The SGO glossary

Scholarship Granting Organization (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

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)

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

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)

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

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

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

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

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

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

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)

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

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

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

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

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

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

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

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)

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

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

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

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)

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

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

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

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

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

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.