they are two](/blog/starting-an-sgo-who-will-run-it). The hard boundary: a service provider never votes on an award. [ClearPath Managed](/products/managed) exists for this. **4. Form it and staff it yourself.** Correct when you have the scale to fund an operation from the administrative allowance, a development office that already runs a real annual fund, and criteria that genuinely cannot be delegated. Rare for one campus in the program's first years, and entirely legitimate when the conditions hold. Note that options 2, 3, and 4 all still require you to clear the multi-school rule honestly. Only option 1 solves it structurally. ## If You Are Forming Anyway: The Sequence The general [formation sequence](/how-to-start-an-sgo) applies, with four adjustments specific to a school-founded SGO: **Separate the entity from the school, visibly.** A new 501(c)(3) whose overwhelming activity is granting scholarships — not a program inside the school, and not a repurposed existing foundation with other activities, which would put [the largely-scholarship-granting safe harbor](/blog/section-25f-safe-harbor-90-percent-test) at risk. **Do not seat your school board as the SGO board.** Overlap is survivable; identity is not. Build in an independent majority, staggered terms, and a conflict policy that names the obvious conflicts because in this structure they are structural rather than occasional. **Write the outreach plan before you incorporate**, and budget for it. It is the artifact that proves the pool is genuinely open, and it is the thing that will be missing when someone looks. **Fund the machine from outside the scholarship accounts.** Ordinary charitable operating gifts, a founding grant, or school support — none of which is constrained by the 10% cap, all of which must be solicited and receipted separately from credit-eligible contributions. Then the standard work: charitable registration, the IRS determination, segregated accounting per state, the verification workflow, the disbursement design, and the state listing when your state publishes a procedure — which [no state has done yet](/blog/education-freedom-tax-credit-regulations-open-questions). ## Five Questions That Settle It Answer these in writing before the board votes. 1. Can we say to our donors, in plain words, that some of this money will fund students at other schools — and will they still give? 2. Do we have a real outreach plan to families who have never heard of us, with a budget and someone accountable for it? 3. Can we seat a committee with genuine independence from our school, knowing that committee members' own families become ineligible? 4. How many households can we realistically enroll in year one, what is 10% of that, and who is funding the gap between that number and our actual costs? 5. Is there a reason our criteria cannot be someone else's criteria — a specific, articulable reason that survives being written down? If question 5 has no answer, join an SGO. If question 1 makes the room uncomfortable, join an SGO. Neither outcome is a failure; both are the same conclusion most single-campus schools reach once the ten-student rule is on the table rather than assumed away. The [single-school overview](/single-school) covers the joining path in full, [ClearPath Launch](/products/launch) covers formation for schools that have decided to form, and [the form-or-join framework](/blog/form-your-own-sgo-or-partner-with-existing) covers the decision itself. **A note on currency.** This reflects statutory requirements and guidance available as of August 2026, including the June 9, 2026 preview. Rules described as previewed are not final, and the credit does not begin until January 1, 2027 — verify with counsel before incorporating. --- ### Does Taking Education Freedom Tax Credit Money Put Your School Under Federal Regulation? Canonical URL: [https://sgoguide.com/blog/education-freedom-tax-credit-federal-strings-schools](https://sgoguide.com/blog/education-freedom-tax-credit-federal-strings-schools) Published: 2026-08-19 · Category: Regulatory Updates · 14 min read Every board of a Christian, classical, or independent school that looks at the federal scholarship tax credit reaches the same question before it reaches any other, and it is almost never the question about compliance mechanics. It is this: **if our families pay tuition with this money, does the federal government now get a say in how we run our school?** The answers circulating are unhelpfully polarized. One camp says the money is private, so there are no strings, full stop. The other says every dollar with a federal fingerprint eventually brings federal control, so stay out. Neither is an analysis. Here is the analysis. It is not legal advice, and the concluding section of this post is a list of things to take to your own counsel — but a board deserves to understand the structure before it hires anyone to opine on it. ## Start By Following the Money The instinct behind the question is that federal money brings federal rules. That instinct is sound. So the first thing to establish is whether any federal money touches your school at all, and the answer turns on the actual path a dollar takes. Under the Education Freedom Tax Credit (Section 25F), the path is: 1. **An individual taxpayer** makes a cash contribution to a scholarship granting organization — a private 501(c)(3). 2. **The taxpayer claims a nonrefundable federal tax credit** of up to $1,700 against their own federal income tax liability. The credit belongs to the individual, not to the SGO and not to any school. 3. **The SGO awards a scholarship** to an income-eligible student through an arm's-length process it controls. 4. **The family** applies that scholarship to qualified elementary and secondary education expenses — tuition among them, but also books, tutoring, technology, and special-needs services. 5. **Your school receives tuition from a family.** Notice what never happens. No federal agency appropriates funds. No money passes through the Treasury on its way to a school. No school signs an agreement with the federal government, applies to a federal program, or is party to any federal instrument. The school is the fifth party in a chain, and its relationship is with the family — the same relationship it has with every other tuition-paying family. That structure is the whole basis of the reassuring answer, and it is a real basis. It is not, however, the end of the inquiry. ## What the Enacted Statute Actually Conditions This is the part worth being precise about, because the standalone bill and the enacted law are not the same document, and a fair amount of the reassurance circulating in school-choice circles is quoting the wrong one. The Educational Choice for Children Act as introduced in the 119th Congress contained language addressed to religious liberty and to the autonomy of scholarship granting organizations and participating schools. What was enacted through the reconciliation law is Section 25F of the Internal Revenue Code, and its subsections are: allowance of credit, limitations, definitions, requirements for scholarship granting organizations, denial of double benefit, carryforward of unused credit, state list of scholarship granting organizations, and regulations and guidance. Two observations follow, and boards should hold both. **The reassuring one: every substantive requirement in the section runs to the SGO, not to schools.** The statutory obligations are the ones our readers already know — [awards to ten or more students who do not all attend the same school](/blog/compliant-scholarship-award-process), [at least 90% of income to scholarships](/blog/sgo-90-10-withdrawal-cap-not-expense-rule), [household income at or below 300% of area median](/blog/sgo-income-eligibility-300-percent-ami), [the qualified-expense limits drawn from the Coverdell rules](/blog/section-25f-qualified-expenses-guide), the priority for continuing students and their siblings, no earmarking, and the self-dealing prohibition. The statute does not impose accreditation requirements, curriculum requirements, hiring requirements, admissions requirements, testing requirements, or reporting requirements on the schools students attend. It does not regulate schools because it does not address schools; it addresses the organizations that grant scholarships. **The sobering one: the enacted section does not carry an express autonomy or no-federal-control clause.** The protective language some advocates cite lives in the standalone bill, not in the codified section. A board being told "the law explicitly protects our autonomy" should ask which law, and should be shown the subsection. The honest statement is narrower and still favorable: the enacted statute imposes nothing on schools — not because it promises not to, but because it never reaches them. Do not skip this distinction on the way to the comfortable conclusion. It is the difference between a protection and an absence, and they behave differently if Congress later legislates. ## The Precedent That Should Give You Pause The fear underneath this question usually has a specific case behind it, whether or not the person raising it can name it. In *Grove City College v. Bell* (1984), the Supreme Court held that a college which accepted no direct federal funds nevertheless became a recipient of federal financial assistance because its **students** received federal grants — which triggered Title IX obligations. The Court limited coverage to the program receiving the aid, and then Congress overrode that limitation in the Civil Rights Restoration Act of 1987, extending coverage institution-wide. That is the sequence every religious school administrator has heard about, and it is why "the money goes to families, not to us" does not by itself end the conversation. Indirect aid has created recipient status before. The distinction between that case and this program is real, and it rests on what the money *is*: - In *Grove City*, students received **federal grants** — appropriated funds disbursed by the government through a federal program. - Under the Education Freedom Tax Credit, a private individual makes a **charitable contribution** to a private organization and receives a credit against tax owed. No appropriated funds exist at any point. The Supreme Court has drawn precisely this line in the scholarship tax credit context. In *Arizona Christian School Tuition Organization v. Winn* (2011), the Court held that taxpayers lacked standing to challenge Arizona's scholarship tax credit, reasoning that contributions producing a credit are not government expenditures — like contributions that lead to charitable deductions, they are not funds owed to the State. And in *Zelman v. Simmons-Harris* (2002), the Court upheld a voucher program on the ground that aid reaching religious schools through the genuine private choice of individual families is not government aid to religion. The more recent line of cases — *Espinoza* (2020) and *Carson* (2022) — pushes further still, holding that states may not exclude religious schools from generally available benefit programs. **But be honest about what those cases are.** *Winn* is a standing decision, not a holding that credit-funded scholarships are private money for every federal statutory purpose. *Zelman* is an Establishment Clause case, not a Title IX case. No court has ruled on whether Education Freedom Tax Credit scholarship dollars make a receiving school a recipient of federal financial assistance, because the program does not begin until January 1, 2027. The defensible summary for a board minute: the structure of this program is materially further from *Grove City* than a voucher or a federal grant is, the money is private under the Court's own reasoning about tax credits, and the enacted statute reaches only SGOs — but this is an untested question, and anyone telling you it is settled is telling you something they cannot know. ## The Four Places Real Exposure Actually Sits If you are going to worry, worry accurately. In descending order of how likely each is to affect your school: **1. Documentation, not regulation — and it is certain.** Your school will be asked for things it may not currently produce: enrollment confirmation for scholarship recipients, itemization of what tuition and fees cover, and cooperation with [disbursement mechanics](/blog/scholarship-disbursement-compliance-guide) that operate on the SGO's calendar rather than yours. If the SGO disburses directly to the school, you will be reconciling against a third party's records. This is administrative work landing on a business office, not federal control — but it is the part every school actually experiences, and it is worth staffing before it arrives rather than after. **2. State-level conditions — the real regulatory risk.** This is where boards under-worry. The Education Freedom Tax Credit requires each participating state to publish a certified list of the SGOs located in it, and the states control that gate. The June 2026 preview indicated that states may not layer SGO-specific requirements on top of the federal ones beyond generally applicable charitable-organization rules — **previewed, not final**, and one of [the questions the September regulations bear on](/blog/education-freedom-tax-credit-regulations-open-questions). Even so, the state your SGO is listed in matters more to your autonomy than the federal statute does, and it will keep mattering because state law changes on a two-year cycle. Read your state's SGO provisions before you read anything else. **3. Future Congresses.** A credit is not a contract. A later Congress can amend the credit, and the absence of an express autonomy clause in the enacted text means there is no statutory promise to point at if it does. This is a genuine risk and it is also unmanageable — every program a school participates in carries it, including state programs your school may already accept. The mitigation is not abstention; it is not building a budget that cannot survive the program's removal. **4. The SGO's own obligations, if the SGO is yours.** Here is the point most often missed in this conversation. The entity that carries the federal compliance burden is the scholarship granting organization. If your school or association [forms its own SGO](/how-to-start-an-sgo), you have not avoided federal obligations — you have volunteered for all of them: the 90/10 discipline, income verification, the arm's-length award committee, the annual independent financial and programmatic audit, the unique donor number and receipting chain, and per-state segregated accounting if you operate in more than one state. If your school instead [joins an SGO someone else runs](/blog/how-to-choose-an-sgo-for-your-school), the federal surface stays with them and your school's obligation is confirming enrollment. That is the trade every board should see plainly: **the federal requirements attach to whoever holds the SGO.** "Does this regulate our school?" and "should we be the SGO?" are separate questions, and the second one is the one that determines your compliance exposure. ## What Does Not Change For completeness, because these come up in the same meeting: - **Your religious character.** The statute contains no curriculum, hiring, or doctrinal conditions on schools, and Coverdell-derived qualified expenses cover education at religious schools without carving out faith-integrated instruction. The genuinely unsettled edge is how faith-integrated programming maps to the qualified expense categories — an SGO-side analysis question we treat in [the faith-community compliance post](/blog/faith-communities-section-25f-compliance), not a school-autonomy question. - **Your admissions.** The SGO decides who receives a scholarship. Your school decides who it admits. Those are different decisions made by different entities, and the statute does not merge them. - **Your tuition-setting.** Nothing in the program conditions the credit on tuition levels or requires a school to discount, cap, or publish pricing. ## Take These Five Questions to Counsel A board that wants a written opinion rather than a blog post should ask for these specifically: 1. Does our receipt of tuition paid from an Education Freedom Tax Credit scholarship make our school a recipient of **federal financial assistance** under Title VI, Title IX, Section 504, or the Age Discrimination Act — and does our answer change if the SGO disburses directly to the school rather than to the family? 2. Does our **state's** SGO listing statute, or its charitable-organization rules, impose anything on participating schools — now, or by delegation to an agency? 3. If our school, association, or church **forms the SGO**, what obligations attach to that entity, and can they be structurally separated from the school? 4. How should our **enrollment agreements and financial aid policies** change to account for third-party scholarship funds with federal expense limitations? 5. What is our **exit posture** if the statute is amended — what would we have to unwind, and on what notice? Get the answers in writing, dated, before your first scholarship recipient enrolls. The value of that memo is not that it eliminates uncertainty. It is that it documents a considered, good-faith position taken in advance — which is the same standard that governs every other decision in this program. ## The Bottom Line for a Board Vote The enacted statute regulates scholarship granting organizations and does not reach the schools that scholarship recipients attend. The money is private under the Supreme Court's own reasoning about tax credits, and the program is structurally further from federal grant aid than any voucher program that has been litigated. There is no express autonomy clause in the codified section, no court has tested the question, and the state your SGO lists in will matter more to your school's autonomy than Washington will. If your board's real question is how to participate while keeping the compliance surface off your school, the answer is not to stay out of the program. It is to be deliberate about [whether the SGO should be yours](/blog/starting-an-sgo-who-will-run-it) — and for many schools, particularly single-campus schools, [the answer to that is no](/blog/two-ways-in-start-an-sgo-or-join-as-a-partner-school) for reasons that have nothing to do with federal strings. For Christian schools and churches, our [dedicated formation guide](/christian-schools) covers the structural decisions in order. For all faith traditions, see the [faith-based SGO overview](/faith-based-sgo). **A note on currency.** This reflects the enacted text of Section 25F and guidance available as of August 2026, including the June 9, 2026 preview. The program begins January 1, 2027 and no court has interpreted it — treat every conclusion here as a framework for a conversation with counsel rather than a substitute for one. --- ### The Consortium SGO: One Scholarship Organization Across Schools That Compete Canonical URL: [https://sgoguide.com/blog/consortium-sgo-independent-christian-schools](https://sgoguide.com/blog/consortium-sgo-independent-christian-schools) Published: 2026-08-16 · Category: Strategy · 13 min read The Education Freedom Tax Credit (Section 25F) rewards scale, and it does so structurally rather than as a matter of efficiency. An SGO must award scholarships to ten or more students who do not all attend the same school. Its award committee must sit at arm's length from any one school community. Its applicant pool has to be diverse enough that awards do not concentrate at a single campus by default. For a single school, [each of those is an architectural problem](/blog/faith-communities-section-25f-compliance). For a network, none of them are. That is why [a diocese clears the structural rules almost by existing](/blog/diocese-sgo-playbook). But a diocese has something an association of independent schools does not: a hierarchy. When a hard question arrives — who governs, how awards are distributed, who pays for the machine — a diocesan structure has an authority that can settle it. An association of independent Christian schools, a classical school network, a state association of private schools, or an ad hoc group of heads who trust each other has no such authority. Its members are **peers who recruit from the same families**. Everything difficult about a consortium SGO follows from that one fact. Here are the five decisions, in the order they arrive. ## Decision 1: Who Holds the Entity The reflex is to run the scholarship program inside the association itself. In nearly every case, that is wrong. The 90% rule requires an SGO to devote at least 90% of its income to scholarships. The previewed safe harbor that makes this workable measures the test against the program's segregated account rather than the organization's whole budget — but [that safe harbor is available only to organizations whose activities are largely scholarship-granting](/blog/section-25f-safe-harbor-90-percent-test). An association with membership dues, an annual conference, accreditation services, professional development, and a job board is not that. Under the general rule, the test would run against total receipts, and the association would fail it structurally. So: **a new 501(c)(3), not a private foundation, whose overwhelming activity is granting scholarships**, affiliated with the association the way a related foundation typically is. The association can seat the board. The association cannot be the SGO. The affiliate structure buys a second thing that matters every single year. The association can fund the SGO's operations — staff, software, launch costs — with ordinary charitable support that never enters the scholarship accounts and therefore [never competes for room inside the 10% administrative allowance](/blog/sgo-90-10-withdrawal-cap-not-expense-rule). Dues fund the machine; contributions fund students. Consortiums that skip this step spend year two trying to run an administration out of a 10% cap that was never sized for it. One caution on entity design: keep the SGO's activity genuinely singular. A scholarship affiliate that also runs the association's conference registration, or administers an unrelated grant program, walks itself back into the same question it was formed to avoid. ## Decision 2: The Board Cannot Be a Delegate Assembly This is the decision that most often breaks a consortium, and it breaks quietly, eighteen months in. The intuitive design is one board seat per member school. It feels fair, it is easy to sell at the organizing meeting, and it produces two predictable failures. A twenty-school consortium gets a twenty-person board, which is a body that cannot decide anything. And every member arrives understanding their job as representing their school's interests — which is precisely the posture the arm's-length requirement exists to prevent. The workable design inverts it: - **A small board with an independent majority.** Members with standing in the community — a CPA, an attorney, a retired administrator, a donor with no child enrolled at a member school — who owe a duty to the SGO rather than to a campus. - **A minority of seats for member-school leadership**, rotating on staggered terms rather than permanently allocated to the largest or founding schools. - **A heads' advisory council with no vote.** School heads have essential operational knowledge — enrollment calendars, financial aid cycles, what families actually need — and giving them a formal advisory channel is how you get that input without seating twenty fiduciaries with divided loyalties. - **A written conflict policy that names the obvious conflicts**, because in this structure they are structural rather than occasional. Set the term lengths and the appointment mechanism in the bylaws at formation. A consortium that begins with one-seat-per-school and tries to restructure after the money arrives is negotiating governance with people who now have something to lose. ## Decision 3: Allocation — The Conversation to Have Before the Money Arrives Here is the question every member school will ask, usually in the second meeting, sometimes in the first: **our families are going to give — do our students get that money back?** The answer is no, and it has to be said in those words, early, in writing. A donor cannot earmark a contribution to a particular school. An SGO cannot allocate awards back to schools in proportion to what each school's community gave — that is earmarking by structure rather than by request, and it is prohibited just as firmly. It is not a drafting problem to be engineered around; it is the design of the program. What replaces proportional return is a published process, and the strength of a consortium is that it can make the process genuinely credible: - **Published eligibility and award criteria**, adopted by the board before any application opens. - **The statutory priority order**, applied systematically rather than as a tiebreaker: continuing recipients first, then their siblings. - **A blind first-pass review** in which applications are scored without the applicant's name or school, with identities revealed only for conflict screening. This is the single most useful structural safeguard available to a consortium, because it converts "trust us" into a procedure. It is also [strong audit evidence](/blog/sgo-selection-committee-disqualified-persons). - **Distribution reported openly** to member schools every cycle — awards by school, by grade band, by award size — so that nobody has to guess. Now hold the honest conversation about what that reporting will show. In any given year, a school whose community raised 40% of the pool may receive 22% of the awards, because awards follow income-eligible applicants and the priority rules, not fundraising. If that outcome will end the consortium, the consortium should not form. Say it at the organizing meeting, put it in the memorandum of understanding, and have every head initial the paragraph. Two things reliably defuse it in practice. First, the arithmetic is not zero-sum in the way it feels: [the credit is uncapped and participation-scaled](/blog/how-much-scholarship-money-federal-credit-your-state), so a consortium that raises more does not divide a fixed pool differently, it enlarges it for everyone. Second, over multiple cycles the distribution tends to track each school's share of income-eligible enrollment — which is the fair measure, and a measure member schools can see in advance. ## Decision 4: One Committee, Real Independence The award committee is where a consortium's peer structure creates its sharpest compliance risk, because the people who best understand the applicant families are the people with the most direct interest in where awards land. The rules that make this work: - **No school head or employee votes on their own school's applicants.** In practice, the cleanest version is that school personnel do not sit on the deciding committee at all — they support intake and verification, which is ministerial work, and the deciding is done by people without a campus. - **Screening and deciding are separate functions.** Verifying that a household is [at or below 300% of area median income](/blog/sgo-income-eligibility-300-percent-ami) is administrative. Ranking a pool is not. Keep the staff on the first and the committee on the second. - **Disqualified persons run at least organization-wide.** A committee member's immediate family is expected to be disqualified from receiving scholarships from the SGO — which in a consortium means from *any* member school, not just the member's own. That is a heavier ask than it sounds, and [whether it is entity-wide or narrower is one of the open questions](/blog/education-freedom-tax-credit-regulations-open-questions). Recruit on the assumption that it is entity-wide, and tell candidates before they accept. - **Minutes that record the process**, not just the outcome: criteria applied, recusals taken, how ties were resolved. ## Decision 5: Who Pays for the Machine The administrative allowance is a withdrawal cap — up to 10% of what comes into each state account may be released to cover administration. It is a ceiling, not a budget, and for a consortium in its first year it will not be enough, because [costs are front-loaded and contributions arrive late](/blog/sgo-operating-budget-year-one). The three sources, in order of preference: - **Association support or member assessments** paid to the SGO as ordinary operating gifts, outside the scholarship accounts. This is the cleanest structure and the reason the affiliate model exists. - **Dedicated operating gifts from donors** who understand they are funding the organization rather than a scholarship, and who receive an ordinary charitable receipt rather than a credit-eligible one. Keep these strictly separate from credit-eligible contributions at the point of solicitation, not just in the ledger. - **The 10% allowance**, treated as the last resort rather than the operating plan. A note on assessments: size them by something stable and observable — enrollment, or a flat per-school fee — rather than by fundraising performance. An assessment that scales with what a school's donors gave recreates the proportional-return expectation you spent Decision 3 dismantling. ## The Memorandum of Understanding Member schools should sign something, and it should be short enough that heads actually read it. What belongs in it: - **What the SGO does and does not promise.** Explicitly: no guaranteed awards, no proportional return, no school-designated gifts. - **What each school commits to** — promoting the program to its families, confirming enrollment for recipients, and supplying the documentation disbursement requires. - **What the SGO commits to** — published criteria, per-cycle distribution reporting, and a defined calendar that fits the tuition year. - **The cost-sharing formula**, and how it changes. - **Governance** — how seats are filled, terms, and how the MOU is amended. - **Exit.** What happens when a school leaves: its families remain eligible on the same terms as any other applicant, no funds are refunded or transferred, and departure does not alter awards already made. Write this while everyone is friendly. What cannot go in it: any provision that guarantees a school awards, any provision that ties awards to fundraising, and any promise to prefer a member school's applicants. A consortium that puts those in writing has documented its own violation. ## Why a Consortium Beats Everyone Forming Their Own Member schools will ask why they should not each stand up an SGO. The answer is arithmetic. The annual independent audit — financial and programmatic — is entity-level. Ten schools with ten SGOs pay for ten audits, ten boards, ten sets of books, ten receipting systems, and ten conflict processes. One consortium pays for one of each. Those are exactly the fixed costs the 10% allowance struggles to cover, and they do not shrink for a smaller organization — [a 10% allowance on $2 million funds a real team; on $200,000 it does not fund one full-time person](/blog/starting-an-sgo-who-will-run-it). And most single schools cannot clear the structural rules alone anyway. The ten-students-more-than-one-school requirement, an applicant pool that does not concentrate at one campus, a committee genuinely at arm's length from the school community — a consortium satisfies all three by construction. ## The Sequence for This Fall Formation runs nine to fifteen months when it goes well, and the first covered year begins January 1, 2027. Working backward: - **Convene the members and settle Decisions 1 through 3 first.** Entity, board, and the allocation conversation. Do not proceed to filings until every head has heard the no-proportional-return paragraph out loud. - **Incorporate the affiliate**, adopt bylaws, the conflict-of-interest policy, and the written no-earmarking policy. - **File for IRS recognition.** This is the long pole and it does not compress. - **Register for charitable solicitation** in each state you will fundraise in. - **Confirm your state's participation status** on the [tracker](/resources/state-tracker), and if your state has not elected, read [the holdout-state posture](/blog/will-michigan-opt-in-education-freedom-tax-credit) — the formation work is identical and the timeline is the argument for starting anyway. - **Build the operating calendar** against the member schools' tuition years, not the SGO's convenience. [Disbursement timing](/blog/scholarship-disbursement-compliance-guide) is what families actually experience. If your group is still deciding whether a shared SGO is the right structure at all, [start with the form-or-join question](/start-or-join-an-sgo) — for some associations the honest answer is that member schools should join an SGO that already operates, and revisit forming one when the volume justifies it. [ClearPath Launch](/products/launch) covers the formation sequence; [ClearPath Managed](/products/managed) covers the case where the consortium should own the SGO but not staff it. **A note on currency.** This reflects statutory requirements and guidance available as of August 2026, including the June 9, 2026 preview. Rules described as previewed are not final — verify with counsel before adopting governing documents. --- ### How Much Scholarship Money Could the Federal Credit Unlock in Your State? Canonical URL: [https://sgoguide.com/blog/how-much-scholarship-money-federal-credit-your-state](https://sgoguide.com/blog/how-much-scholarship-money-federal-credit-your-state) Published: 2026-08-14 · Category: Strategy · 11 min read Every school-choice program before this one came with a number attached. A voucher program is sized by its appropriation. An ESA program is sized by its enrollment formula. State tax-credit scholarship programs are sized by their caps — Georgia's $120 million, Pennsylvania's roughly $590 million, each exhausted or rationed year after year. The federal scholarship tax credit — the $1,700-per-person credit that goes live January 1, 2027 — has no number attached. No appropriation, no statewide cap, no national ceiling. Its size in each participating state will be set by exactly one variable: how many taxpayers claim it. That design choice has a useful consequence for anyone planning around the program: the market math is simple enough to run on a napkin, and honest enough to put in front of a board, a bishop, or a legislature. This post runs it. ## The Formula Three numbers, multiplied: - **Taxpayers.** The IRS publishes the count of individual income tax returns filed from each state (Statistics of Income state tables). Nationally it is more than 160 million returns a year. - **Participation rate.** The share of those filers who contribute to an SGO and claim the credit. This is the number nobody knows yet — the benchmarks below bound it. - **Average credit.** Up to $1,700 per taxpayer, $3,400 for a married couple filing jointly. Assuming participants give at or near the cap is reasonable: a dollar-for-dollar credit makes the cap the rational gift. The useful framing is per percentage point: every 1% of a state's filers participating at the cap is that state's filer count times $17. And a per-donor version for organizers: every 1,000 donors at the individual cap is $1.7 million in scholarships, every year. ## Worked Examples Using IRS state filing counts, rounded — run your own state against the same tables in an afternoon: - **Texas** — roughly 13 million returns. Each 1% of filers at the cap is about $220 million per year in scholarship funding. At an $8,000 average award — in line with what large state programs pay — that is roughly 27,000 students funded per percentage point of participation. - **Ohio** — roughly 5.8 million returns. Each 1% is close to $100 million a year, on the order of 12,000 students. - **Iowa** — roughly 1.5 million returns. Each 1% is about $25 million a year — in a small state, a single percentage point of participation builds one of the largest scholarship funds in the state's history. For calibration, the entire national private-school population is about 4.7 million K-12 students (federal NCES data), and the eligibility line — household income at or below [300% of area median income](/blog/sgo-income-eligibility-300-percent-ami) — reaches well into the middle class. Even low-single-digit participation rates produce scholarship funding at a scale that changes what tuition-dependent schools can offer. And because eligible expenses follow [the Coverdell list](/blog/section-25f-qualified-expenses-guide) — tutoring, books, technology, special-needs services, not just private tuition — the demand side includes public-school and homeschooling families too. ## What Participation Rate Is Honest? Nobody should model double-digit participation, and nobody serious will. The useful anchors: - **State programs prove sustained demand at partial credit values.** Arizona's individual scholarship credits have drawn steady, broad participation for over twenty-five years at caps near $3,100 per couple. Georgia's 100% credit does not struggle to find donors — it struggles to fit them under the cap, which has routinely sold out almost immediately. Florida's program moves scholarship funding on the order of a billion dollars a year. Demand for this shape of giving, where it is understood, is proven. - **The federal credit is a stronger offer than any of them.** One hundred percent, no cap race, no itemizing required, available in every participating state — [and to donors in every state, participating or not](/blog/sgo-donor-state-asymmetry). - **Awareness, not appetite, is the year-one constraint.** No state program launched at maturity. Most taxpayers have never heard of this credit, and a credit nobody has heard of has a participation rate of zero. A defensible modeling band: a fraction of a percent of filers in 2027, growing toward the low single digits over several years in states where organizers actually work the ground. The spread between those numbers is not driven by policy — the policy is identical everywhere — but by organizing: [the program's own fundraising economics](/blog/sgo-90-10-withdrawal-cap-not-expense-rule) reward organizations with existing trusted networks, which means school systems, dioceses, and associations largely determine their own state's participation rate. ## What Holdout States Are Leaving on the Table Twenty states are not on the 2027 participating list, and the same arithmetic runs in reverse for them — with an uncomfortable twist. Non-participation does not stop a state's taxpayers from claiming the credit. It only stops the state's students from receiving the scholarships. A filer in a holdout state can give to an SGO listed in a participating state, designate that state, and claim the full federal credit; the scholarship funds a student who lives there. - **California** — roughly 18 million returns, the largest filer base in the country. Every 1% of Californians who participate at the cap sends over $300 million a year to other states' students. - **Michigan** — roughly 4.8 million returns; each 1% is about $80 million a year, currently exportable only. [Michigan's decision point follows its November 2026 election](/states/michigan). - **Pennsylvania** — roughly 6.4 million returns, each 1% over $100 million — in a state whose own capped, partial-credit program turns away scholarship demand every year. Pennsylvania donors will soon face a plain choice: a 75–90% state credit that helps Pennsylvania students, or a 100% federal credit that helps students somewhere else. States may elect annually, so every one of these numbers is an argument that renews each year — and organized donor pledges conditioned on a state opting in are the concrete form of that argument. ## The Method, Stated Plainly So the numbers can be checked and reused: filer counts are IRS Statistics of Income state data, rounded; private-school enrollment is NCES; the $8,000 average award is a benchmark from mature state programs, and the per-1% figures are pure arithmetic — filers times 1% times $1,700. The participation-rate band is judgment, bounded by state-program precedent, and clearly labeled as such. Anyone who prefers different assumptions can substitute them; the formula does not change. Two closing observations, one for each audience this math serves. For policy analysts: this is the first school-choice mechanism whose scale is set by voluntary taxpayer behavior rather than by a legislature's number, which makes participation-rate data — not appropriations fights — the thing to watch from 2027 onward. For organizers: in an uncapped program, the market-size question and the strategy question collapse into one. The credit supply is infinite; organized donor relationships are the scarce resource, and [they are being claimed now](/how-to-start-an-sgo), before the first tax season teaches every taxpayer what the credit is. The napkin math above is not a forecast. It is a description of what is available to whoever builds first. Current state-by-state status, sourced against the IRS participating-state list, is on [our state tracker](/resources/state-tracker). --- ### What It Actually Costs to Run an SGO: Hours, Dollars, and Who Does the Work Canonical URL: [https://sgoguide.com/blog/sgo-operating-budget-year-one](https://sgoguide.com/blog/sgo-operating-budget-year-one) Published: 2026-08-12 · Category: Strategy · 15 min read Every organization that gets serious about the federal scholarship tax credit budgets for formation. Incorporation, legal review, the IRS filing, maybe a consultant. It is a discrete project with a discrete number, and boards are comfortable approving discrete numbers. Almost nobody budgets for the part that starts the day after. [Operating an SGO is a job with no end date](/blog/starting-an-sgo-who-will-run-it), and it is funded by a mechanism most organizations misread until their first full year is underway. This post is a planning model, not a price list. The figures below are placeholders chosen to make the arithmetic legible — they are not measured industry data, because there is no measured industry data: no SGO has operated a full year under the Education Freedom Tax Credit (Section 25F), and none will until 2027 closes. Substitute your own numbers. The structure is what transfers. ## Part 1: The Ceiling Is Not a Budget Start with what can legally fund administration. At least 90% of an SGO's income must go to qualified scholarships. The remaining 10% is available for everything else — and it is a **withdrawal cap, not an expense rule**. It governs how much may leave each state's segregated account, per account, with [no cross-subsidy from a large state to a thin one](/blog/sgo-90-10-withdrawal-cap-not-expense-rule). What that ceiling produces, at the $1,700 individual cap ($3,400 for a married couple filing jointly, as two individuals): - **$200,000 raised** — roughly 118 donors at the cap — **$20,000** releasable for administration - **$500,000 raised** — roughly 294 donors — **$50,000** releasable - **$1,000,000 raised** — roughly 588 donors — **$100,000** releasable - **$2,000,000 raised** — roughly 1,176 donors — **$200,000** releasable - **$5,000,000 raised** — roughly 2,941 donors — **$500,000** releasable Read that table twice, because it contains the central fact about this program's economics: **the credit is capped per donor, so revenue scales with the number of people you enroll, not the size of any gift.** There is no major-gift shortcut to an administrative budget. A $50,000 donor does not exist here; five hundred $1,700 donors do. And now the consequence. A $200,000 SGO has $20,000 a year to run every function described in Part 2. That does not fund a part-time administrator in most markets, let alone software, an audit, and insurance. A $2,000,000 SGO has $200,000 — a small real team. The threshold at which an SGO becomes self-supporting is a real number in your market, and the honest exercise is to find it before you form rather than after. ## Part 2: The Work, By Function Here is the operating job broken into the functions that actually consume time. The hour figures are **planning placeholders** — replace each one with your own estimate and the model still works. **Per contribution:** - Gift processing, receipting, and the written acknowledgment carrying the unique donor number the IRS matches against the donor's return. Mostly automated at volume; the cost is in exceptions — mailed checks, mismatched names, corrected addresses, a donor who exceeded the cap across two gifts, and the [designation field on gifts arriving without one](/blog/education-freedom-tax-credit-regulations-open-questions). - Planning placeholder: near zero per clean gift, 10–20 minutes per exception, with exceptions running some percentage of total gifts that your own rails will determine. **Per applicant:** - Intake and completeness review. - [Income verification against 300% of area median income](/blog/sgo-income-eligibility-300-percent-ami) — collecting paystubs, returns, or transcripts, reading them, handling the household that does not fit the form, and re-requesting what is missing. This is the single largest recurring labor cost in an SGO and the one most consistently underestimated, because the median case is fast and the tail is not. - Planning placeholder: 20–45 minutes per applicant in the median case, several hours in the tail, with a meaningful share of applicants requiring at least one follow-up. **Per award cycle:** - Docket preparation, blind-review scoring, conflict screening against the donor file, the committee meeting itself, and minutes that record criteria applied and recusals taken. [The screening is ministerial; the deciding is not](/blog/sgo-selection-committee-disqualified-persons), and the two must stay separated. - Award notification, acceptance certification, and the duplicate-award check. **Per award, ongoing:** - [Disbursement and reconciliation](/blog/scholarship-disbursement-compliance-guide) — direct-to-school ACH, restricted card, or reimbursement against receipts. Each channel trades donor-facing simplicity for back-office work, and reimbursement is the most labor-intensive by a wide margin. - Enrollment confirmation with the school, per term. - Expense documentation where awards cover [more than tuition](/blog/section-25f-qualified-expenses-guide). **Monthly and annual:** - Per-account 90/10 monitoring — monthly, per state, not annually in aggregate. - Bookkeeping with segregated accounts, and a second set of books if you also run a state program. - Annual state reporting for each covered state. - The annual independent audit — financial *and* programmatic. The programmatic half examines whether your award process, verification, and disbursement actually followed your written policies, which means the documentation trail is built all year or not at all. - Board and governance: meetings, conflict disclosures, policy review. - Donor communication and renewal — which in a participation-scaled program is a continuous acquisition function, not a year-end appeal. Total it with your own assumptions. The pattern most organizations discover is that the work is **continuous rather than seasonal**: applications and awards cluster, but receipting, verification, disbursement, reconciliation, and monitoring run every week of the year. ## Part 3: Year One Is Structurally Broken — Plan for It Now add the timing problem, which is the part that surprises boards. Costs are front-loaded. Revenue is not. - **Formation costs land before any contribution exists**: incorporation, counsel, the IRS filing, bylaws and policy drafting, charitable registration, insurance binding, systems selection and setup. - **Contributions arrive late in the calendar year**, because a tax credit is claimed on a calendar-year return and donor behavior in every comparable program concentrates in the fourth quarter. - **The administrative allowance is 10% of what came in**, so a partial first year produces a small numerator against a cost base that was fully incurred. An SGO that plans to fund year one from the 10% allowance will find the allowance arriving in December against costs incurred in March. Whether any smoothing relief exists for startup costs is [an open question the September proposed regulations may address](/blog/education-freedom-tax-credit-regulations-open-questions). Notice 2025-70 raised it and did not resolve it. **Budget as though no relief comes.** If relief arrives, you have a better year than planned; if you budgeted on it and it does not, you have a compliance problem layered on a cash problem. ## Part 4: The Cost Categories, and Which Pool Pays Every line below has to be assigned to a funding source before you incur it. The categories: **One-time / formation** - Incorporation and registered agent - Counsel: bylaws, conflict-of-interest policy, no-earmarking policy, award policy - IRS recognition filing - Charitable solicitation registration, per state - Systems selection, configuration, and data migration - Board recruitment and orientation **Recurring / operating** - Staff or contracted administration - Software: donor management, application intake, verification workflow, disbursement, per-account accounting - Payment processing — and note that [interchange competes inside the same 10% allowance](/blog/sgo-credit-card-fees-10-percent) under the general rule, which is why ACH-first design is an operating decision and not a preference - The annual independent audit, financial and programmatic - Directors and officers insurance - Bookkeeping and tax preparation, including the Form 990 - State annual reports and registration renewals - Records retention and secure document storage — income verification documents are sensitive and long-lived - Donor acquisition and communications **The two pools that can pay for them** - **The scholarship accounts**, from which up to 10% may be withdrawn per state account. Constrained, arriving late, and the only pool most organizations think about. - **Ordinary operating support** — charitable gifts made under the normal deduction rules, association dues, sponsoring-organization funding, or a founding grant. Not credit-eligible for the donor, not constrained by the 10% cap, and available before the first scholarship dollar exists. The organizations that will operate comfortably are the ones that fund the machine primarily from pool two and treat pool one as a partial offset. This is the structural reason [a diocese should fund its scholarship affiliate from the chancery](/blog/diocese-sgo-playbook) and [an association should fund its affiliate from dues](/blog/consortium-sgo-independent-christian-schools). Keep the two solicitations genuinely separate — different asks, different receipts, different ledger treatment. A donor who believes an operating gift earned a $1,700 credit is a receipting problem you do not want to discover in April. ## Part 5: The Three Paths, Priced There are exactly three ways to get the work done, and the right answer follows from the table in Part 1. **Staff it yourself.** You hold the SGO and employ the people. Below roughly $1,000,000 in annual contributions, the administrative allowance generally cannot fund a competent full-time operator plus systems plus an audit — which means the gap comes from pool two indefinitely, and "indefinitely" is the word a board should focus on. Above $2,000,000 the math becomes ordinary. **Own it and outsource the operation.** The SGO is yours — your board, your criteria, your name on the donor receipt — and the desk work is contracted. This converts an unpredictable staffing problem into a line item that scales with volume, which is what most sub-$1,000,000 organizations actually need. The hard boundary: [a service provider never votes on an award](/blog/starting-an-sgo-who-will-run-it). Deciding is the SGO's, always. [ClearPath Managed](/products/managed) is built for this path. **Join an SGO that already runs.** No entity, no board, no audit, no compliance surface — your school confirms enrollment and your families apply. The trade is that someone else's committee decides every award and your preference can never bind. For a single-campus school this is frequently the correct answer for reasons that have nothing to do with cost: [the ten-students-more-than-one-school rule is an architectural problem for one school](/blog/faith-communities-section-25f-compliance), not a budgeting one. [ClearPath Partner Schools](/products/partner-schools) covers this path, and [the twelve diligence questions](/blog/how-to-choose-an-sgo-for-your-school) cover how to choose whose SGO to join. ## Part 6: Run Your Own Numbers Eight questions produce a defensible budget. Answer them in order, in writing, before the board votes. 1. **How many donors can you actually enroll in year one?** Not dollars — people. Multiply by $1,700 (or $3,400 per couple) for your revenue line. Be conservative; the second year is when participation programs compound. 2. **What is 10% of that number?** That is your entire legally available administrative revenue, and it arrives late. 3. **How many applicants will that revenue serve**, at your expected average award — and how many applications will you receive per award you can fund? 4. **What are your total labor hours** from Part 2 at your own assumptions, and what does an hour cost you — staffed, contracted, or volunteered? 5. **What are your fixed costs regardless of size?** Audit, insurance, software, registrations, bookkeeping. These do not shrink with a smaller program, which is why small SGOs are structurally harder than large ones. 6. **What is your year-one gap**, given that costs land in Q1–Q3 and contributions land in Q4? 7. **Who funds that gap from pool two**, and have they committed in writing? 8. **At what revenue level does this become self-supporting**, and what is your realistic path to that level — over how many years, and who is accountable for it? If question 7 has no answer, the organization is not ready to form. If question 8 has no plausible path, the honest conclusion is that the SGO should not be yours — which is a legitimate and common outcome, not a failure. [The form-or-join framework](/blog/form-your-own-sgo-or-partner-with-existing) exists for exactly that finding. ## The Sentence Boards Should Take Away The 10% allowance is a ceiling on a number that has not arrived yet, calculated per state account, funded by donors who each give at most $1,700, in a first year where the costs come first. An SGO that plans on that alone is planning on a bridge that gets built after the crossing. Fund the machine from outside the accounts, size the operation to the donor count rather than to ambition, and decide early which of the three paths you are actually on. The [compliance calendar](/blog/sgo-compliance-calendar) covers the recurring obligations this budget has to carry, and [ClearPath Advisory](/products/advisory) covers the decisions that come before the budget. **A note on currency.** This reflects statutory requirements and guidance available as of August 2026, including the June 9, 2026 preview. All figures are illustrative planning placeholders, not measured data or price quotes — the program does not begin until January 1, 2027. Verify with counsel and your own accountants before adopting a budget. --- ### The Diocese Playbook: Standing Up a Scholarship Organization Across Dozens of Schools Canonical URL: [https://sgoguide.com/blog/diocese-sgo-playbook](https://sgoguide.com/blog/diocese-sgo-playbook) Published: 2026-08-09 · Category: Strategy · 13 min read Most coverage of the new federal scholarship tax credit — the $1,700 credit that goes live January 1, 2027 — is written for organizations that have to strain to meet its structural rules. Scholarships to ten or more students at more than one school. No earmarking a gift to a particular school. An award committee at arm's length from any single school community. For a parish with one school, [each of those is a genuine architectural problem](/blog/faith-communities-section-25f-compliance). For a diocese, none of them are. A superintendent's office overseeing thirty schools satisfies the multi-school rule by existing. A diocesan donor base is already accustomed to giving that serves the whole local church. And a chancery already runs exactly the kind of centralized administration — development, finance, school oversight — that a scholarship granting organization (SGO) needs. Which is why dioceses and statewide Catholic conferences are likely to become some of the largest SGO operators in the country. But scale does not make the structural decisions automatic — it raises their stakes. Here are the six that matter, in the order you will face them. ## Do Not Make the Diocese Itself the SGO The reflex will be to run the scholarship program inside an existing structure — the diocese, the Catholic foundation, the education office. Resist it. The federal 90% rule requires an SGO to spend at least 90% of its income on scholarships, and the safe harbor that makes this workable — measuring the test against the scholarship program's segregated account rather than the whole organization's budget — is available only to organizations whose activities are largely scholarship-granting. A diocese is the opposite of that: parish assessments, ministries, cemeteries, Catholic Charities, clergy support. [Under the general rule, the 90% test runs against total receipts](/blog/section-25f-safe-harbor-90-percent-test), which would make SGO status structurally impossible for a diocese as such. The answer is a dedicated scholarship entity: a new 501(c)(3) — not a private foundation — whose overwhelming activity is granting scholarships, affiliated with the diocese the way a Catholic foundation or a housing corporation typically is. The bishop can have a role in governance; the entity's activities are what must stay clean. Every diocese already knows how to run this pattern. The affiliate structure has a second advantage that will matter every year: the diocese can fund the SGO's operations — staff, systems, launch costs — with ordinary support that never touches the scholarship accounts and therefore [never strains the 10% administrative allowance](/blog/sgo-90-10-withdrawal-cap-not-expense-rule). The scholarship accounts fund students; the chancery, if it chooses, funds the machine. ## One Diocese, or the Whole State? In a state with several dioceses, someone will ask — usually at the Catholic conference table — whether there should be one statewide SGO or one per diocese. The honest answer: the compliance math favors consolidation, and the fundraising reality favors diocesan identity. The design question is how to get both. What consolidation buys: the annual independent audit is entity-level — one audit for a statewide SGO versus one per diocese. Same for the board, the conflict-of-interest process, the receipting system, and the donor-number infrastructure. These fixed costs are exactly what the 10% allowance struggles to cover, and they do not shrink for smaller entities. What diocesan identity buys: donors. A parishioner in one diocese gives because of their diocese's schools, their bishop's ask, their community's families. A statewide brand is nobody's community. The workable middle: one entity, diocesan faces. A single statewide SGO — governed jointly, often naturally convened by the state Catholic conference — that runs diocesan-branded campaigns and reports diocesan-level results, while operating one audit, one receipt system, and one award process behind them. One caution before promising more than that: gifts cannot be earmarked to a diocese's schools any more than to a single school, so diocesan campaigns are appeals, not designations. And note that a committee member's family is expected to be disqualified from receiving scholarships [across the entire organization](/blog/sgo-selection-committee-disqualified-persons) — a wider footprint in a statewide entity, and worth naming to every committee candidate before they accept. A diocese that spans state lines, or a conference weighing service to students in a neighboring participating state, should read [how multistate SGOs actually work](/blog/multistate-sgo-one-entity-state-accounts) — one entity can be listed in several states, but every dollar is locked to the state the donor designates. ## The Parish Problem: Money Cannot Follow the Offertory Here is the cultural collision to get ahead of. Catholic school giving is parish giving: the second collection for the school, the parish festival, the pastor's appeal for the families the parish knows. The federal program prohibits every version of that instinct. A donor cannot direct a gift to their parish school. The SGO cannot allocate scholarships back to parishes in proportion to what each parish's people gave — that is earmarking by structure rather than by request, and it is equally prohibited. And mechanically, gifts cannot pass through the collection basket at all: the credit requires an identified individual donor, a compliant receipt, and a unique donor number the IRS matches against that donor's tax return. The gift must go directly from the parishioner to the SGO. What a diocese can honestly promise is still strong — and it is a promise no single parish could make: your gift funds Catholic school families across this diocese, at real scale, with a 100% federal credit. Diocesan scale converts the earmarking rule from a betrayal of donor intent into a mission statement. The parishes' role shifts from collecting the money to carrying the message — which, as the next section shows, is precisely the role the program's economics reward. Say all of this before launch, from the pulpit and in print, rather than explaining it to an upset donor in February. [Donors who understand the rule up front accept it](/blog/compliant-scholarship-award-process); donors who discover it after giving feel misled. ## The Fundraising Math Was Built for a Diocese The federal credit caps at $1,700 per person — $3,400 for a married couple. This is not a major-gifts program; it is a participation program, and the arithmetic is the kind a chancery should find familiar: one thousand households at the couple cap is $3.4 million in scholarships, every year, at a net cost to each household of roughly nothing — the credit returns the full gift at tax time. The constraint is acquisition cost. The 90/10 rule means [fundraising that does not return ten times its cost cannot be paid for from scholarship money](/blog/sgo-90-10-withdrawal-cap-not-expense-rule) — which rules out buying donors with a media budget and rewards exactly the channels a diocese already owns free: the parish bulletin, the pastor's word, Catholic Schools Week, the school's own families and alumni, the Knights council. No organization in American life has cheaper trusted distribution to people who care about Catholic education than a diocese. Three notes for the development office. The credit is individuals-only and cash-only — corporate gifts, appreciated stock, and donor-advised funds do not earn it, so those channels stay pointed at the existing annual appeal; the two programs complement rather than compete. Take gifts by bank transfer first, [not card, or processing fees will quietly eat a quarter of the administrative allowance](/blog/sgo-credit-card-fees-10-percent). And flag the substantial-contributor trap: in the SGO's first year, a single generous seed benefactor can cross the disqualification threshold and make their own family ineligible for scholarships — model it before the first big check, and consider whether that donor's support belongs on the operating side instead. ## What Happens to Your Existing Tuition-Assistance Fund? Nearly every diocese already runs need-based aid. Keep it — the SGO is an addition, not a replacement, and the two do different jobs. The SGO's awards are arm's-length: income-verified against a federal threshold — household income at or below 300% of area median income, a generous line that reaches well into the middle class — decided by a committee against published criteria, never tied to a particular school's enrollment office. Diocesan aid is everything the SGO cannot be: school-specific, discretionary, responsive to a principal's knowledge of a family's situation, available to families above the federal income line. The clean sequencing: families apply to the SGO first; diocesan and school aid then fills gaps and covers those the federal program cannot reach. Keep the money and the decisions separate — the SGO's committee cannot simply adopt a school's aid determinations, and scholarship funds never backfill a school's own aid budget. Done right, the federal program frees existing diocesan aid dollars to go further, which is the quiet, second-order win in all of this. ## The Calendar Is Unforgiving The credit goes live January 1, 2027. A new entity needs [four to six months for formation, IRS recognition, and state listing](/how-to-start-an-sgo) — which makes this fall the deciding season. A diocese that forms its entity now, files while the IRS processes, and reaches its state's certified list by December collects qualified contributions from day one. Treasury's proposed regulations land by the end of September and will settle several open questions — committee scope among them — so build the governance flexibly and [document the reasoning behind every interim position](/blog/treasury-june-2026-section-25f-preview). The first diocese in a state to launch does not just start earlier. It signs up the donors, sets the narrative for what Catholic-school scholarship giving looks like under the federal credit, and becomes the infrastructure everyone else joins. In a program with no statewide cap on credits, the ceiling on what a diocese builds is set by how early and how well it organizes — and by nothing else. For how this compares across organization types, see [our use-case guide](/use-cases), and for the decision between building and joining, [the form-or-partner framework](/blog/form-your-own-sgo-or-partner-with-existing). --- ### Already Running a State Tax-Credit Scholarship Program? What the Federal Credit Changes for You Canonical URL: [https://sgoguide.com/blog/state-scholarship-programs-meet-federal-credit](https://sgoguide.com/blog/state-scholarship-programs-meet-federal-credit) Published: 2026-08-04 · Category: Strategy · 12 min read If your organization already runs a state tax-credit scholarship program — a Georgia SSO, an Indiana SGO, an Iowa or Arizona STO, a Pennsylvania scholarship organization, one of Florida's scholarship funding organizations — the new federal scholarship tax credit was, in a very real sense, modeled on you. Congress took the structure states have been running for two decades, made the credit 100 cents on the dollar, and took it national. That makes organizations like yours the best-positioned entrants in the entire program: you have the donor file, the school relationships, the income-verification muscle, and a state agency that already knows your name. It also creates a trap. The federal credit — created by the tax code's new Section 25F, and often called the education freedom tax credit in press coverage — is not an expansion pack for your state program. It is a parallel program with its own listing process, its own donor economics, and compliance rules that differ from yours in ways that will bite the operators who assume they already know this game. Here is what carries over, what does not, and how to run both programs side by side without stepping on either. ## First, the Headline Differences Five structural differences between the federal credit and the typical state program drive everything else in this post: - **The federal credit is 100%, dollar for dollar.** Most state credits are partial — Indiana's is 50%, Iowa's is 75%, Pennsylvania's EITC runs 75% to 90%. A donor who gives $1,700 through the federal program takes $1,700 off their federal tax bill. - **There is no statewide cap.** If your program lives with a credit cap that sells out — Georgia's $120 million cap has routinely been exhausted almost immediately; Pennsylvania's roughly $590 million cap turns giving into a first-come scramble — the federal program removes that ceiling entirely. No race on January 1, no waitlist, no proration. The constraint shifts from credit supply to donor demand. - **Individuals only.** The federal credit is not available to corporations or businesses. If your state program is corporate-driven — Florida's and Pennsylvania's largely are — your corporate donor file does not transfer. Your individual file does. - **Small gifts, by design.** The credit caps at $1,700 per person per year ($3,400 for a married couple). This is a broad-participation program, not a major-gifts program. - **Cash only.** No appreciated stock, and donor-advised fund grants do not qualify, because the credit belongs to the individual taxpayer. The stock-gift playbook many state programs run does not work here. ## Your State Approval Does Not Carry Over This is the first operational surprise. Being approved under your state's program does not make you a federally listed SGO — and there is no grandfathering. Qualifying for the federal credit requires two separate things: your state must elect to participate in the federal program for the year, and your organization must appear on that state's certified list. Thirty states are participating for 2027, and the overlap with legacy-program states is substantial but not complete. Georgia, Indiana, Iowa, Florida, Ohio, Oklahoma, Kansas, Missouri, Montana, Nevada, South Carolina, South Dakota, Virginia, and Alabama — all states with existing scholarship credit or choice programs — are in. But Arizona, Pennsylvania, Wisconsin, and Illinois — home to some of the country's largest and oldest programs — are not, as of the 2027 list. [Our state tracker](/resources/state-tracker) follows every state's status against the IRS participating-state list. If your state is in: get on its certified list for 2027. States may not pile SGO-specific requirements on top of the federal ones, and for an organization that already reports to a state scholarship agency, the listing lift is modest. If your state is out, you have real options, but they are different ones. Your donors can still claim the full federal credit by giving to an SGO listed in a participating state — [donor eligibility does not depend on where the donor lives](/blog/sgo-donor-state-asymmetry) — and state-conditional pledge campaigns let you organize commitments that activate the day your state opts in. What you cannot do is offer the federal credit for scholarships to your own state's students. For Arizona and Pennsylvania operators, the sharpest available move is honest math in front of your legislature: your donors now face a choice between a partial state credit that helps local students and a 100% federal credit that helps students somewhere else. ## Does the Federal Program Live Inside Your Existing Organization? For most state scholarship organizations, yes — and this is where you hold a structural advantage most nonprofits entering this space do not. The federal 90% test comes with a safe harbor for organizations whose activities are largely scholarship-granting: the test runs against the money in the federal program's segregated account rather than against your entire budget. A diversified nonprofit — a school association with dues and events, a community foundation with many program areas — [generally needs to form a separate entity to qualify](/blog/section-25f-safe-harbor-90-percent-test). A purpose-built scholarship organization is already the thing the safe harbor was written for. Granting scholarships under a state program and a federal program is still, in substance, one activity: granting scholarships. Two cautions before you conclude no new entity is needed. If your organization has grown side lines over the years — program services, consulting, an ESA administration contract, event revenue — have counsel look at whether you are still comfortably "largely scholarship-granting," a term the September regulations are expected to sharpen. And whatever the entity answer, federal contributions must live in their own segregated account, separate from your state-program funds, with [the federal 90/10 test running on that account alone](/blog/sgo-90-10-withdrawal-cap-not-expense-rule). Your state program's overhead ratio, whatever it is, does not transfer, does not blend, and does not excuse. You will run two sets of books because you will be running two programs. ## Rebuild the Donor Pitch, Not the Donor File The interaction rule that shapes all donor strategy: a donor cannot take both credits on the same dollars. The federal credit is reduced by any state credit claimed for the same contribution. So the game is not stacking — it is routing. - **Individual donors, first $1,700 (or $3,400 per couple): route to the federal program.** A 100% federal credit beats a 50%, 75%, or even 90% state credit on the same gift. For your existing individual donors, the honest advice is to redirect their first dollars — and for donors who have been giving less than the cap, the 100% credit is the strongest upgrade ask your program has ever had. - **Corporate donors: they stay with the state program.** The federal credit cannot touch them. If your program is corporate-heavy, the federal program is not a threat to that revenue — it is a new individual-donor program running alongside it. - **Gifts above the federal cap: back to the state credit.** A generous donor's $10,000 can take the federal credit on the first $1,700 and the state credit on the rest, where your state's rules allow. One gift conversation, two programs, no wasted credit. - **Stock and DAF givers: they stay with the state program too**, where your state permits those forms. The federal program is cash only. Run this segmentation across your file before your 2027 campaign, because your donors will otherwise run it themselves — with less accurate information, in April, while doing their taxes. One more difference arrives at the receipt line: the federal program requires a written acknowledgment carrying a unique donor number, generated under an IRS method, which the IRS matches against the donor's return. No state program has an equivalent. Your receipting system — likely built carefully around your state's requirements — [needs a parallel federal track](/blog/treasury-june-2026-section-25f-preview). ## The Compliance Deltas That Will Bite The federal rules will feel familiar. Familiar is the danger. The deltas: - **Eligibility runs on a different measure.** Most state programs key eligibility to a multiple of the federal poverty line or a fixed income figure. The federal program uses household income at or below [300% of area median income](/blog/sgo-income-eligibility-300-percent-ami) — a local measure that produces a different, generally broader, eligible population. Families who miss your state cutoff may qualify federally, and occasionally the reverse. Your verification workflow needs to render two verdicts per family. - **Scholarships can pay for more than tuition.** Federal awards cover [the full Coverdell expense list](/blog/section-25f-qualified-expenses-guide) — tuition, but also books, tutoring, technology, special-needs services. If your state program is tuition-only, your disbursement infrastructure has never had to track expense categories. Now it does. - **The priority rules are federal law, not program policy.** Returning recipients first, then their siblings — systematically applied, not as a tiebreaker. - **Ten or more students, more than one school — per program.** Long-established operators clear this easily, but the test runs on the federal program's own awards, not your combined history. - **An annual independent audit, financial and programmatic, furnished to your state.** Many state programs require financial review; the federal audit also examines whether your award process, verification, and disbursement actually followed the rules. Build the documentation trail with that reviewer in mind from the first federal dollar. ## What to Do This Fall The sequencing for an existing operator is compressed but manageable, because you are skipping the hardest parts of [formation](/how-to-start-an-sgo) — you exist, you are a 501(c)(3), and your state knows you. - Confirm your state's 2027 participation status and its listing process, and file for the federal list. - Get an entity-level answer on the safe harbor from counsel — most pure scholarship operators will clear it as-is. - Stand up the federal segregated account and the second set of books. - Build the federal receipt and unique-donor-number workflow alongside your state receipting. - Segment the donor file — individuals to the federal credit, corporate and over-cap dollars to the state credit — and script the 2027 ask now. - Watch September. The proposed regulations will finalize the safe harbor's contours and several open questions, and organizations already on a state list will be positioned to adjust fastest. Two decades of state programs proved the model works. The federal credit takes the model your organization already runs and removes its two biggest constraints — the partial credit and the capped pool. The operators who treat it as a second program with its own rules, rather than a bigger version of the one they know, are the ones who will own it. --- ### You Don't Have to Live in a Participating State to Claim the $1,700 Scholarship Tax Credit Canonical URL: [https://sgoguide.com/blog/sgo-donor-state-asymmetry](https://sgoguide.com/blog/sgo-donor-state-asymmetry) Published: 2026-07-30 · Category: How-To · 9 min read The most common question we hear from donors in states that have not opted into the Section 25F program is some version of: "So I just can't participate?" It is a reasonable assumption — and it is wrong. Nothing in the statute requires a donor to live in a participating state. Understanding exactly what the law requires, and what it does not, opens a real giving path for donors in holdout states starting January 1, 2027. ## What the Statute Actually Requires The Section 25F credit — the IRS's official name is the Federal Scholarship Tax Credit; press coverage often calls it the Education Freedom Tax Credit — is available to individual U.S. citizens and residents who make cash contributions to a qualifying Scholarship Granting Organization. Two geographic conditions matter, and neither is about the donor: - **The SGO must be listed.** The organization must appear on the certified list of a state that has elected to participate for that year. - **The student must reside in that state.** A qualified contribution funds scholarships solely for eligible students within the state in which the SGO is listed. The donor's own state of residence appears nowhere in that chain. A taxpayer in Michigan, Wisconsin, or California — none of which are participating for 2027 — can contribute to an SGO listed in Iowa, Ohio, or any of the [30 participating states](/resources/state-tracker), designate that state, and claim the full federal credit of up to $1,700 ($3,400 for a married couple filing jointly, as two individuals). ## How It Works Mechanically Multistate SGOs are required to have donors designate the state in which their contribution will be used, and to track and match designated contributions to scholarships for students residing in that state. So the cross-state gift is not a loophole — it is the designed shape of the program. The donor picks a participating state at the moment of giving; the dollar enters that state's segregated account; it funds a student who lives there. We cover the full structure in [our multistate SGO explainer](/blog/multistate-sgo-one-entity-state-accounts). Three practical notes for donors: - **Cash only.** Qualified contributions must be cash — no appreciated stock, and donor-advised fund distributions do not work, because the credit runs to the individual taxpayer. - **No double benefit.** A contribution credited under Section 25F cannot also be taken as a charitable deduction. - **Unused credit carries forward.** The credit is non-refundable, but unused amounts carry forward up to five years. ## An Underappreciated Advantage for Holdout-State Donors Here is a detail that cuts in favor of donors in non-participating states: the federal credit is reduced by any state tax credit claimed for the same contribution. A donor in a state with its own tax-credit scholarship program has to net the two benefits. A donor in a holdout state has no overlapping state credit — so the federal credit arrives at full value, undiluted. ## The Honest Trade-Off There is no way around this part, so it should be said plainly: a Michigan donor's gift to an Iowa-listed SGO funds Iowa students. Michigan children cannot receive Section 25F scholarships until Michigan opts in. Michigan legislators debating the issue have made exactly this point — credits claimed by residents of non-participating states will fund students elsewhere. For some donors that is fine; helping an income-eligible family afford school is the point, wherever that family lives. For donors whose motivation is their own community, cross-state giving is best understood as a bridge: real scholarships funded now, a giving habit and infrastructure in place, and a donor base already organized on the day their home state opts in. States may elect annually, so a state that is out for 2027 can be in for 2028 — [Michigan's decision point, for example, follows its November 2026 gubernatorial election](/states/michigan). ## The Organized Version: State-Conditional Pledges For SGOs and school communities in holdout states, the sharpest tool available right now is the state-conditional pledge: a donor commits today, and the gift processes only if and when the state opts in. Nothing is contributed — and nothing is at risk — unless the condition is met. This converts a state's worst feature (uncertainty) into pipeline. It gives organizers a concrete number to show a board ("this is what launches the day we're in"), it gives would-be donors a way to act now without writing a check into limbo, and it pairs naturally with cross-state giving for donors who want to fund students immediately in a neighboring participating state. Our [ClearPath Pledge](/products/pledge) platform was built for exactly this pattern, including the state-condition trigger. ## What to Do If Your State Is Out - **Give across the line if immediate impact is the goal.** Pick a participating state — ideally one where you have a genuine connection — designate it, and claim the credit. Confirm the SGO appears on that state's certified list for the year. - **Make a conditional commitment if your community is the goal.** A state-conditional pledge costs nothing unless your state opts in, and organized pledge totals are among the more persuasive facts a future governor or legislature can be shown. - **Watch the annual election cycle.** Participation is elected year by year. [The state tracker](/resources/state-tracker) follows every state's status, sourced against the IRS participating-state list. The Section 25F program was designed with mobile money and fixed students. Donors who understand that asymmetry can participate from anywhere in the country on day one — and can be the reason their own state's students participate in year two. --- ### The 90/10 Rule Is a Withdrawal Cap, Not an Expense Rule — and It Rewrites SGO Fundraising Math Canonical URL: [https://sgoguide.com/blog/sgo-90-10-withdrawal-cap-not-expense-rule](https://sgoguide.com/blog/sgo-90-10-withdrawal-cap-not-expense-rule) Published: 2026-07-26 · Category: How-To · 11 min read Most organizations meet the 90/10 rule as an accounting requirement: spend at least 90% of income on scholarships, keep overhead inside 10%. That framing is accurate but incomplete, and the incomplete version leads planners to two mistakes — imagining an expense-allocation exercise that the rule never requires, and missing a fundraising constraint that it absolutely imposes. The reframe that fixes both: under the safe harbor Treasury previewed in June 2026, the 90/10 test is a withdrawal cap on each state account. It governs what leaves the account, not where the organization's costs sit. Everything else follows from that. ## What the Test Actually Governs Under [the safe harbor](/blog/section-25f-safe-harbor-90-percent-test), income for the test is the amount held in a state's Section 25F segregated account — qualified contributions plus earnings. Of what is in the account, at least 90% must go out as scholarships to that state's students. Which means each account may release up to 10% of its contents for anything else. Those releases leave the account and land in the organization's general operating funds. And once there, the money pools. Nothing in the statute or the previewed guidance requires a state's released 10% to be traced to that state's expenses. If one state's account releases $100,000 and another's releases $8,000, the organization has $108,000 in general funds and may lawfully spend it wherever operations require. The constraint is the cap on release, which binds per account — not the destination of the money afterward. Two overlays temper this in practice: state charitable-solicitation law applies to how funds are raised and represented in each state, and donor expectations constrain what is wise even where the statute is silent. But the federal test itself is a withdrawal cap, full stop. ## The Cap Binds Per Account — a Worked Example Because [money never moves between state accounts](/blog/multistate-sgo-one-entity-state-accounts) and the test never aggregates, the binding math happens state by state. Say an SGO's account in State A holds $1,000,000 and its account in State B holds $80,000. State A can release up to $100,000; State B up to $8,000. Combined releasable funds: $108,000. Now suppose the organization runs a $150,000 donor campaign covering both states. However the cost is allocated — by contributions, by population, by any reasonable method — the campaign cannot be funded from the accounts: the total available is $108,000, and each account's share of a proportionate allocation would exceed its own cap. The organization is $42,000 short before the first scholarship is affected, and the shortfall must come from somewhere else. This is the arithmetic behind a rule of thumb that is not actually a rule of thumb: thin state accounts cannot carry their own costs. It is forced by the cap. ## The 10:1 Hurdle Generalize the example and you get the most important sentence in SGO fundraising economics: any fundraising spend that does not return better than ten times its cost — in the same state, within the same test period — cannot be funded from Section 25F money. Run the failure case. Spend $20,000 on donor acquisition in a state; raise $40,000. A 2:1 return would delight most nonprofit development teams. But the $40,000 sits in the state account, and the account can release only $4,000. The organization is $16,000 underwater on a successful campaign — and the account cannot legally cover the difference. Raise nothing, and it is $20,000 underwater with no release at all. Paid acquisition — direct mail, digital advertising — rarely returns 10:1 on first-year donors anywhere in the charitable sector. Inside the accounts, it is not inefficient; it is effectively unfundable. ## What Clears the Hurdle Channels with near-zero acquisition cost clear a 10:1 hurdle trivially: a school's bulletin, a principal's email to the parent list, an alumni newsletter, an announcement at a grandparents' day event. The gift arrives because trust and relationship already exist, and the marginal cost of the ask rounds to zero. This is why school networks, associations, and faith communities are structurally advantaged as SGO operators. They already own the one asset the 90/10 economics reward: free, trusted distribution to people who care about the students being served. A standalone SGO planning to buy its donor base with a media budget is fighting the program's arithmetic; an organization activating existing relationships is working with it. ## The Escape Hatch: Money That Never Enters the Accounts None of this means an SGO cannot market itself. It means the funding source matters. Under the safe harbor, only what is held in the segregated accounts counts as income for the test. Money that never enters them — general operating gifts taken as ordinary charitable deductions, foundation grants for operations, sponsorships, a parent organization's support — is not in the denominator, and spending it does not move the ratio at all. So the sustainable structure separates two gift types: qualified contributions flow to the state accounts and become scholarships; operating support flows to general funds and pays for staff, systems, and growth. The same donor can do both — $1,700 as a qualified contribution for the full credit, plus a separate operating gift deducted normally. Fundraising campaigns, launch costs, and anything that cannot clear 10:1 belong on the operating side. (Note the caution that comes with it: the safe harbor requires the organization's activities remain largely scholarship-granting, operating gifts must be genuinely separate with no quid pro quo, and large operating donors may still accrue substantial-contributor status under [the disqualified-person rules](/blog/sgo-selection-committee-disqualified-persons).) ## Three Caveats Before You Build the Budget - **The 90% is a spending obligation, not just a ceiling on release.** Contributions sitting undisbursed in an account are their own compliance problem. The cap limits what can leave for operations; it does not excuse scholarships that never leave at all. - **Year one is the hard case.** Formation, registration, systems, and launch campaigns are all spent before the first qualifying dollar arrives, and a partial first year of contributions cannot absorb them within 10%. IRS Notice 2025-70 asked whether the regulations should provide start-up relief or multi-year smoothing — the question is open, so model as if the answer is no and fund the launch from operating money. - **Fees eat the same 10%.** Payment processing competes for the identical allowance, and on card rails it can claim a quarter of it. [The payment-rail analysis](/blog/sgo-credit-card-fees-10-percent) covers the ACH-first playbook. ## The Takeaway Read as an expense rule, 90/10 looks like a bookkeeping burden. Read correctly — as a per-account withdrawal cap — it is a design constraint on the entire operating model: fund operations from outside the accounts, fundraise through channels that are already free, treat every state account as its own closed economy, and let the 10% releases be a supplement rather than the plan. Organizations that internalize this before launch build budgets that work. Organizations that discover it afterward build deficits. For the broader regulatory picture, start with [our walkthrough of Treasury's June preview](/blog/treasury-june-2026-section-25f-preview). --- ### Do Credit Card Fees Count Against Your SGO's 10%? The Payment-Rail Problem Nobody Is Pricing In Canonical URL: [https://sgoguide.com/blog/sgo-credit-card-fees-10-percent](https://sgoguide.com/blog/sgo-credit-card-fees-10-percent) Published: 2026-07-21 · Category: How-To · 9 min read 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](/blog/treasury-june-2026-section-25f-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](/blog/understanding-the-90-10-rule). 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](/blog/section-25f-safe-harbor-90-percent-test), 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. --- ### Selection Committees and Disqualified Persons: The Family Cost of an SGO Committee Seat Canonical URL: [https://sgoguide.com/blog/sgo-selection-committee-disqualified-persons](https://sgoguide.com/blog/sgo-selection-committee-disqualified-persons) Published: 2026-07-16 · Category: Regulatory Updates · 12 min read Section 25F prohibits SGOs from awarding scholarships to disqualified persons, determined under rules similar to the private-foundation self-dealing framework of Section 4946. That sentence sounds like boilerplate. It is not. Combined with what Treasury signaled in its [June 2026 guidance preview](/blog/treasury-june-2026-section-25f-preview), it means the people an SGO seats on its scholarship selection committee are choosing to make their own grandchildren, children, and siblings' children ineligible for scholarships from that organization. For school-community organizations — where the natural committee candidates are exactly the respected local leaders whose families fill the member schools — this is a governance decision with a family cost, and it should reach the board before the first committee member is recruited, not after. ## What Treasury Previewed Treasury expects the proposed regulations to provide that a member of the SGO's selection committee, or a member of that person's immediate family, is a disqualified person with respect to that SGO. Substantial contributors are disqualified as well, along with the other categories familiar from Section 4946. Read the phrase "with respect to that SGO" carefully. Not "with respect to that state account." The SGO is the whole legal entity. For a multistate organization — [one entity operating segregated accounts in many states](/blog/multistate-sgo-one-entity-state-accounts) — the natural reading is that a committee member's family is disqualified everywhere the entity operates, in every state, from every account. Whether that organization-wide reading is correct is genuinely unresolved. [IRS Notice 2025-70](https://www.irs.gov/pub/irs-drop/n-25-70.pdf) explicitly asked whether the self-dealing requirement for a multistate organization should be analyzed across all states on whose lists it appears, or state by state. Treasury asked the question and has not answered it. The June preview says most operational requirements apply per state account while certain organization-wide rules apply to the entity as a whole — without saying which side of the line disqualification falls on. The September proposed regulations should settle it. Until then, design for the conservative reading. ## Can One Committee Serve Every State? Yes. Nothing in Section 25F or the guidance requires state-specific committees — or, strictly, a committee at all. The statute regulates outcomes: who may receive awards, in what priority, funded from which account. It does not prescribe governance architecture. And if disqualification does attach organization-wide, splitting into per-state committees buys nothing. A committee member in one state would still disqualify their family in every state, while the organization would now be running thirty conflict-of-interest processes, thirty training cycles, and thirty sets of minutes. Under the organization-wide reading, the single national committee wins outright: the disqualification footprint is the same, and the fixed costs — which must survive contact with [the 10% administrative allowance](/blog/understanding-the-90-10-rule) — are dramatically lower. Only if Treasury lands on state-by-state analysis does the per-state committee become a live trade-off. ## One Committee, Many Dockets What a single committee cannot do is make a single national decision. Because the operational requirements run per state account, the committee must produce a separately documented award decision for each state: - **No national ranking.** The committee cannot rank all applicants across states and fund down the list. Section 25F's priority waterfall — first to students who received a scholarship from the organization the previous year, then to siblings of prior recipients — runs inside each state's applicant pool. A stronger first-time applicant in one state must never displace a returning recipient in another; they are not competing for the same dollars in the first place. - **No moving money.** Contributions are designated, tracked, and matched to scholarships within their state. The committee's award decisions in each state are constrained by that state's account balance, full stop. - **Separate compliance checks.** The requirement that scholarships reach ten or more students who do not all attend the same school must be satisfied — per account, if that test turns out to be per-state, which is another question the Notice flagged and the regulations must answer. The workable design is one standing committee voting on state-segregated dockets: separate minutes, a separate priority waterfall, a separate multi-school check, and a separate funding constraint for each state. Done well, this audits better than thirty committees would — the annual programmatic audit is furnished to every covered state, and one consistent methodology applied thirty times documents far more cleanly than thirty local methodologies applied once each. ## Two Design Safeguards **Separate screening from deciding — and keep screening ministerial.** A multistate SGO will want regional staff assembling dockets: verifying household income against the area median income threshold, confirming enrollment, establishing priority status. Keep that work purely rules-based, with zero discretion over who wins. If screeners exercise judgment about outcomes, they risk being treated as selection committee members themselves — re-expanding the disqualified class the committee structure was designed to contain. **Use blind review — for the right reason.** Anonymized application review does not cure disqualification; that status turns on who a person is, not on what the committee knows about them. But blind review is strong audit evidence on two requirements a programmatic auditor will actually probe: that awards were made at arm's length and that no contribution was earmarked for a particular student. An SGO that can show its committee scored applications without names attached has a materially better answer than one relying on attestations alone. ## The Substantial-Contributor Trap There is an adjacent landmine in the same body of rules. Treasury is considering defining "substantial contributor" for Section 25F purposes as anyone who has contributed more than 2% of the total contributions the SGO has received since inception — without the dollar floor that exists in the private-foundation rules. Run that against a new SGO's first year. When cumulative contributions are small, 2% of them is a very small number. An early major donor — often exactly the committed grandparent or business owner a school community leans on to seed a launch — could cross the threshold with a single generous gift and disqualify their own family from ever receiving a scholarship from the organization. The exposure is largest precisely when the organization is newest. Until the September regulations define the term, the prudent move is to model the threshold before the first campaign, warn major donors of the possibility, and — where a donor's family may need scholarships — consider whether their support belongs in general operating funds rather than the qualified-contribution accounts. That decision has other consequences under [the safe harbor](/blog/section-25f-safe-harbor-90-percent-test), so it should be made deliberately. ## Raise It Before They Discover It None of this makes committee service unattractive — it makes it a decision that must be informed. The worst version of this issue is the one where a committee member's daughter-in-law applies in year two and the organization discovers the disqualification rule in front of its auditor. The best version is the one where every candidate is told, before accepting a seat: this role means your immediate family does not receive scholarships from this organization, likely in any state we operate in. Committee architecture is expensive to unwind once people are seated and awards are made, and the rules here are previewed rather than final. This is one of the handful of Section 25F questions that genuinely belongs in front of an exempt-organizations tax attorney before an organization commits — and a well-run SGO should treat that consultation as part of formation, not as a remediation cost later. --- ### One Entity, Many State Accounts: How Multistate SGOs Actually Work Under Section 25F Canonical URL: [https://sgoguide.com/blog/multistate-sgo-one-entity-state-accounts](https://sgoguide.com/blog/multistate-sgo-one-entity-state-accounts) Published: 2026-07-11 · Category: Regulatory Updates · 12 min read The most commonly misunderstood part of the Section 25F program is what happens when an SGO wants to operate in more than one state. The phrase "national SGO" gets used as if there were a single national scholarship pool an organization could raise into and award from. There is not — and the actual structure, confirmed in Treasury's [June 2026 guidance preview](/blog/treasury-june-2026-section-25f-preview), has sharp consequences for fundraising, committee design, and which states are worth operating in at all. ## Yes, One Charity Can Be Listed in Thirty States Start with what is permitted. A single 501(c)(3) can appear on the certified list of more than one participating state. Per the June preview, the conditions are that the organization is "located in" each state and maintains a separate Section 25F account for each state. "Located in" is more accommodating than it sounds. It means the organization is authorized to do business in the state and complies with the state's generally applicable charitable-organization rules — registration, solicitation requirements, the rules that apply to every charity. No office, no staff, no physical presence required. And states may not impose SGO-specific requirements more restrictive than Section 25F itself, which prevents participating states from building bespoke obstacle courses. So the entity picture is simple: one charity, one board, one audit, many state listings. What is not simple is the money. ## But There Is No National Pool Section 25F(c)(3) requires that a qualified contribution be used to fund scholarships for eligible students solely within the state in which the organization is listed. [IRS Notice 2025-70](https://www.irs.gov/pub/irs-drop/n-25-70.pdf) spells out what a multistate organization must certify to each of its states: - It funds scholarships to eligible students in that certifying state. - It requires donors to designate the state in which their contribution will be used. - It tracks and matches designated contributions to scholarships for students within that state. - It satisfies all of the single-state requirements within that state — including that scholarship recipients reside there. Put plainly: the donor picks a state at the moment of giving, and that dollar is locked to that state's segregated account for its entire life. It funds a student who resides in that state, or it funds nothing. This is why "national SGO" is a misleading label. What the statute permits is one legal entity operating a portfolio of state-locked programs. A "regional SGO" is the same thing — the Notice acknowledges organizations that raise funds and award scholarships across a multistate region, but every requirement still applies state by state. There is no such thing as a pooled regional fund where a dollar raised for the region can find a student in whichever state needs it. ## The 90/10 Test Runs Per Account The consequences compound when you add [the 90/10 rule](/blog/understanding-the-90-10-rule). Under the safe harbor Treasury previewed in June, income for the 90% test is measured by the amount held in the Section 25F segregated account — and for a multistate organization, the safe harbor must be satisfied separately for each state-specific account. Each state account must independently send at least 90% of its contents out as scholarships to that state's students. Each account can release at most 10% for everything else. A large account in one state cannot carry a small account in another — there is no cross-subsidy, because the test never aggregates. That no-cross-subsidy rule is the binding constraint on footprint. A state account holding $80,000 can release at most $8,000 toward administration — which will not cover that state's share of anything. Opening an account in a state where an organization has only a handful of schools or families is not merely inefficient; the arithmetic does not work. Multistate SGOs should concentrate where they have real density and add thin states only when the account can plausibly sustain itself. ## What Stays Entity-Level Not everything fragments by state. The June preview makes the annual audit — financial and programmatic, by a qualified independent third party — an entity-level obligation: one audit, furnished to each covered state on whose list the organization appears. The board is entity-level. Donor records and the forthcoming [unique donor number](/blog/treasury-june-2026-section-25f-preview) acknowledgments are entity-level. The organization's expense-allocation methodology — how shared costs are apportioned across state accounts, a question on which the guidance is entirely silent so far — is necessarily designed once and applied consistently. This split is exactly why one multistate entity beats a constellation of single-state organizations. Separate entities would each need their own board, filings, conflict-of-interest process, and audit — multiplying precisely the fixed costs that the 10% allowance struggles to cover — while gaining nothing, because account-level separateness is already mandatory inside a single entity. ## The Donor Lives Wherever the Donor Lives One genuinely national feature survives all of this: the donor. Nothing in Section 25F requires a donor to live in a participating state. The credit is available to any U.S. citizen or resident; eligibility turns on where the SGO is listed and where the student resides — not where the donor pays state taxes. A donor in a state that has not opted in can contribute to an SGO listed in a participating state, claim the full federal credit, and fund that state's students. For SGOs with supporters concentrated in non-participating states, this is the honest bridge: organize the donor base now, direct gifts to states where students can actually receive them, and be ready the moment the home state opts in. State-conditional pledge campaigns — commitments that only process if and when a state opts in — are the organized version of that readiness, and they pair naturally with [the state opt-in tracker](/resources/state-tracker). The per-state account structure, for all its rigidity, has a donor-facing virtue worth naming: in a program where earmarking a gift to a particular school or student is prohibited, the state designation is the legitimate form of donor intent. Donors who want their giving to stay close to home can honestly be told: your state, guaranteed; your school, never. ## What Remains Open Treasury has previewed that most operational requirements apply separately to each state account while certain organization-wide rules apply to the SGO as a whole — without fully enumerating which are which. Notice 2025-70 explicitly asked whether the ten-students/multiple-schools test, the earmarking prohibition, the priority rules, and the self-dealing analysis should run in aggregate or state by state. The September proposed regulations should settle these. Until they do, the conservative design assumes per-state application of the operational tests — and flexible systems that can flip when the answers land. The committee question — whether one selection committee can serve every state, and what it costs in disqualified families — is consequential enough that we gave it [its own analysis](/blog/sgo-selection-committee-disqualified-persons). One operational note: this structure is what [our platform](/products) models natively — donors designate a state at the moment of giving, every dollar is tracked in its state's segregated account with the 90/10 cap enforced per account, applications route to the student's resident state, and committees run per state or as one national committee over per-state dockets. --- ### The Section 25F Safe Harbor: Why the 90% Test Nearly Broke Every Diversified Nonprofit — and What Changed in June Canonical URL: [https://sgoguide.com/blog/section-25f-safe-harbor-90-percent-test](https://sgoguide.com/blog/section-25f-safe-harbor-90-percent-test) Published: 2026-07-07 · Category: Regulatory Updates · 11 min read Section 25F requires a Scholarship Granting Organization to spend not less than 90% of its income on scholarships for eligible students. Every SGO operator knows the number. What most organizations have not fully absorbed is that the definition of "income" in that sentence was, until June, the single largest structural threat in the program — and that Treasury's June 9, 2026 guidance preview changed it in a way that should determine how new SGOs are structured. ## The Problem: What Counts as "Income"? The statute says 90% of "income of the organization" must go to scholarships. It does not define the term. [IRS Notice 2025-70](https://www.irs.gov/pub/irs-drop/n-25-70.pdf), issued in late 2025, described Treasury's anticipated approach: income would include all income of the organization — including unrelated business income — and would not be limited to the qualified contributions held in the segregated scholarship account. Consider what that means for any organization that does more than grant scholarships. A school association with membership dues, accreditation fees, curriculum sales, and events revenue. A community foundation with management fees and multiple program areas. A church network with congregational support. Under the Notice's reading, if such an organization became an SGO, it would need to spend 90% of its entire organizational income — every dues dollar, every program fee — on K-12 scholarships. That is not a compliance burden. It is a structural impossibility. Under the general rule as previewed, the 90% requirement is measured against total receipts, unreduced by expenses — an organization cannot even net out the cost of its other programs before the test applies. The literal Notice position made it flatly irrational for any diversified organization to seek SGO status. The only viable path was a stripped-down entity that did nothing else. ## The Fix: The June Safe Harbor Treasury's June preview introduced the safe harbor that resolves this. If an organization's activities are largely scholarship-granting, it may measure income for the 90% test by the amount held in its Section 25F segregated account — the qualified contributions themselves, plus earnings on them. Under the safe harbor, the test becomes what most people assumed it always was: of the money donors contributed for scholarships, at least 90% must be spent on scholarships. Money that never enters the segregated account — dues, grants for operations, general support gifts — is simply not in the denominator. For a multistate SGO, the safe harbor must be satisfied separately for each state-specific segregated account. There is no blending across states — a point with real consequences that we cover in [our multistate structure analysis](/blog/multistate-sgo-one-entity-state-accounts). ## The Condition: "Largely Scholarship-Granting" The safe harbor is conditional, and the condition is the part every board should read twice. It is available to organizations whose activities are largely scholarship-granting. Treasury has not defined "largely." There is no percentage, no revenue threshold, no activity test — nothing yet that tells an organization how much non-scholarship activity forfeits the safe harbor and throws it back onto the general rule, where the test runs against total receipts. That question is on the open list for the September proposed regulations. What is already clear is the direction: a diversified organization, as a whole, does not qualify. An entity whose overwhelming purpose and activity is granting scholarships does. ## The Structural Consequence: Form a Separate Entity Put the pieces together and the design answer writes itself. An organization with existing programs and revenue should not itself become the SGO. It should form a separate affiliated entity — its own 501(c)(3), not a private foundation — whose activities are largely scholarship-granting, and let that entity seek listing. The affiliated-entity structure does three things at once: - **It secures the safe harbor.** The scholarship entity's activities are, by construction, largely scholarship-granting. The 90% test runs against its segregated accounts, not against the parent organization's budget. - **It quarantines the general-rule risk.** If the September regulations draw the "largely scholarship-granting" line somewhere unexpected, a dedicated entity is on the right side of any plausible line. A diversified organization is betting its whole budget on a definition that does not exist yet. - **It keeps the parent's operations out of scope.** The parent's dues, programs, and reserves stay outside the SGO's compliance perimeter — while remaining available, if the parent chooses, to fund the SGO's operations as money that never touches the segregated accounts and never enters the denominator. That last point has a corollary worth naming: under the safe harbor, an SGO's overhead does not have to be funded from the 10% at all. General operating gifts — deductible under the ordinary charitable rules rather than credited under Section 25F — sit outside the test entirely. The two-gift structure this enables is a topic for its own post, but the safe harbor is what makes it work. ## The Caveats Three cautions before anyone treats this as settled. **It is a preview, not a regulation.** Treasury has said proposed regulations will arrive by the end of September 2026 and will be reliable for tax year 2027. Until then, the safe harbor's precise contours — especially the "largely scholarship-granting" condition — can move. **The 90% is a spending test, not just a ratio.** Money sitting undisbursed in a segregated account is its own compliance problem. The safe harbor defines the denominator; it does not relax the obligation to actually move scholarship dollars to students. **Year one remains hard.** A new SGO's launch costs are front-loaded, and a first partial year of contributions cannot absorb them inside a 10% allowance. Notice 2025-70 explicitly asked whether the regulations should address start-up costs or multi-year smoothing. No answer has been given. Prudent modeling assumes no relief and treats any September accommodation as upside — which means year-one funding must come from outside the segregated accounts. ## The Bottom Line The June safe harbor converted the 90% test from an existential threat into an engineering constraint. But it rewards one structure heavily over all others: a dedicated, largely-scholarship-granting entity with clean segregated accounts, operating alongside — not inside — whatever organization gave rise to it. Organizations making formation decisions this summer should make them with that structure as the default, and should have exempt-organizations counsel pressure-test anything else. For the full context of the June preview — the audit rules, the unique donor number, income verification, and the rest — see [our complete item-by-item walkthrough](/blog/treasury-june-2026-section-25f-preview). --- ### Treasury's June 2026 Section 25F Preview: Every Item, Explained Canonical URL: [https://sgoguide.com/blog/treasury-june-2026-section-25f-preview](https://sgoguide.com/blog/treasury-june-2026-section-25f-preview) Published: 2026-07-01 · Category: Regulatory Updates · 15 min read On June 9, 2026, the Deputy Assistant Secretary for Tax Policy delivered remarks previewing the regulations Treasury intends to propose under Section 25F — the federal scholarship tax credit program created by the One Big Beautiful Bill Act. The remarks were released publicly the next day, and they are the most detailed picture yet of how the program will actually operate when it goes live on January 1, 2027. Treasury has said proposed regulations will be issued no later than the end of September 2026, and that states, SGOs, and taxpayers will be able to rely on them for tax year 2027. Until then, everything below is previewed rather than final — but organizations forming now cannot wait for September to make structural decisions, and the preview resolves several questions that had been genuinely open since [IRS Notice 2025-70](https://www.irs.gov/pub/irs-drop/n-25-70.pdf) requested public comment last fall. One naming note before diving in, because search results are genuinely confusing on this point: the IRS's official label for the program is the Federal Scholarship Tax Credit (FSTC), press coverage often calls it the Education Freedom Tax Credit, and the statutory citation is Section 25F. All three names refer to the same program. This site uses the statutory cite. This post walks through every item in the preview. Several deserve — and have — their own deep dives, linked throughout. ## The Safe Harbor for the 90% Test The single most consequential item. Section 25F requires an SGO to spend at least 90% of its income on scholarships. Notice 2025-70 had anticipated that "income of the organization" would mean all income — including unrelated business income, and not limited to the contributions sitting in the segregated scholarship account. Read literally, that position made SGO status structurally impossible for any organization with meaningful non-scholarship revenue. The June preview introduces a safe harbor: if an organization's activities are largely scholarship-granting, its income for the 90% test may instead be measured by the amount held in its Section 25F segregated account, including qualified contributions and earnings. For a multistate SGO, the safe harbor must be satisfied separately for each state-specific account. The practical consequence is a structural one: organizations with diversified revenue should form a separate, dedicated scholarship-granting entity rather than housing the SGO inside an existing organization. We cover the mechanics, the reasoning, and the remaining ambiguity in [our full analysis of the safe harbor](/blog/section-25f-safe-harbor-90-percent-test). ## The Multistate Rules: One Entity, Many State Accounts The preview confirms that a single 501(c)(3) can appear on more than one participating state's list, so long as it is "located in" each state — meaning authorized to do business there and compliant with generally applicable state charitable-organization rules, with no physical presence required — and maintains a separate Section 25F account for each state. States may not impose SGO-specific requirements more restrictive than Section 25F itself. What the preview does not permit is a national pool. Each dollar is designated to a state by the donor and locked to that state's account, funding only students who reside there. The 90% test runs per account. There is no cross-subsidy between states. This is the most commonly misunderstood part of the program, and it drives everything from committee design to which states an organization should operate in. [The full breakdown is here](/blog/multistate-sgo-one-entity-state-accounts). ## The Audit Requirement Every SGO must obtain an annual financial and programmatic audit performed by a qualified independent third party, furnished to each covered state on whose list the organization appears. The stated intent is that states can rely on the audit rather than each building its own compliance-review apparatus. Two details matter operationally: - **The audit is entity-level, not per-state.** A multistate SGO performs one audit and furnishes it to each of its states. The largest recurring compliance cost does not multiply with geographic footprint — a significant point in favor of a broad multistate entity over separate organizations per state. - **Smaller SGOs get a streamlined alternative.** The audit may instead be performed by an internal committee unrelated to management, with the report signed under penalties of perjury. For a new SGO's early years, this materially lowers the compliance cost floor. The word "programmatic" deserves attention. This is not only a financial statement audit — it examines whether the organization's award process, income verification, and disbursement practices actually complied with the program's requirements. Documentation practices should be designed with that reviewer in mind from day one. ## The Definition of a School Consistent with the Section 530 (Coverdell) framework, eligible schools include public, private, and religious K-12 schools as determined under state law. Two clarifications in the preview: - **Homeschools count** where they are treated as schools under state law. Because state homeschool law varies widely, this is a state-by-state analysis — but the door is open. - **Tribal schools qualify.** ## Income Verification: A Generous Menu Section 25F limits scholarships to students in households at or below 300% of area median gross income. The preview describes a flexible verification regime: paystubs, tax returns, IRS transcripts, W-2s, or commercial data sources are all acceptable. Beyond documentation, the preview adds categorical eligibility: a household qualifies if a member participates in a needs-based federal, state, or tribal program whose income limits are at or below the Section 25F threshold. Foster children qualify without separate verification. Treasury is also considering an additional area-based safe harbor for students attending schools in low-income areas. For SGOs, this menu is good news — it means verification workflows can meet families where they are rather than demanding a single document type. Our guide to [the 300% AMI requirement](/blog/sgo-income-eligibility-300-percent-ami) covers the underlying eligibility math. ## The Unique Donor Number This item has no analogue in existing state tax-credit scholarship programs, and it is a hard product requirement for every SGO's donor systems. The SGO must issue each donor a timely written acknowledgment of annual contributions that includes a unique donor number, generated under an IRS-provided method. The SGO reports donor and contribution data to the IRS using that number, and the taxpayer reports the same number on their federal return. The IRS matches the two. The design goal is to enable credit verification without SGOs collecting Social Security numbers. Every SGO's receipting, reporting, and donor-records infrastructure will need to implement this. Organizations evaluating software should be asking vendors specifically how they intend to support it. ## Duplicate-Award Prevention States are expected to prevent duplicate awards to the same student for the same expense. One approach the preview contemplates is a formal scholarship acceptance in which the family certifies that no other award covers that expense. Expect acceptance certifications to become a standard artifact in the award workflow. ## An IRS SGO Portal, Phased In Treasury previewed a planned IRS portal for SGOs, to be phased in over time. Details are thin, but the direction is toward centralized federal reporting infrastructure — another reason SGO record systems should be built for structured export from the start. ## Qualified Expenses: A Separate Workstream Guidance on the scope of Section 530 qualified expenses — what scholarships can actually pay for — will follow as a separate workstream after the Section 25F proposed regulations. Treasury did state its intent that scholarships cover additive academic tutoring and special needs services. Until that guidance lands, [the existing Coverdell framework](/blog/section-25f-qualified-expenses-guide) remains the operating reference. ## Selection Committees and Disqualified Persons The preview signals that a member of an SGO's selection committee — or a member of that person's immediate family — will be treated as a disqualified person who cannot receive scholarships from that SGO, under rules similar to the private-foundation self-dealing framework. Whether that disqualification applies organization-wide or state-by-state for a multistate SGO is one of the most consequential open questions in the program, and it deserves board-level attention before committees are seated. [We cover the committee architecture question in depth here](/blog/sgo-selection-committee-disqualified-persons). ## What the Preview Did Not Answer The preview is substantial, but several questions remain genuinely open until the September proposed regulations: - Whether payment processing fees reduce the safe-harbor income base or must come out of the 10% administrative allowance — [our analysis of the fee problem](/blog/sgo-credit-card-fees-10-percent) explains why this matters more than it sounds. - How shared expenses are allocated across a multistate SGO's state accounts. There is no guidance at all; a documented, consistent methodology is the only defensible interim position. - Whether disqualified-person status is organization-wide or per-state. - Whether the ten-students / multiple-schools test applies per state account or in aggregate. - Whether there will be start-up cost relief or multi-year smoothing for the 90% test — Notice 2025-70 asked the question, which tells you Treasury knows year one is hard. - How "substantial contributor" will be defined, and what happens when a donor fails to designate a state. ## What to Do With This Three moves make sense for organizations forming now. **Build on what is settled.** The statutory requirements — 501(c)(3) status, the ten-student multi-school distribution, no earmarking, income verification at 300% of area median gross income, the priority for returning students and siblings — are not going to change. Neither, realistically, is the basic multistate architecture the preview describes. **Design flexibly where Treasury has not answered.** Committee structure, expense allocation methodology, and undesignated-gift handling should all be built so they can flex when the September regulations land, not poured in concrete now. **Document methodology decisions before the fact.** Where you must take a position on an unsettled question — and every operating SGO must — record the rationale contemporaneously. A programmatic auditor in 2028 will care less about whether your interpretation was ultimately adopted than about whether it was reasonable, consistent, and documented when you made it. The September proposed regulations should settle most of the open list. We will publish a full analysis when they do — the newsletter signup below is the fastest way to get it, and [the state opt-in tracker](/resources/state-tracker) stays current in the meantime. --- ### Why Most SGOs Get Scholarship Disbursement Wrong — And What a Compliant System Actually Looks Like Canonical URL: [https://sgoguide.com/blog/scholarship-disbursement-compliance-guide](https://sgoguide.com/blog/scholarship-disbursement-compliance-guide) Published: 2026-06-10 · Category: How-To · 14 min read The compliance requirement that surprises most people entering the SGO space is not income eligibility verification or the arm's-length award process. Those get explained early. The requirement that creates the most ongoing operational liability — and the one where most organizations discover they have a problem only during an audit — is disbursement. An SGO does not just need to get money to scholarship recipients. It needs to prove that every dollar of scholarship funds was used for a qualified educational expense. That proof is the audit trail. And building an audit trail that works at scale requires designing your disbursement system before you make your first scholarship award — not after. ## What the Statute Actually Requires Section 25F requires that scholarship funds be used for qualified educational expenses as defined under the Coverdell Education Savings Account framework (IRC §530(b)(4)). Tuition, fees, books, tutoring, special needs services, and educational technology are the core categories. The SGO must maintain records demonstrating that each disbursement went to a qualified expense. This sounds simple. It is not, for two reasons. **First, the expense categories have real limits.** "Educational expenses" in common usage means almost anything education-adjacent. Under Section 530(b)(4), it means a defined list with meaningful exclusions. After-school childcare: not qualified. Sports participation fees: not qualified. Non-required enrichment activities: not qualified. Computer equipment not used primarily for educational purposes: not qualified. An SGO that disburses funds without tracking how they are used is assuming — without evidence — that all expenditures fell within the qualified categories. That assumption will not hold up to review. **Second, the SGO carries the burden of proof.** If the IRS or a state regulator asks for documentation that scholarship funds were used for qualified expenses, the SGO must produce it. "We asked families to spend it on qualified expenses" is not documentation. "Here is the school's written confirmation that this student is enrolled, the payment that covered her tuition, and the line-item order for her books" is. ## The Receipt Collection Trap Most SGOs handle disbursement by transferring the scholarship to the family and asking them to submit receipts afterward. This approach has intuitive appeal — it is simple, uses standard bank transfer infrastructure, and puts the responsibility for qualified spending on the family. It does not work at meaningful scale. Here is why. **Families do not reliably submit receipts.** This is not a criticism of scholarship recipients — it is a realistic description of human behavior. When you receive money and spend it on your children's education, documenting those purchases and uploading them to a portal later requires a separate act of attention that many people do not complete. Compliance rates on voluntary receipt submission are typically well below 100%. An SGO that disbursed $400,000 in scholarships and collected receipts for $280,000 of it has a $120,000 documentation gap in its audit trail. **Receipts arrive late, out of order, and incompletely.** Even families who intend to submit receipts often do so weeks or months after the purchase, in batches, with missing information. A receipt for "$47.83 — Office Supplies Plus" tells you very little about whether the purchase was for qualified educational materials or general household supplies. **Receipt verification requires judgment, not just collection.** An SGO staff member reviewing a receipt cannot simply check that a receipt exists — they need to determine whether the specific purchase was a qualified educational expense. A computer purchased from Best Buy: was it used primarily for educational purposes? A tutoring service invoice: is the tutor qualified, and is the curriculum academic? These are not binary questions that can be answered by looking at a receipt. They require case-by-case assessment that is difficult to systematize and that consumes staff time most SGOs cannot afford under the 90/10 overhead constraint. **Gaps in the audit trail create retroactive liability.** The consequences of missing receipt documentation are not limited to the period when the gap is discovered. If a state annual review reveals that 20% of disbursements lack adequate documentation, the question for the regulator is not just about the current year — it is about whether previous years are similarly documented. A gap that seems minor in isolation can cascade into a review of the organization's entire compliance history. ## Three Channels, Not One A compliant disbursement system does not use a single payment method. It uses different channels for different expense types — each designed to create the strongest possible compliance record for that type of purchase. What the three have in common matters more than what separates them: none of them puts scholarship money in a family's hands. ## Direct Payment to the School For tuition — the single largest expense category for most scholarship programs — the cleanest compliance solution is to never let the money touch the family's hands at all. The SGO pays the school directly. **How it works:** The school is registered in the SGO's platform as an approved vendor with verified payment details. As the committee approves tuition awards, each approval *queues* a payment rather than sending one. Once several students at the same school have been approved, the SGO assembles a single payout batch for that school — one payment, one remittance list, however many students it covers. **The verification step that makes it airtight:** Before that batch can be released, the school itself confirms that every student on it actually attends. The school's registrar signs in to a portal, sees the list of students the payment would cover, and confirms each one. A batch in which even one student is unconfirmed cannot be sent. That is a materially stronger record than an invoice, because the school is not merely billing — it is attesting to enrollment, in writing, before any money moves. **Why the compliance record is clean:** The payment flow is a closed loop. Approvals in. Enrollment attested by the school. One payment out, accompanied by a remittance advice naming each student and their amount. There is no ambiguity about what the funds paid for, no receipt collection, no family self-reporting, and no after-the-fact verification. **The operational dividend:** Batching also removes real cost. An SGO paying 60 students across 12 schools individually executes 60 transfers, 60 reconciliation entries, and 60 chances to send the wrong amount to the wrong place. Batching executes 12. The school's bookkeeper receives one payment and one itemized list rather than 60 unexplained deposits — which is often the difference between a school that actively recommends your program and one that quietly stops. **Where direct-to-school falls short:** It works well for tuition and large fees but is impractical for small individual purchases — a $40 workbook, a $25 field trip fee, a $15 subscription to a required educational app. Schools do not invoice for those, and the administrative burden of a payment per item exceeds the value of the direct-payment approach. ## Procurement Instead of Spending Money For everyday educational expenses — books, supplies, educational software, required equipment — the strongest channel is not a payment at all. It is a purchase. Rather than giving a family money and constraining where they can spend it, the SGO buys the items itself, on its own business purchasing account. In practice that means a **PunchOut** session: the standard procurement handshake (cXML) that connects a buyer's system to a supplier's catalog. Staff open the student's award, click through to the SGO's own Amazon Business account, build a cart of the approved items, and submit it. The cart returns to the platform as a disbursement request with every line item priced. When it is approved, the platform places the order on the SGO's account and the goods ship straight to the student — the SGO is billed, the family never handles the money. **The compliance case for this approach:** The audit trail is a purchase order, not an inference. The record is not "a $47.83 transaction at a merchant whose category code suggests school supplies." It is "one algebra workbook, $18.99; one scientific calculator, $28.84 — ordered against student X's award, approved by staff member Y, on this date." Line-item detail is the strongest possible evidence that a purchase was a qualified educational expense, and it is produced automatically as a byproduct of buying the thing. **Why this beats a spend-restricted card.** A card locked to merchant categories can only ever tell you *where* money was spent, never *what* was bought — and merchant category codes are notoriously imprecise. A legitimate tutoring service coded as a general service business gets declined; a general retailer coded as a bookstore gets approved. Procurement sidesteps the problem entirely. There is no card to issue, freeze, or replace, nothing sits in a family's wallet, and the question "was this purchase qualified?" is answered by the item description rather than by an assumption about the merchant. **What procurement cannot do:** It cannot pay tuition. Schools are not catalogs. Procurement is the complement to the direct-to-school channel for everyday expenses, not a replacement for it. ## A Check to the Provider — The Edge Case Channel Some scholarship expenses fit neither channel. A specialized therapy provider that invoices on paper. A small tutoring service that only accepts checks. Adaptive equipment from a vendor with no online catalog. For these, the SGO issues a check — to the provider, never to the family. The provider is added to the vendor registry, the expense is requested against the student's award and approved under the same thresholds as any other disbursement, and staff record the check reference when it goes in the mail. **How this creates a defensible audit trail:** The documentation arrives before the payment rather than after it. The provider's invoice is on file, a staff member has reviewed it against the qualified expense categories, the approval is logged with a timestamp and a reviewer identity, and the check reference ties the payment back to the invoice. It is the same chain every other disbursement follows, simply executed on paper. **The appropriate scope of this channel:** This should be the edge case, not the primary method. It is the only channel that requires manual handling, so it is the only one whose cost scales linearly with volume. The direct-to-school and procurement channels exist precisely to keep the check rail small. ## How SGO Scholarship Policy Connects to Disbursement Design One of the underused levers available to SGOs is scholarship use policy — the rules each SGO sets about what its scholarships can pay for. Federal law establishes the universe of potentially qualifying expenses, but an SGO can restrict its scholarships to a subset of those categories. This policy decision is simultaneously a mission decision and a disbursement architecture decision. An SGO that restricts its scholarships to tuition only can operate a purely direct-to-school disbursement model. No purchasing account. No check runs. The compliance record is a set of payout batches carrying school enrollment attestations and payment confirmations, and the overhead burden is minimal. An SGO that covers tuition plus books and supplies needs both the direct-to-school channel for tuition and a business purchasing account for everyday items. More coverage means more channel complexity. An SGO covering the full Coverdell list — tuition, tutoring, technology, special needs services, supplementary materials — needs all three channels actively managed. The practical implication: designing your scholarship use policy is part of designing your disbursement infrastructure. An SGO that offers broad expense coverage without the infrastructure to manage compliance across all expense types has taken on more liability than it can operationally support. ## Building the Vendor Registry Both direct-to-school payment and checks to providers require a vendor registry — a database of approved schools and service providers with verified payment details and confirmed qualification status. Every school that receives tuition payments needs a registry record: verified payment details held in encrypted storage, a named contact who actually handles remittances, confirmed enrollment of the scholarship recipients, and documentation that it is a qualifying educational institution. Every provider that receives a check needs the same review before the first payment, not after it. This is real operational work. But it creates a compliance asset: a directory of pre-approved vendors where any payment carries a presumption of qualification because the vendor has already been reviewed. It also makes the batch model work — because the registry holds the remittance contact, each school receives its per-student payment list automatically instead of through an email chain. The more vendors in the registry, the less review burden on staff. ## What a Complete Disbursement Audit Trail Looks Like A complete disbursement record for each scholarship award should include: - The award decision, with income eligibility documentation and the committee's approval record - The disbursement channel used for each expense category - For direct-to-school payments: the school's attestation that the student is enrolled, the payout batch and its per-student remittance list, and the payment confirmation - For procurement orders: the line-item purchase record — description, quantity, unit price — and the order confirmation on the SGO's account - For checks to providers: the provider's invoice, the review and approval record, and the check reference - The remaining scholarship balance at the close of each award period Organizing these records by student and by award period — and maintaining them in a system that can produce them on demand in either aggregate or individual form — is an operational requirement, not an optional compliance enhancement. It is the difference between an organization that can answer a regulatory question in an afternoon and one that spends weeks reconstructing records from scattered sources. ## What Disbursement Practice Signals About the Organization Scholarship disbursement compliance is one of the most visible signals of how seriously an SGO takes its compliance obligations overall. An organization that has designed its disbursement system thoughtfully — with clear channels, automatic audit trails, and minimal reliance on family self-reporting — demonstrates operational sophistication that carries weight with state regulators, with major donors, and with the schools and families who depend on the program. An organization that has not thought through disbursement — that hands families unrestricted transfers and hopes for receipts — demonstrates the opposite. The documentation gaps it accumulates are not just a compliance risk. They are evidence, in the event of a regulatory review, that the organization approached its compliance obligations casually. That inference, once drawn, extends beyond disbursement to every other aspect of the SGO's operations. Disbursement is not a back-office function. It is part of how your organization presents itself to regulators, donors, and the families who trust you with their students' educational futures. Getting it right from the beginning is worth the operational investment. --- ### Faith Communities and Section 25F: The Compliance Tensions Unique to Religious Organizations Canonical URL: [https://sgoguide.com/blog/faith-communities-section-25f-compliance](https://sgoguide.com/blog/faith-communities-section-25f-compliance) Published: 2026-06-02 · Category: Strategy · 13 min read Faith communities are among the best-positioned organizations to take advantage of Section 25F. They have established giving relationships, community trust, and a natural alignment between their mission and the income-eligible student population the statute is designed to serve. They are also, in practice, the organizations that most frequently run into compliance problems — not because of bad intent, but because the federal compliance requirements for SGOs are in direct tension with the cultural norms of congregational giving. This post examines the four compliance tensions that are specific to faith-community SGOs, why each one is more acute in a religious organization context than in other SGO structures, and what organizations need to do to address them before the first contribution is received. ## The Earmarking Tension: When Congregational Giving Meets Federal Law The no-earmarking requirement is the most universally understood compliance rule in Section 25F. What is less understood is how difficult it is to actually implement in a congregation that has been giving to its school community for decades. In most faith communities, giving is relational. A parishioner donates because of a personal connection — to the school, to the families in the school community, to the mission of faith-based education specifically. That connection is often the thing that makes them a donor at all. When an SGO tells a donor that their contribution cannot be directed toward the school they care about or the families they know, it creates friction that can cause the donor to withdraw entirely. **Why this is harder in faith communities than elsewhere.** A community foundation SGO or a civic nonprofit starting an SGO has a more transactional donor relationship — donors give because they support the mission generally, not because of a specific personal tie to specific recipients. Faith communities have the opposite structure. The giving is deeply personal by design. **What makes it a legal problem, not just a relationship problem.** The no-earmarking prohibition applies to implicit earmarking as well as explicit requests. An SGO that only markets to one congregation's community, only accepts applications from families who attend that congregation's school, and awards all scholarships to students at that school has created structural earmarking — even if no donor ever explicitly requested it. The distribution of the applicant pool, not just what donors say when they give, determines compliance. **The solution is communication before, not correction after.** The most effective approach is to set donor expectations correctly before the first contribution is received. Donors who understand the no-earmarking requirement and the reason for it — that the federal tax credit is only possible because the program is genuinely arm's-length — accept it more readily than donors who learn about it after they expected to direct their gift. The SGO's donor onboarding process should explain this clearly, in plain language, as a feature of how the tax credit works rather than as a bureaucratic restriction. ## The Single-School Problem: When Your Community All Attends One School Section 25F requires that scholarships be awarded to ten or more students who do not all attend the same school. The threshold is ten students, not ten schools — but the awards cannot all land at one campus. That is straightforward for a large diocesan network with twenty campuses. It is genuinely difficult for a congregation that has one school, whose entire community sends children to that school, and whose scholarship program is naturally oriented toward helping those families. The single-school distribution requirement is not just a technical hurdle. It is a structural feature of the program designed to ensure that SGOs are operating as genuine scholarship programs rather than as tuition assistance mechanisms for a single institution. An SGO that awards all scholarships to students at one school is, in substance, a tuition assistance program — and the federal tax credit is not available for tuition assistance to a specific school. **How this plays out operationally.** An SGO formed by a single church to support families at its attached school can technically open its application to students at other schools. But if the only outreach is to the congregation's community, the only applicants will be from that school. An application process that generates a diverse applicant pool requires outreach that goes beyond the congregation — to neighboring schools, through community organizations, through the income-eligible population more broadly. This is not optional; it is a prerequisite for compliant operation. **The governance implication.** An award committee made up entirely of congregation members, using scholarship criteria written to favor the congregation's school community, will tend to produce award decisions that concentrate at that school — even without explicit intent. The committee structure and criteria must be designed to produce genuinely distributed awards, not just to avoid explicit earmarking. **For smaller single-school communities, the partnership option is worth evaluating.** An organization that cannot realistically achieve multi-school distribution may be better served by partnering with an existing SGO that already operates across multiple schools, rather than forming its own. The scholarship dollars can still flow to the community's students, but through an existing infrastructure that handles the multi-school distribution requirement. See our earlier post on [forming your own SGO versus partnering with an existing one](/blog/form-your-own-sgo-or-partner-with-existing). ## Qualified Expenses and Faith-Integrated Curriculum The qualified expense definition for Section 25F scholarships comes from the Coverdell Education Savings Account rules (IRC §530(b)(4)). Coverdell expenses include tuition, fees, books, tutoring, academic enrichment, and educational technology — but they do not include non-educational religious programming. In most private K-12 schools, the line between education and other activities is clear enough. In a faith-integrated school — where Scripture is woven through the academic curriculum, where theology is part of the standard course sequence, where the school's academic mission and its religious mission are intentionally inseparable — that line is genuinely ambiguous. **The questions that need answers before the scholarship launches.** Does the cost of a full-year enrollment at a faith-integrated school qualify entirely as a Coverdell expense? Does the qualification depend on whether the school separates religious instruction from secular academic instruction in its schedule? Is the cost of a mandatory chapel program that includes academic components a qualified expense? Is a tutoring program that uses Scripture as instructional text a qualified academic tutoring expense? **Why this matters at formation, not operation.** An SGO that awards scholarships for tuition at a faith-integrated school without having worked through the qualified expense analysis is taking a position without a written rationale. If the IRS later determines that some portion of the tuition does not qualify under Coverdell definitions, the organization may have awarded scholarships for non-qualified expenses — a compliance failure that could affect its approved status and donors' ability to claim their credits. **The practical approach.** Work with qualified tax counsel before the first scholarship is awarded to develop a written analysis of how your specific school's or program's costs map to the Coverdell expense categories. Document the methodology. Where the analysis is uncertain — components that might or might not qualify — note the uncertainty and the position you are taking. This documentation is the foundation of a good-faith compliance record. ## Governance Independence in Close Communities The scholarship award committee is the most compliance-sensitive governance structure in an SGO. Its decisions — who receives scholarships, how much, for what expenses — are the output of the entire system. If those decisions are not genuinely independent, the SGO's compliance foundation is compromised. In faith communities, the governance challenge is structural. The people who are most qualified to serve on a scholarship committee — who know the community, the families, the school — are often the same people who are major donors to the SGO, whose children attend the school, or who have close relationships with specific families in the applicant pool. Excluding them entirely may not be realistic. Allowing them to participate without safeguards creates independence problems. **What arm's-length independence actually requires.** The committee's decisions must be made on the basis of the established scholarship criteria, not on the basis of committee members' knowledge of specific families or preferences about where scholarship funds should flow. This does not require that committee members be strangers to the community — but it does require that the committee's process be structured so that personal relationships cannot drive award decisions. **Practical structure options.** Several structural approaches can achieve independence within a faith community context: A **blind review process** — in which scholarship applications are reviewed without the applicant's name, school, or identifiable information during the initial scoring phase — prevents personal relationships from influencing the initial selection. Only after initial scoring are identities revealed, for conflict-of-interest checking. A **community advisory committee** that includes members from outside the founding congregation — educators, community members, or professionals with no direct relationship to the school — adds external perspective and reduces the appearance of a closed process. **Recusal policies** that require committee members to disclose relationships with applicants or their families, and to abstain from decisions where a relationship exists, provide a documented process for managing conflicts that cannot be fully avoided in a small community. **Documentation of the process** — what criteria were applied, who was recused, how the final decisions were made — is the evidentiary foundation for demonstrating independence if the SGO's award process is ever questioned. ## The Common Thread The compliance challenges facing faith-based SGOs are not fundamentally different from the challenges any SGO faces. The same no-earmarking rule applies. The same multi-school distribution requirement applies. The same arm's-length award standard applies. What is different is the community context in which those requirements must be implemented. A compliance framework designed for a community foundation SGO will not work, without modification, for a parish SGO. The donor communication needs to speak to donors who have personal stakes in the outcome. The applicant outreach needs to go genuinely beyond the congregation. The award committee needs structural safeguards appropriate to a tight-knit community. Getting the faith-community compliance framework right requires understanding both the regulatory requirements and the community they are being applied to. The organizations that do this well — that design their donor programs, their award processes, and their governance around both the statute and the community's culture — build scholarship programs that are genuinely sustainable. The organizations that apply a generic compliance template to a faith community context are the ones that discover, mid-operation, that the template does not fit. For Christian schools and churches specifically, see our [dedicated guide to Christian school SGO formation](/christian-schools). For all faith traditions, see our [faith-based SGO overview](/faith-based-sgo). --- ### The SGO Compliance Calendar: What Your Organization Must Do Every Month and Year Canonical URL: [https://sgoguide.com/blog/sgo-compliance-calendar](https://sgoguide.com/blog/sgo-compliance-calendar) Published: 2026-05-20 · Category: How-To · 13 min read Most organizations approaching SGO formation focus on what they need to do to get started — the legal formation, the IRS application, the state approval. That is the right focus during the formation phase. But the harder, longer-term question is what your organization needs to do to stay compliant once it is up and running. A Section 25F SGO has ongoing compliance obligations at multiple time horizons: some things need to happen in real time with each contribution or scholarship award, some things need to happen on a monthly basis, some are quarterly, and some are annual. Organizations that treat compliance as a year-end exercise discover mid-year problems too late to fix them without significant disruption. This calendar covers the ongoing compliance obligations for an operating SGO. ## Real-Time: With Each Contribution **Verify donor eligibility and contribution limits.** Not every person who wants to contribute to your SGO is eligible for the Section 25F credit — the credit is only available to individual taxpayers, not corporations or businesses. Before accepting a contribution, confirm it is from an individual donor. Also track each donor's cumulative contributions for the year to enforce the $1,700 per-taxpayer annual cap. A donor who contributes $1,000 in March and $1,000 in October has exceeded the cap — only the first $1,700 of contributions generates a credit. **Issue a Section 25F tax credit receipt promptly.** When a donor makes a qualified contribution, issue a receipt that complies with Section 25F requirements. The receipt should document the contribution amount, the date, the SGO's state approval information, and the donor's eligibility for the credit. Do not batch receipts at year end — issue them promptly when contributions are received. **Record the contribution in your donor management system.** Your records need to track each donor's contributions across the full calendar year. Integrate contribution records into your 90/10 ratio tracking from the moment the contribution is received. ## Real-Time: With Each Scholarship Award **Verify income eligibility before awarding.** The income verification must be completed and documented before the scholarship is awarded, not after. An award made without income verification is a compliance failure regardless of whether the recipient would have qualified. **Document the committee's award decision.** The scholarship committee's meeting, the applications reviewed, the criteria applied, and the awards made should be documented in meeting minutes or a decision record. This does not need to be elaborate, but it needs to exist. **Confirm multi-school distribution at each award cycle.** Before finalizing any award cycle, verify that the awards being made — combined with any prior awards in the same cycle — will meet the multi-school distribution requirement. Do not complete an award cycle in which all scholarships go to students at the same school. **Issue scholarship disbursements in accordance with the award.** Pay qualifying expenses directly to the institution or vendor when possible. When reimbursement is necessary, collect receipts that document the qualified expenses. ## Monthly: Ongoing Operations **Track the 90/10 overhead ratio.** At the end of each month, calculate your year-to-date overhead ratio: total overhead costs to date divided by total revenues to date. This number should never approach 10% in a way that is not controllable. If your overhead ratio is tracking toward the limit in the first half of the year, you have time to accelerate fundraising or reduce discretionary costs. If you discover this in November, your options are much more limited. **Reconcile contribution records.** Monthly bank reconciliation is standard accounting practice. For SGOs, it also serves a compliance function: verifying that contributions received match your donor management records and that no contributions were received that are not properly recorded. **Review any pending income verification cases.** Applications where income documentation is incomplete or borderline should not sit unresolved. Monthly review of pending verification cases keeps your award pipeline from backing up. **Monitor regulatory developments.** The regulatory environment for Section 25F is actively developing. IRS guidance, state regulatory updates, and legislative changes can affect your compliance obligations. Monthly monitoring — at minimum a review of IRS releases and state agency communications — keeps your organization ahead of regulatory change. ## Quarterly: Process and Governance **Scholarship committee meeting (if quarterly award cycles).** Many SGOs run scholarship award cycles on a quarterly basis. Each cycle requires a committee meeting, documented deliberations, and award decisions that meet the arm's-length standard. Do not let cycles run without formal committee meetings. **Board report on compliance metrics.** The SGO's board has governance responsibility for the organization's compliance. Each quarter, the board should receive a report that includes: contributions received and the 90/10 ratio to date, scholarships awarded and multi-school distribution status, any pending income verification issues, and any regulatory developments that may affect operations. Board governance that is disconnected from compliance metrics is not effective governance. **State reporting check-in.** Review your state's annual reporting requirements and the documentation you are accumulating toward that report. If your state requires specific data that you are not currently collecting, identify the gap while there is time to fill it. **Review donor communications for compliance.** Periodically review your donor-facing materials — website content, fundraising communications, social media — to ensure that no language implies donors can direct contributions to specific students or schools. The no-earmarking prohibition applies to implied earmarking, not just explicit requests. ## Annually: Required Filings and Formal Reviews **State annual report.** Section 25F requires that approved SGOs file annual reports with the state in which they are approved. Each state specifies the content and format of its annual report. Most states will require: total contributions received, total scholarships awarded, distribution of scholarships by school and expense category, the income verification methodology, and a certification that the SGO met its compliance obligations for the year. File on time — state annual reports are a condition of maintaining approved status. **IRS Form 990.** As a 501(c)(3) organization, your SGO must file an annual information return with the IRS. The form appropriate for your organization depends on gross receipts: 990-N for organizations with gross receipts under $50,000, 990-EZ for organizations with receipts between $50,000 and $200,000, and full Form 990 for organizations with receipts over $200,000. Most meaningful SGOs will file the full Form 990. The 990 is a public document — it will be reviewed by donors, researchers, and regulators. **Annual financial review or audit.** Depending on your state's requirements and your organization's size, an annual financial review or audit may be required. Even where it is not required, a financial review provides valuable assurance that your accounting practices are sound and your 90/10 calculations are accurate. **Board governance review.** Once per year, the board should formally review: the SGO's scholarship criteria (are they still appropriate for the mission?), the scholarship committee structure (does it have appropriate independence?), the donor communications (do they comply with the no-earmarking requirement?), and the organization's overhead structure (is the 90/10 ratio sustainable at current program scale?). **Regulatory update review.** At the end of each calendar year, conduct a formal review of regulatory developments from the prior year and assess their implications for your organization's operations. Update your income verification thresholds for the new year using current HUD AMI data. Assess whether any changes to state regulations require amendments to your governing documents or operational procedures. **Update AMI thresholds.** HUD publishes updated area median income figures each year. Update your income eligibility thresholds as soon as new figures are available — typically mid-year. Document the update and the date it was implemented. ## The Compliance Culture A calendar of tasks does not create a compliance culture. Compliance culture comes from an organization's leadership understanding that the tax credits donors receive are real federal tax benefits, and that those benefits depend on the SGO operating exactly as the statute requires. Organizations that treat compliance as a burden to be minimized — doing the minimum to check the boxes — are the organizations that accumulate the small lapses that become large problems. Organizations that treat compliance as the foundation of their credibility with donors, students, and states are the ones that build lasting, successful scholarship programs. The compliance calendar is a tool. The commitment behind it is what makes it work. --- ### The $1,700 Federal Scholarship Tax Credit: A Complete Guide for Donors Canonical URL: [https://sgoguide.com/blog/section-25f-tax-credit-guide-for-donors](https://sgoguide.com/blog/section-25f-tax-credit-guide-for-donors) Published: 2026-05-14 · Category: How-To · 10 min read The Section 25F scholarship tax credit is one of the more taxpayer-friendly provisions in the One Big Beautiful Bill Act. Unlike a charitable deduction — which reduces your taxable income and saves you taxes at your marginal rate — the Section 25F credit directly reduces your federal income tax liability dollar for dollar. For a donor in the 22% tax bracket who donates $1,000 to a qualifying SGO, a charitable deduction would save $220 in taxes. The Section 25F credit saves the full $1,000. That difference is why the program has attracted significant donor interest. A quick note on names, because coverage is inconsistent: you may see this program called the Federal Scholarship Tax Credit (FSTC) — the IRS's official label — or the Education Freedom Tax Credit in news reports. They all refer to the same program; Section 25F is the tax-code citation. This guide explains how the credit works, what you need to claim it, and the rules that govern it. ## The Basic Mechanics The Section 25F credit is a non-refundable credit against regular federal income tax liability. Here is what that means in practice: **Dollar-for-dollar reduction.** For every dollar you contribute to a qualifying Scholarship Granting Organization, you receive one dollar of reduction in your federal income tax liability. A $1,700 contribution generates a $1,700 credit. **Non-refundable.** The credit can reduce your federal income tax liability to zero, but it cannot generate a refund. If your federal income tax liability for the year is $900 and you contributed $1,700 to a qualifying SGO, your credit is limited to $900 — the amount of your tax liability. The remaining $800 of credit is not refunded in that year, but it is not lost either: Section 25F carries unused credit forward for up to five succeeding tax years. **Against regular income tax, not AMT.** The credit applies against regular income tax. The interaction with the Alternative Minimum Tax is a question IRS guidance will need to address, but the statutory language suggests the credit is not available to offset AMT liability directly. ## The Annual Contribution Limit The statute caps the credit at $1,700 per taxpayer per year. For married couples filing jointly, the limit is $3,400 — each spouse's $1,700 limit is effectively combined. Several important clarifications: **The limit is per taxpayer, not per SGO.** You can split your $1,700 across multiple SGOs — $1,000 to one and $700 to another — and claim a credit for the combined amount. The limit is on the total credit you can claim, not on the amount you can contribute to any single organization. **Contributions above the limit do not generate additional credit.** If you contribute $2,500 to a qualifying SGO, you can claim a credit for $1,700. The additional $800 does not generate a federal tax credit under Section 25F. It may still be deductible as a charitable contribution under Section 170 if you itemize, but it does not generate the dollar-for-dollar credit. **The limit applies to qualified SGO contributions only.** Contributions to organizations that are not qualifying SGOs — including general scholarship funds, private foundations, and even other types of school-choice organizations — do not generate the Section 25F credit. ## What Makes an SGO "Qualifying" Not every organization that calls itself an SGO generates the Section 25F credit. A qualifying SGO must: - Be approved by a state that has enacted Section 25F opt-in legislation - Hold 501(c)(3) status with primary SGO mission - Award scholarships to ten or more students at multiple schools - Prohibit donor earmarking **The state approval requirement is essential.** An organization that meets all the structural requirements but has not yet received state approval is not a qualifying SGO for credit purposes. Before making a contribution you intend to claim as a Section 25F credit, verify that the organization holds valid state approval. ## What You Need to Claim the Credit To claim the Section 25F credit on your federal income tax return, you need: **A Section 25F tax credit receipt from the SGO.** This is not the same as a charitable contribution acknowledgment under Section 170. The Section 25F receipt must confirm that the contribution was made to a qualifying SGO, the amount of the contribution that qualifies for the credit (up to $1,700), and the SGO's state approval information. The IRS has not yet issued final guidance on the exact content requirements for these receipts, but qualifying SGOs should be issuing receipts that clearly identify the contribution as a qualified Section 25F contribution. **Accurate records of your contribution.** Keep your bank records, credit card statements, or canceled checks confirming the contribution and its date. The date matters — contributions must be made during the tax year for which you claim the credit. **The contribution must be to an approved SGO in an opted-in state.** As of the 2027 tax year, the credit is available for contributions made in calendar year 2027 to SGOs operating in states that have opted into the program. ## How It Interacts With the Charitable Deduction The Section 25F credit and the Section 170 charitable deduction are not mutually exclusive for the portion of a contribution that exceeds the $1,700 credit cap — but they cannot both apply to the same dollars. For the $1,700 (or less) that generates the Section 25F credit, you cannot also claim a charitable deduction. The credit and the deduction cannot both apply to the same contribution. For contributions that exceed the $1,700 limit, the excess may be deductible under Section 170 if you itemize deductions — but this requires that the SGO is also a qualifying charitable organization (which it should be, given its 501(c)(3) status) and that your itemized deductions exceed the standard deduction. For most donors, the Section 25F credit is more valuable than the charitable deduction for the same amount. The dollar-for-dollar credit generates more tax savings than a deduction at any marginal rate below 100%. ## Common Questions **Do I need to itemize to claim the credit?** No. Credits are not deductions and do not require itemization. You can claim the Section 25F credit and still take the standard deduction. **Does the credit expire?** The credit is a permanent feature of the Internal Revenue Code as amended by the OBBBA. It is not subject to a sunset provision under current law. **Can corporations or businesses claim the credit?** The Section 25F credit is available to individual taxpayers. It is not a business credit. Business contributions to SGOs may be deductible as charitable contributions, but they do not generate the Section 25F credit. **What if the SGO I contributed to loses its approved status?** If an SGO loses its state-approved status for a year in which you made a qualified contribution, there is risk that your credit could be disallowed. This is a reason to contribute to well-established, operationally sound SGOs rather than newly formed organizations with uncertain compliance track records. The Section 25F credit is a genuinely valuable federal tax benefit. For donors who are positioned to use it — those with sufficient federal income tax liability to absorb a $1,700 credit — it makes contributing to a qualifying SGO one of the most tax-efficient forms of charitable giving available under federal law. --- ### SGO Scholarship Eligibility: How the 300% AMI Requirement Works in Practice Canonical URL: [https://sgoguide.com/blog/sgo-income-eligibility-300-percent-ami](https://sgoguide.com/blog/sgo-income-eligibility-300-percent-ami) Published: 2026-04-29 · Category: How-To · 11 min read The income eligibility requirement for Section 25F scholarships is one of the more technically demanding compliance elements of the SGO program. Every scholarship award must go to a student from a household that meets the income threshold — and the SGO, not the student's family, is responsible for verifying that threshold before the award is made. Getting income verification right matters because an award made to an ineligible student is a compliance failure, not just an administrative error. A pattern of awards to ineligible students is the kind of finding that puts an SGO's approved status at risk. ## What the Statute Requires Section 25F restricts scholarships to students from households with income at or below 300% of area median gross income. Three terms in that phrase require careful attention. **"Household."** Income is assessed at the household level — the people living together and sharing expenses in the student's home — not just the income of the student's parents. In most cases household income and parental income are the same thing. In non-standard household configurations — a student living with grandparents who provide primary support, or a student in a blended family with a non-custodial parent contributing income — the determination of whose income counts is a question of facts and circumstances. Document your methodology. **"Area median gross income."** The statute uses the phrase "area median gross income," which is not identical to the "area median income" (AMI) published by HUD for housing program purposes. HUD's AMI figures are the most widely used reference point for area median income determinations, and in the absence of IRS guidance specifying a different data source, most SGOs are using HUD's figures as their reference. This is a reasonable, well-documented position — but it is a position, not settled law. Document the methodology your organization uses for its income threshold determinations. **"300%."** Three hundred percent of area median gross income is a high threshold. A household earning up to three times the area median income qualifies. In most markets, this captures a broad middle-income range — not just low-income families. The program is not limited to families in financial distress; it is available to a wide income band that includes working and middle-class families who face genuine affordability challenges in private K-12 education. ## How AMI Varies by Location Area median income is not a single national number. It is calculated at the metropolitan statistical area (MSA) level and varies significantly across markets. A household earning $120,000 per year might be well above the income threshold in a lower-cost rural county but comfortably within the threshold in a high-cost metropolitan area where median income is high. This geographic variation means your income verification process must use the correct AMI figure for the specific area where the student's household is located — not a statewide average or a national figure. HUD publishes updated AMI figures annually. Your income verification process should use the current-year figures, and you should update your system each year when HUD publishes new data. An SGO that is using prior-year AMI figures and has not updated them may be applying thresholds that are too low — potentially disqualifying families who are actually eligible — or too high — potentially awarding scholarships to families who do not qualify. ## What Documentation to Collect Income verification requires documentation that allows you to determine household income with reasonable certainty. The IRS has not yet issued specific guidance on what documentation is required, but analogous scholarship tax credit programs at the state level have established useful practices: **Federal tax return (most recent year).** The prior year's federal income tax return, specifically Form 1040, provides adjusted gross income. This is the most reliable documentation because it reflects the household's income as reported to the IRS. Families who have not yet filed for the most recent year should provide the prior-prior year return, with a notation of the filing status. **W-2s and 1099s.** For families whose income situation changed significantly from the prior year (job change, income loss, or new income sources), supplementing the tax return with current-year wage statements provides a more accurate picture. **Attestation from the applicant.** Many programs require the applicant household to attest in writing that the income documentation provided is accurate and complete. This does not independently verify income, but it creates a record that the family represented their income accurately. **Documentation of non-employment income.** Social Security, child support, disability payments, and other non-employment income sources are income for threshold purposes. Your application should ask families to disclose all income sources, not just wages. ## The Verification Process Verification is the SGO's responsibility, not the student's school and not the student's family. The SGO must review the documentation, apply the correct AMI threshold for the student's location, and make a determination before the scholarship is awarded. A practical verification workflow: 1. Collect income documentation as part of the scholarship application 2. Determine the applicable AMI figure based on the student's household location 3. Calculate 300% of that AMI figure 4. Compare the documented household income to the threshold 5. Make and record the eligibility determination 6. Retain the documentation The determination record — documenting which AMI figure was used, what the threshold calculation produced, and what the household's documented income was — is the heart of your compliance record for each scholarship. If your SGO is ever audited, this is the documentation that demonstrates each award was made to an eligible student. ## Managing Difficult Cases **Families near the threshold.** A family whose income is close to the 300% threshold creates verification risk if the documentation is ambiguous. When income is near the threshold, require complete documentation and apply the threshold conservatively. Awarding to a family that is slightly over the threshold is a compliance failure; declining to award to a family that is slightly under is a conservative judgment call. **Families with variable income.** A family with significant income variability — seasonal workers, commission-based income, self-employment — may have a prior-year return that does not accurately represent current-year income. Consider whether current-year documentation (YTD pay stubs, bank statements) should supplement the tax return for high-variability situations. **Families that cannot produce documentation.** Some families do not file federal tax returns — either because their income is below the filing threshold or for other reasons. For these families, alternative documentation (Social Security statements, benefits letters, employer letters) should be collected. Document your approach to non-standard situations. **Returning scholarship recipients.** Section 25F creates a priority for returning scholarship recipients and their siblings. Your income verification must be updated each year for returning recipients — a family that was income-eligible two years ago may not be today. Income eligibility verification is not a bureaucratic formality. It is the mechanism through which the SGO demonstrates that its scholarships are reaching the intended population. Get the process right from the first award cycle. --- ### Section 25F Proposed Rules: What SGOs Need to Know Before Finalizing Their Structures Canonical URL: [https://sgoguide.com/blog/section-25f-proposed-rules-what-sgos-need-to-know](https://sgoguide.com/blog/section-25f-proposed-rules-what-sgos-need-to-know) Published: 2026-04-15 · Category: Regulatory Updates · 12 min read **Update (July 2026):** Treasury previewed its forthcoming Section 25F regulations on June 9, 2026, resolving several of the open questions discussed below — including the safe harbor for the 90% test and the multistate account rules. For current coverage, see [Treasury's June 2026 Section 25F Preview: Every Item, Explained](/blog/treasury-june-2026-section-25f-preview). The analysis below reflects the landscape as of April 2026. Section 25F of the Internal Revenue Code, enacted as part of the One Big Beautiful Bill Act, creates the federal Scholarship Granting Organization program. The statute is effective January 1, 2027. The IRS has not yet issued final regulations interpreting the statute — but organizations that wait for final rules before beginning formation will miss the 2027 window entirely. This post covers what the statute says, where regulatory uncertainty exists, and how SGOs should structure their operations in light of that uncertainty. ## What the Statute Establishes Section 25F creates a federal tax credit for individual taxpayers who make contributions to state-approved Scholarship Granting Organizations. The credit is non-refundable, taken against regular income tax liability, and is capped at $1,700 per taxpayer per year (with specific rules for married couples filing jointly). The statute requires that qualifying SGOs meet four structural conditions: **1. State Approval.** The SGO must appear on the certified list of a state that has elected to participate. A federal tax credit is only available for contributions to SGOs operating in states that have formally opted into the program. This state-by-state approval requirement creates significant geographic complexity for organizations operating across state lines. **2. Section 501(c)(3) Status.** The SGO must qualify under Section 501(c)(3) of the Internal Revenue Code, and its primary mission must be to provide scholarships to eligible students. This primary mission requirement has real consequences: existing 501(c)(3) organizations that have broad educational missions may need to amend their governing documents before qualifying. **3. Scholarship Distribution to Multiple Students and Schools.** The statute requires that scholarships be awarded to ten or more students who do not all attend the same school. This multi-student, multi-school requirement is the statutory basis for the arm's-length award process that SGOs must implement. An SGO that effectively serves a single school's population faces structural compliance risk under this provision. **4. No Earmarking.** Scholarship awards cannot be conditioned on the donor's identity or preferences. A donor cannot designate that their contribution benefit a specific student or a student at a specific school. This prohibition is explicit in the statute and is one of the most commonly misunderstood compliance requirements — particularly in faith community contexts where donors may expect their giving to benefit "their" community. ## Where Regulatory Gaps Exist The statute establishes these structural requirements but leaves several important implementation questions to the IRS to resolve through regulation. **Qualified Expense Definitions.** Section 25F incorporates the Coverdell Education Savings Account expense definitions (Section 530(b)(4)) to define what scholarship funds can pay for. The Coverdell categories include tuition, fees, tutoring, academic enrichment, and educational materials at eligible institutions — both private K-12 schools and public school supplemental programs. However, the IRS has not yet provided guidance on how these categories apply in specific contexts. An after-school tutoring program that includes ministry components alongside academic content: what portion qualifies? A private school that provides services across multiple buildings on different campuses: is this one school or multiple for the ten-school distribution requirement? These questions await regulatory answers. **Income Verification Standards.** The statute ties scholarship eligibility to household income at 300% of area median gross income. Area median income is a figure published by HUD for use in housing programs — but the Section 25F statute uses "area median gross income," a term that is not identical to HUD's published figures. Whether "area median gross income" tracks HUD's AMI figures, uses a different data source, or requires an independent calculation is a question that final regulations will need to answer. In the interim, SGOs that calibrate their income verification to HUD area median income are making a reasonable, documented choice — but they should maintain records of that methodology. **State Reporting Requirements.** The statute requires that SGOs file annual reports with the state in which they are approved. The content and format of those reports is left to the states, which means that multi-state SGOs face different annual reporting requirements in each state. States with well-developed opt-in frameworks have begun to specify their reporting requirements; states in earlier stages of framework development have not yet done so. **Donor Receipt Content.** Tax credit receipts under Section 25F are not the same as charitable contribution receipts under Section 170. The specific content requirements for a valid Section 25F tax credit receipt — the information that must appear on the receipt for a donor to successfully claim the credit — have not yet been specified in IRS guidance. SGOs should be designing their receipt systems now, based on the statutory language and analogous guidance from state tax credit programs, and should be prepared to update their systems when final guidance issues. ## What SGOs Should Be Doing Now Given the regulatory gap, the question for organizations in formation is how to structure their operations prudently in the absence of complete guidance. **Base formation decisions on the statute, not anticipated regulations.** The statute is clear on the structural requirements: 501(c)(3) with primary SGO mission, state approval, multi-student multi-school distribution, and no earmarking. These requirements are not subject to regulatory revision — they are statutory. Form your organization to comply with these requirements now. **Document every methodology decision.** Where the statute is ambiguous — expense categorization, income verification methodology, what constitutes a "school" for distribution purposes — document the rationale for the position you take. If the IRS issues final regulations that require adjustments, having documented your methodology demonstrates good faith and makes remediation straightforward. **Build adaptable systems, not brittle ones.** Your donor receipt generation system, your income verification workflow, and your state reporting infrastructure should be designed to be updated as regulatory guidance issues. This means using platforms that can be reconfigured as requirements evolve, not custom-coded systems that are expensive to change. **Monitor the regulatory process.** The IRS published a request for information in late 2025 seeking input on Section 25F implementation. Comments submitted in response to that request will inform the proposed regulations. Following the regulatory process — and having advisors who are following it closely — means you will not be surprised when proposed rules issue. **Do not wait for final regulations to begin formation.** The formation and state approval process takes four to six months at minimum, and state approval timelines vary significantly. Organizations that begin in mid-2026 may not complete state approval before January 1, 2027. Organizations that wait for final regulations — which may issue in late 2026 — will almost certainly miss the first operational year of the program. The regulatory environment for Section 25F will continue to evolve through 2027 and beyond. An ongoing infrastructure partner — not just formation counsel — is essential for organizations that need to track and implement regulatory changes as they occur. --- ### What Can Section 25F SGO Scholarships Pay For? A Guide to Qualified Expenses Canonical URL: [https://sgoguide.com/blog/section-25f-qualified-expenses-guide](https://sgoguide.com/blog/section-25f-qualified-expenses-guide) Published: 2026-04-08 · Category: Regulatory Updates · 10 min read One of the practical questions that SGOs face early in their operational planning is: exactly what can scholarships pay for? The answer comes from an unlikely source — the Coverdell Education Savings Account rules under Section 530(b)(4) of the Internal Revenue Code, which Section 25F incorporates by reference to define qualified educational expenses. Understanding the Coverdell expense categories, and how they apply in the Section 25F context, is essential for designing your scholarship program and for advising applicant families on what expenses are eligible for awards. ## The Coverdell Framework Section 530(b)(4) of the Internal Revenue Code defines qualified education expenses for Coverdell purposes as: - Tuition, fees, books, supplies, and equipment required for enrollment or attendance - Academic tutoring - Special needs services for a beneficiary with special needs - Room and board (subject to limits) for full-time students - Uniforms required by the school - Transportation costs to and from the school - Computer technology, equipment, or internet access and related services (if used by the student primarily for educational purposes) - Supplementary educational items For Section 25F purposes, these categories apply to elementary and secondary education (K-12) rather than to higher education. The expenses must be incurred in connection with the student's attendance at an eligible school. ## What Clearly Qualifies **Tuition and required fees.** The core scholarship use case — paying for tuition and fees required for enrollment at a private K-12 school. This is unambiguous. **Required textbooks, supplies, and equipment.** Books and supplies that the school requires for coursework are qualified expenses. The "required" standard matters — books that the student chooses to buy but that are not required by the school are more questionable. **Academic tutoring.** Tutoring services provided by a qualified tutor to supplement classroom instruction are qualified expenses. The tutoring should be academic in nature — subject-matter instruction that directly supports the student's education. **Uniforms.** If the school requires uniforms, the cost of those uniforms is a qualified expense. Schools that have dress codes but do not require specific uniform items create more ambiguity. **Computer equipment and internet access.** A computer or tablet purchased primarily for educational use, and internet access used primarily for educational purposes, are qualified expenses. The "primarily for educational purposes" standard requires judgment — a family that purchases a gaming-focused PC and calls it a school computer is testing the boundary of this provision. **Special education services.** For students with identified special needs, services designed to address those needs in an educational context are qualified expenses. Documentation of the need and the service's educational connection is important. ## What Does Not Qualify **Non-required enrichment activities.** Extracurricular activities that are not part of the school's curriculum — a sports league, a private music studio, summer camp — are not qualified expenses even if they are educational in a broad sense. The expense must be connected to the student's attendance at an eligible school. **Medical expenses.** Healthcare costs, even those incurred by a student in connection with school attendance (a required physical for sports, for example), are not qualified education expenses under the Coverdell framework. **After-school care.** Childcare and after-school supervision programs that are not academic in nature are not qualified expenses, even if they are provided by the school. **College preparatory expenses not connected to K-12 enrollment.** SAT prep courses, college application fees, and similar expenses oriented toward post-secondary education are not qualified K-12 expenses under Section 25F. ## The Gray Areas Several categories of expenses present genuine uncertainty, and IRS guidance on Section 25F may eventually address them. **Transportation.** The Coverdell framework includes transportation costs to and from school as qualified expenses. In practice, this means school bus fees and similar transportation costs required for the student to attend school. Whether it extends to private car transportation costs (fuel, mileage) or to transportation associated with educational activities away from the main campus is less clear. **Educational technology that serves multiple purposes.** A laptop that a student uses for schoolwork and personal entertainment is a common fact pattern. The "primarily for educational purposes" standard creates a judgment call that is fact-specific. Documentation of how the device is used in the school's curriculum strengthens the position that it is a qualified expense. **Programs with mixed educational and religious content.** For faith-based schools that integrate religious instruction into their academic curriculum, the religious components of an otherwise academic program are not clearly excluded by the Coverdell framework. The statute does not contain an explicit exclusion for faith-based educational content. However, this area is likely to receive regulatory attention, and SGOs serving faith-based school communities should monitor IRS guidance closely. **Educational programs outside the traditional classroom.** Home-based schooling programs, virtual schools, and non-traditional educational models create questions about which expenses are "required for enrollment or attendance." A home-schooled student enrolled in a formal curriculum program has a clearer claim to qualified expenses than a student in a loosely organized home-education arrangement. ## How SGOs Should Manage Qualified Expenses The practical implication of these rules is that SGOs should not simply write checks to families or students and leave expense categorization to them. A scholarship awarded "for education" without more specific guidance creates the risk that families use the funds for non-qualified purposes, which puts the scholarship's compliance status at risk. **Design your award as reimbursement or direct payment.** Rather than distributing scholarship funds to families, consider paying qualifying institutions and vendors directly. A check written to the school for tuition is unambiguously a qualified expense. A check written to a family with an instruction to use it for qualified expenses is harder to verify. **Provide families with a qualified expense list.** As part of your scholarship award documentation, give families a clear explanation of what expenses qualify and what does not. When families understand the rules, they are more likely to use funds appropriately. **Require receipts for reimbursement awards.** If your program uses a reimbursement model — families pay first, then submit receipts — require that receipts accompany reimbursement requests and that the expenses on the receipts are clearly categorized. **Document your expense categorization methodology.** Where you make judgment calls on borderline expenses — transportation, mixed-use technology, partially-religious programming — document the rationale. If IRS guidance later clarifies those categories, your documentation demonstrates that you were applying a reasonable methodology in the interim. The qualified expense rules under Section 25F are intended to ensure that scholarship funds reach students in educationally meaningful ways. An SGO that manages its expense categories carefully protects its compliance record and ensures that its scholarship awards genuinely serve the educational purposes the statute is designed to advance. --- ### Form Your Own SGO or Partner With an Existing One? A Framework for the Decision Canonical URL: [https://sgoguide.com/blog/form-your-own-sgo-or-partner-with-existing](https://sgoguide.com/blog/form-your-own-sgo-or-partner-with-existing) Published: 2026-03-28 · Category: Strategy · 11 min read One of the first strategic questions any organization faces when exploring the Section 25F program is whether to form its own Scholarship Granting Organization or to partner with an existing SGO that is already approved and operational. The answer is not the same for every organization. It depends on factors specific to your mission, your donor base, your governance structure, and your long-term ambitions for the scholarship program. This post lays out the framework we use when helping organizations evaluate the decision. **One update since this was written.** The framework below treats the choice as binary — form or partner — and for the questions it asks, that still holds. But the two things people bundle into "forming" are separable: **owning** the SGO and **operating** it. An organization can hold the entity, the board and the scholarship criteria while a team it hires rather than employs does the operating work. That third answer changes who the criteria below point toward, so if the bandwidth questions are the ones giving you trouble, read [Starting an SGO: Who Is Actually Going to Run It?](/blog/starting-an-sgo-who-will-run-it) alongside this. ## The Core Trade-Off Forming your own SGO gives you control — over brand, governance, scholarship criteria, donor relationships, and program design. Partnering with an existing SGO gives you speed and simplicity — you can begin accepting scholarship contributions and awarding scholarships without the four-to-six-month formation and approval timeline. The trade-off is real, and neither option is inherently better. The right choice depends on which factors matter more for your specific situation. ## When Forming Your Own SGO Makes Sense **Your organization has a distinct mission that requires specific scholarship criteria.** If your scholarship program is specifically designed to serve students in your faith tradition, your school network, or your geographic community, a partnership SGO may not be able to implement scholarship criteria that match your mission. A diocesan SGO can award scholarships specifically to Catholic school students in the diocese. A coalition SGO serving a broad population cannot easily restrict awards to a specific faith community. **You have an existing donor base that gives because of your organization's identity.** If your donors give to you because they trust your organization — your leadership, your mission, your track record — they may not transfer that giving to a third-party SGO that happens to hold their contribution before it becomes a scholarship. The donor relationship is an asset, and it belongs to the organization that cultivated it. **Your program scale justifies the formation investment.** The cost and time of formation is fixed — it does not scale with the size of the scholarship program. An organization that expects to raise $2 million per year in SGO contributions is absorbing that formation cost against a significant program. An organization that expects to raise $50,000 per year is absorbing the same cost against a much smaller base. **You need governance control over award decisions.** Section 25F's no-earmarking requirement means that scholarship awards must be made through an arm's-length process. But the SGO board still controls the criteria: which students are eligible, how awards are prioritized, what expense categories are covered. If your organization's leadership needs to have final authority over those decisions, forming your own SGO is the only way to achieve that. **Your state has a mature opt-in framework.** In states with well-developed approval processes, the state registration phase is predictable and has an established timeline. In states still building their frameworks, formation risk is higher. Check where your state is in the process before committing to a formation timeline. ## When Partnering With an Existing SGO Makes Sense **You want to move quickly.** If your organization wants to begin accepting SGO contributions in 2027 but is starting the exploration process late in 2026, formation may not be feasible in time. An existing SGO with approved status and operational infrastructure can begin accepting contributions on your behalf far more quickly than a new entity can be approved. **Your organization does not have the administrative capacity to operate an SGO.** A compliant SGO is an ongoing operational commitment — state reporting, donor management, income verification, compliance monitoring. If your organization's leadership does not have the bandwidth to oversee these functions, and you are not planning to engage an infrastructure partner to handle them, the ongoing operational burden of a standalone SGO may exceed what you can manage. Note the conditional: capacity you do not have is a reason to partner only if you have also ruled out hiring the operation, which [ClearPath Managed](/products/managed) exists to do. Capacity is the weakest of the reasons on this list to give up ownership, because it is the only one you can buy your way out of. **Your scholarship program is small or experimental.** If you are testing whether the SGO model works for your community before committing to full formation, a partnership arrangement allows you to learn without the formation investment. If the program grows to a scale that justifies its own infrastructure, you can form your own SGO later. **You operate in a state that has not yet completed its opt-in process.** If your state is still developing its opt-in framework, you may not be able to get state approval at all in 2026. An existing SGO approved in a state that has opted in may be able to serve donors who live in your state, depending on how your state's framework handles multi-state operations. This requires careful legal analysis of your specific situation, but it is sometimes a viable path. ## The Questions to Ask Before Deciding If you are evaluating this decision, here are the questions that matter most: 1. **Who are your donors, and why do they give to you?** If donor loyalty is organizational — tied to your brand and mission — a partnership arrangement that transfers the giving relationship to a third party creates relationship risk. 2. **What scholarship criteria matter most to you, and can a partnership SGO implement them?** Be specific. "Students from low-income families in our community" is implementable by most SGOs. "Students attending schools in our diocese who demonstrate financial need as assessed by our admissions office" is not. 3. **What is your realistic fundraising projection for the first three years?** This drives the ROI calculation on formation investment. If you do not know, start with a bottoms-up estimate based on your existing donor relationships. 4. **What is your state's opt-in status and approval timeline?** If your state has not yet opted in, your formation timeline is uncertain regardless of when you start. 5. **Do you have (or plan to engage) the operational infrastructure to run a compliant SGO ongoing?** Compliance monitoring, state reporting, and donor management are not one-time tasks. The ongoing cost and complexity of operating your own SGO is often underestimated at the formation stage. ## The Most Common Mistake The most common mistake we see is organizations defaulting to "form our own" without working through the criteria above — because forming their own SGO feels like the full commitment to the program, while a partnership feels like a temporary half-measure. The full commitment question is: how many students do you want to help, and which path — formation or partnership — gets you there faster, more reliably, and with the scholarship criteria that match your mission? For some organizations, that is clearly their own SGO. For others, it is a partnership that gets them operational in 2027 while they develop the program scale to justify formation in 2028 or 2029. Neither is a half-measure. Both are legitimate paths to the same outcome: scholarship dollars reaching income-eligible students. And if the criteria above point toward your own SGO while your honest answer to question 5 is no, that is not a contradiction — it is the third path, laid out in full at [Start or Join an SGO](/start-or-join-an-sgo). --- ### SGOs, ESAs, and Vouchers: Understanding the Three Models of School Choice Canonical URL: [https://sgoguide.com/blog/sgo-vs-esa-vs-voucher-school-choice-comparison](https://sgoguide.com/blog/sgo-vs-esa-vs-voucher-school-choice-comparison) Published: 2026-03-20 · Category: Strategy · 12 min read The phrase "school choice" covers a wide range of policy mechanisms, and conversations about Section 25F often happen alongside references to ESAs, vouchers, and state-level tax credit programs. These are meaningfully different structures. Understanding how they work — and how the Section 25F SGO model differs from each — clarifies what is distinctive about the federal program and why organizations are forming SGOs rather than waiting for other programs to expand. ## Vouchers: Direct Government Payment to Schools A school voucher is the simplest school choice mechanism conceptually: the government pays a portion of a student's tuition directly to the school the student attends, in lieu of that money going to the public school the student would otherwise attend. **How they work.** Voucher programs are state-level programs. A state government allocates a per-pupil dollar amount — typically some fraction of what it would spend on that student in the public school system — and directs that amount to the private school the family chooses. The money flows from the state treasury to the school. **Key characteristics.** Vouchers are government spending, not tax benefits. They are funded through state appropriations, which means they compete in state budget processes with other spending priorities. Voucher amounts are typically fixed at a legislated per-pupil amount that may not cover full private school tuition. Participating schools often face regulatory requirements as a condition of accepting voucher funds — curriculum standards, financial reporting, and sometimes testing requirements. **The Section 25F difference.** Section 25F is not a voucher program. No government money flows to schools through the SGO mechanism. Instead, private donors make contributions to nonprofit SGOs, receive federal tax credits, and the SGO awards scholarships to eligible students. The financial engine is private charitable giving incentivized by tax credits — not public appropriation. This structural difference means Section 25F does not face the same budget constraints as voucher programs, and participating schools are not receiving government funds, which reduces regulatory exposure. ## Education Savings Accounts: Family-Controlled Spending An Education Savings Account (ESA) — also called an Education Flexible Spending Account or scholarship account in some states — is a government-funded account that families can use to pay for a range of educational expenses. **How they work.** Under a state ESA program, a qualifying family receives a government deposit into an account managed by a state agency or a state-designated financial institution. The family can draw from the account to pay for approved educational expenses — tuition at a private school, tutoring, curriculum materials, educational technology, and sometimes even college savings. The account replaces what the state would have spent on the student in the public school system. **Key characteristics.** ESAs are more flexible than vouchers — families can use the funds across a range of providers and expense categories, not just a single school's tuition. They are family-directed rather than school-directed: the educational decision-making authority rests with the parent, not with a school enrollment decision. Arizona's Empowerment Scholarship Accounts and Florida's Family Empowerment Scholarship for Educational Options are the most prominent examples of large-scale ESA programs. **Federal ESA context.** There have been federal proposals to create a federal ESA program, but as of the OBBBA's enactment, no federal ESA program exists. The federal school choice mechanism is Section 25F — the SGO tax credit, not an account-based system. **The Section 25F difference.** Like ESAs, Section 25F uses tax policy rather than direct government spending to fund private education. But unlike ESAs, Section 25F channels money through nonprofit SGOs rather than through government-managed accounts. Families do not control Section 25F scholarship funds directly — the SGO receives the contributions, verifies student eligibility, and makes independent award decisions. The SGO model adds an intermediary that ESA programs eliminate. ## State Scholarship Tax Credit Programs: The Predecessor Model Before Section 25F, several states operated their own scholarship tax credit programs that closely resemble the Section 25F model. Florida's Tax Credit Scholarship Program, Pennsylvania's Educational Improvement Tax Credit (EITC), and similar state programs created state-level tax credits for contributions to state-approved scholarship organizations. **How they work.** The state-level model is structurally identical to Section 25F: donors receive a state income tax credit for contributions to approved scholarship organizations, which award scholarships to income-eligible students at private schools. The programs operate through nonprofit intermediaries and prohibit donor earmarking. **The relationship to Section 25F.** Section 25F is modeled on these state programs and is conceptually compatible with them. In states with existing scholarship tax credit programs, organizations that are already approved under the state program may be well-positioned to seek Section 25F approval as well. However, state program approval and federal Section 25F approval are separate processes — a state-approved organization is not automatically a Section 25F-qualified SGO, and vice versa. **The additive effect.** In states that opt into Section 25F and also have their own scholarship tax credit programs, donors may be able to stack benefits — receiving both the federal Section 25F credit and the state scholarship tax credit for the same contribution. Whether stacking is permissible depends on each state's program rules and the interaction with the federal credit rules. This is an area where qualified tax counsel is essential. ## Why Organizations Are Forming SGOs Now Against this landscape, the Section 25F SGO model has several distinctive features that explain why it is attracting significant organizational interest: **Federal scope.** Unlike state programs, Section 25F operates nationally — in any state that opts in. An SGO with federal approval operating in an opted-in state receives the full dollar-for-dollar federal tax credit for its donors. This is the first federal-level school choice mechanism. **Tax credit value.** The dollar-for-dollar federal income tax credit is more valuable to most donors than a charitable deduction and more valuable than many state scholarship tax credits, which typically offer credits in the 50-75% range rather than the 100% range that Section 25F provides. **Private, not governmental.** SGOs are private nonprofit organizations. They do not receive government funds. They are not subject to the regulatory conditions that come with government voucher or ESA funding. This preserves the independence of participating schools in a way that government-funded programs may not. **Organizational control.** An organization that forms its own SGO controls its scholarship program — the criteria, the application process, the award decisions, the donor relationships, and the brand. For organizations with a specific mission or community they intend to serve, that control matters. The school choice landscape will continue to evolve as states build out their Section 25F frameworks, federal regulations develop, and state-level programs interact with the federal mechanism. Understanding where SGOs fit in that landscape is the starting point for strategic formation planning. --- ### How to Run a Compliant Scholarship Award Process Under Section 25F Canonical URL: [https://sgoguide.com/blog/compliant-scholarship-award-process](https://sgoguide.com/blog/compliant-scholarship-award-process) Published: 2026-03-10 · Category: How-To · 14 min read The scholarship award process is where Section 25F compliance is most visible — and where the most consequential errors occur. An award process that violates the no-earmarking rule or fails to maintain arm's-length documentation can result in the loss of the SGO's approved status, which means donors lose their tax credits retroactively. This post walks through what a compliant award process looks like in practice. ## The Statutory Requirements Section 25F imposes three specific requirements on the scholarship award process: **No Earmarking.** Scholarship awards cannot be conditioned on a donor's identity, the donor's preferences, or a donor's request that a scholarship benefit a specific student or a student at a specific school. This prohibition applies to explicit earmarking ("please use my donation to help the Johnson family") and to structural arrangements that functionally create earmarking (allocating scholarship funds by school in proportion to donations from that school's community). **Multi-Student, Multi-School Distribution.** Scholarships must be awarded to ten or more students who do not all attend the same school. This is both a minimum number requirement and a distribution requirement. An SGO that awards ten scholarships all at the same school violates the multi-school requirement even if it technically meets the ten-student minimum. **Arm's-Length Award Decisions.** The statute does not use the phrase "arm's-length" directly, but the combination of the no-earmarking prohibition and the multi-school distribution requirement creates an implicit arm's-length standard: award decisions must be made by a process that is genuinely independent of donor preferences and that results in awards distributed across multiple schools. ## Structuring the Award Committee The award committee is the entity that makes scholarship decisions. Its structure is important for compliance. **Independence from donors.** Award committee members who are also major donors to the SGO create an independence problem. The committee's decisions may be — or may appear to be — influenced by the donor-members' interests in how their contributions are used. Best practice is to maintain clear separation between the donor development function and the award decision function. **Independence from specific schools.** Award committee members who are employed by or closely affiliated with specific schools that receive scholarship recipients create a similar problem. A committee member who is the principal of School A has an interest in ensuring that scholarship awards flow to School A's students. Best practice is either to avoid school-affiliated members or to recuse them from decisions affecting their school. **Documented process.** The committee must document its decisions: which applications it reviewed, what criteria it applied, and how those criteria resulted in the awards made. Documentation does not need to be elaborate — a committee meeting record that identifies the applications reviewed and confirms the decision criteria were applied is sufficient. But no documentation creates an audit vulnerability. ## The Application Process The scholarship application process is the input to the award decision. A compliant application process: **Makes awards available to all eligible students, not just those associated with the SGO's founding community.** An SGO formed by a specific church that only markets its scholarship program to that church's community is creating earmarking risk through selection bias — the award process may be formally arm's-length while the applicant pool is functionally limited to a single community. **Collects income verification documentation upfront.** The eligibility requirement — household income at or below 300% of area median gross income — must be verified before an award is made. Verification after the fact creates both compliance risk and administrative burden. The application process should collect the documentation necessary to verify eligibility as part of the application. **Gives returning students and siblings priority in the manner the statute specifies.** Section 25F creates a priority system: returning scholarship recipients (students who received a scholarship in a prior year) and their siblings are prioritized in the award process. This priority must be systematically applied — it cannot be ad hoc. **Does not collect information that would allow awards to be conditioned on school preference.** If the application asks "which school does your student attend" and the award committee can see that information when making award decisions, the process has a structural earmarking risk. Either remove that field from the application visible to the committee, or implement a process where school information is collected but not visible to the committee during initial deliberations. ## Handling Donor Communications How the SGO communicates with donors about its scholarship program is a compliance question, not just a fundraising question. **What you can say:** Your SGO makes scholarship awards to income-eligible students at multiple schools in your service area. Donors receive a tax credit receipt documenting their qualified contribution. The SGO's scholarship committee makes independent award decisions based on the program criteria. **What you cannot say (or imply):** That a donor's contribution will benefit a student at a specific school, that a donor can direct their contribution to a specific community or program, or that donors "sponsor" specific students or families. **The hard case in faith communities.** In parish communities, donors frequently want their giving to benefit students at "their" school. This is natural — the parish school relationship is central to how many communities understand their giving. The legal prohibition on earmarking does not make this preference disappear; it creates tension between donor expectations and compliance requirements. The right response to this tension is clear donor communication, not accommodation. Donors should understand, before they give, that the SGO makes independent award decisions and that their contribution cannot be directed to a specific school or student. Many donors will accept this once they understand the federal compliance requirements that make the tax credit possible. Donors who cannot accept it may not be good SGO donors — and that is a better outcome than a compliance violation. ## Documenting the Award Cycle At the end of each scholarship award cycle, the SGO's records should include: 1. The total number of applications received and their schools of attendance 2. The eligibility determination for each application (income verified, documentation collected) 3. The committee's award decisions and the criteria applied 4. The distribution of awards across schools (confirming multi-school compliance) 5. The disbursement records for each award (funds paid to whom, for what qualified expense) This documentation package is the foundation of the SGO's compliance record. It supports state annual reporting, responds to IRS documentation requests, and demonstrates good faith in the event of a compliance inquiry. ## The Most Common Award Process Errors Based on how other scholarship programs and analogous tax credit programs have been administered, the most common errors in award processes are: **Retrospective earmarking.** The award process is formally arm's-length, but after decisions are made, leadership informally redirects awards toward preferred schools or communities. Any post-decision modification to awards must be documented as a separate committee decision, with the same arm's-length process applied. **Insufficient applicant pool diversity.** The award process cannot generate multi-school distribution if the applicant pool is concentrated at one school. Outreach must be broad enough to generate a genuinely diverse pool. **Incomplete income verification.** Awards are made before income documentation is collected and verified. Incomplete verification means some awards may go to students who do not qualify, which creates both compliance risk and potential recapture issues for the SGO. **Missing committee documentation.** The committee makes decisions verbally, without a written record. This is a correctable error going forward, but it cannot be remediated retroactively. A compliant award process is not bureaucratic for its own sake. The documentation and process requirements exist because the tax credits donors receive are real federal tax benefits — and the system that delivers those benefits must be demonstrably trustworthy. --- ### State SGO Opt-In Status: What We Know As of Spring 2026 Canonical URL: [https://sgoguide.com/blog/state-opt-in-tracker-what-we-know](https://sgoguide.com/blog/state-opt-in-tracker-what-we-know) Published: 2026-02-20 · Category: State News · 9 min read Section 25F of the Internal Revenue Code creates a federal tax credit for contributions to state-listed Scholarship Granting Organizations — but only in states that have elected to participate. The state opt-in requirement is one of the most significant structural features of the program, and the variation in state opt-in status is one of the most significant planning challenges for organizations exploring the SGO model. **Superseded (August 2026):** the landscape has moved a long way since this was written — thirty states now appear on the IRS participating-state list for 2027. Read [State Opt-In Status: 30 States Are In for 2027](/blog/state-opt-in-status-mid-2026) for the current picture. The structural explanation below still holds; the counts and expectations do not. This post summarizes what we knew about state opt-in status as of early 2026. We update our full state tracker tool as new information becomes available. **Important disclaimer:** State legislative and regulatory status changes frequently. Nothing in this post should be relied upon as legal advice or as a definitive statement of any state's opt-in status. Verify current status with qualified counsel before making formation decisions. ## What "Opting In" Requires A state opts in by filing an advance election with the IRS — signed by the governor or another individual or entity designated under state law. Legislation is not required, though many states pair the election with authorizing legislation that: 1. Formally establishes the state's participation in the federal SGO tax credit program 2. Creates a state approval process for SGOs seeking to operate in the state 3. Specifies any state-level requirements beyond the federal minimums 4. Establishes the state's annual reporting requirements for approved SGOs Some states have preemptively enacted legislation in anticipation of the OBBBA's passage. Others are in the process of developing opt-in legislation. Others have not yet begun the process. ## The Landscape as of Early 2026 The states that were most prepared to move quickly on SGO opt-in legislation were generally states with pre-existing school choice infrastructure — states that had already been operating state-level scholarship tax credit programs under their own laws before Section 25F existed. States with existing scholarship tax credit programs had several advantages in the opt-in process: - They had administrative infrastructure (state agencies familiar with SGO oversight) already in place - They had experience with income verification, award process requirements, and annual reporting - Their legislatures had already approved the general concept of using tax credits to fund private school scholarships - They had legal frameworks that could be amended to incorporate the federal program requirements States without pre-existing scholarship tax credit programs face a more complete build-out of their opt-in framework: they need to designate a state agency for SGO approval and oversight, establish an approval process and criteria, develop annual reporting requirements, and pass enabling legislation — all before any SGO in their state can achieve the federal approval needed to accept qualified contributions. ## What Organizations in Non-Opted States Should Do If your state has not yet enacted opt-in legislation, you have three options: **Option 1: Monitor and prepare.** Follow your state's legislative session and stay current on the status of any opt-in legislation being considered. Use the time before opt-in to complete your internal formation work — revise governing documents, structure your board, develop your scholarship criteria and application process. When your state opts in and an approval process becomes available, you can move immediately. **Option 2: Partner with an existing SGO in an opted state.** Depending on how your state's framework ultimately develops, there may be a path for donors in your state to receive tax credits for contributions to an SGO approved in a neighboring state. This requires careful analysis of your specific state's situation and is not universally available, but it is a path worth exploring with qualified counsel. **Option 3: Form in an opted state where you have program operations.** If your organization operates scholarship programs in multiple states, and one of those states has already opted in, you may be able to form and approve your SGO in that state and serve students there while you wait for your primary state to opt in. ## The Uncertainty to Plan For The state opt-in landscape will continue to evolve throughout 2026 and into 2027. Several states that have not yet acted are likely to move during their 2026 legislative sessions. The political momentum behind school choice programs means that the number of opted-in states is likely to grow, not shrink, over the first years of the program. However, "likely to opt in" is not the same as "has opted in." Organizations should not begin formation planning that depends on their state opting in before that opt-in has actually occurred. Formation takes time, but so does state approval once opt-in legislation passes — a state that opts in in July 2026 is unlikely to have its approval process operational in time to approve SGOs before January 1, 2027. Planning for 2027 launch in a non-opted state is optimistic unless the opt-in legislation passes with substantial lead time in early 2026. Planning for 2028 launch in a state that opts in during 2026 is more realistic. That does not mean doing nothing — it means using the preparation time wisely. ## Our State Tracker We maintain a continuously updated state tracker at [/resources/state-tracker](/resources/state-tracker) that covers each state's opt-in status, approval process status, any state-specific requirements we are aware of, and our assessment of the likely timeline for states that have not yet acted. The tracker is updated as new information becomes available. The tracker includes explicit uncertainty ratings for each state — we do not present uncertain information as settled. But having a current, organized view of where each state stands is essential planning information for any organization working through the SGO decision. --- ### The 90/10 Rule: How to Maintain Compliance From Your First Scholarship Cycle Canonical URL: [https://sgoguide.com/blog/understanding-the-90-10-rule](https://sgoguide.com/blog/understanding-the-90-10-rule) Published: 2026-02-05 · Category: Regulatory Updates · 11 min read One of the compliance requirements that most surprises organizations early in their SGO planning is the 90/10 spending rule. The rule requires that an SGO spend at least 90% of its annual revenues on qualified scholarships — leaving only 10% for administrative costs, fundraising costs, and any other operating expenses. For organizations accustomed to operating nonprofits with overhead ratios in the 20-30% range, this constraint is real and requires deliberate planning from the first day of operations. ## What the Statute Says Section 25F requires that at least 90% of the SGO's annual revenues be expended on qualified scholarships. The 10% maximum overhead applies to the combination of administrative costs and fundraising expenses. The statutory calculation is annual: the 90/10 ratio is tested against each year's revenues and expenditures. An SGO that falls below 90% in year one does not get to "make it up" in year two. A violation in year one is a compliance failure with consequences for that year. The consequences of a 90/10 violation are significant. Depending on the severity and circumstances, a state may suspend or revoke the SGO's approved status. Loss of approved status means donors cannot claim the federal tax credit for contributions made while the SGO was out of compliance — a liability that creates significant risk for both the organization and its donor relationships. ## The Hidden Complexity: Start-Up Costs The most common 90/10 violation risk is in the start-up year. Formation costs — legal fees, state filing fees, platform setup, training — can be significant. If these costs are treated as operational expenses in the first year, they can push the overhead ratio above 10% before the scholarship program has had time to build to scale. Several strategies help manage this risk: **Front-load formation costs before the operating year begins.** Costs incurred before the SGO is an approved operating organization are not operational costs of the SGO — they are pre-operating formation costs. If formation and state approval are completed in 2026, and the SGO begins accepting contributions on January 1, 2027, the costs of formation properly belong to 2026, not to the 2027 operating year. **Structure platform and infrastructure costs as multi-year.** Software licensing, platform access fees, and similar costs that are paid on a recurring basis are operational costs distributed across multiple years. A one-time platform setup fee, if it can be structured as a multi-year contract, may be spread across those years rather than treated as a single-year expense. **Plan the first year's fundraising to create sufficient scholarship volume.** The 90/10 ratio is a ratio, not an absolute dollar amount. $100,000 in revenues with $10,000 in overhead and $90,000 in scholarships meets the requirement. $50,000 in revenues with $10,000 in overhead and $40,000 in scholarships does not (overhead would be 20%). A small scholarship program can meet the ratio if overhead is correspondingly small — but a small program with startup-year overhead is the most common failure pattern. ## What Counts as Overhead The statute does not comprehensively define which costs count as overhead for 90/10 purposes — this is one of the areas where IRS guidance will matter. But based on the statutory language and analogous state-level scholarship tax credit programs, the general categories are: **Overhead (subject to the 10% limit):** - Management and administrative salaries and benefits - Office space and utilities attributable to administrative functions - Accounting, auditing, and compliance services - Legal fees for ongoing operations (not formation) - Technology and platform costs for organizational management - Fundraising costs, including staff, events, and marketing **Scholarships (counting toward the 90% requirement):** - Scholarship disbursements to eligible students for qualified expenses - The cost of income verification (arguably a scholarship-related cost, though IRS guidance may classify this differently) - Scholarship application processing (same classification uncertainty) Organizations should work with their advisors to document their overhead classification methodology now. When IRS guidance issues, having a clear methodology makes any required adjustments straightforward. ## Building Operational Discipline Around the Ratio The most important thing an SGO can do to maintain 90/10 compliance is track the ratio in real time, not just at year end. An SGO that reaches October of its first operating year with $300,000 in revenues and $50,000 in overhead has a 16.7% overhead ratio — and only two months to receive enough additional contributions to drive the ratio below 10%. That is a recoverable situation, but a stressful one that creates pressure on the organization's fundraising. An SGO that tracks the ratio monthly and sees it creeping toward 10% in Q2 has time to take corrective action: accelerate fundraising, reduce discretionary overhead, or understand that the program is on a compliance boundary and plan accordingly. Real-time 90/10 monitoring is one of the most important operational requirements of an SGO — not because violations are easy to accumulate, but because they are hard to reverse once they occur, and the consequences of a violation are severe. ## The Ratio and Program Scaling One of the structural advantages of scale in the SGO model is that the 90/10 ratio becomes easier to manage as the program grows. A program with $1 million in annual revenues can sustain $100,000 in overhead — enough to fund meaningful administrative capacity. A program with $100,000 in annual revenues can only sustain $10,000 in overhead, which is a very thin administrative budget. This scaling dynamic has several implications for early-stage SGOs: **Keep early-year overhead minimal.** Resist the impulse to build administrative capacity in advance of the scholarship program. Hire and invest as scholarship revenue grows. **Use infrastructure partners to defer overhead.** A managed infrastructure model — in which a platform partner provides compliance, reporting, and administrative services — can convert variable overhead costs (percentage-based fees) into costs that scale with scholarship volume. A $3,000/month flat administrative cost is a 36% overhead rate for a $100,000 program. A 5% platform fee is a 5% overhead cost at any volume. Structure matters. **Plan for 2027 with realistic fundraising projections.** Before committing to your operational budget for 2027, build a bottom-up fundraising projection based on your identified donor relationships. Design your overhead budget to be below 10% of that projection. If the projection is uncertain, design for a conservative case. The 90/10 rule is manageable with the right planning. The organizations that get into trouble are those that discover the constraint at year end, not at the beginning of their planning process.