The Treasury Department offered a preview of upcoming guidance on a new federal scholarship tax credit that was included as part of the One Big Beautiful Bill Act.
Processing Content
The guidance is expected to provide states, scholarship-granting organizations, taxpayers and other stakeholders with a way to prepare for the launch of the Education Freedom Tax Credit next January. The Treasury and the Internal Revenue Service expect to issue proposed regulations by the end of September. States, scholarship-granting organizations and taxpayers should be able to rely on those proposed regulations for tax year 2027, according to the Treasury.
The new scholarship tax credit under section 25F of the Tax Code aims to expand educational opportunity by encouraging private contributions to scholarship-granting organizations. Participating states can opt into the program and provide the IRS with a list of eligible scholarship-granting organizations located in their state.
Scholarship-granting organizations that are included on one or more state scholarship-granting organization lists can receive qualified contributions from taxpayers and use those funds to provide scholarships for eligible students. Taxpayers who make qualified contributions may claim a federal tax credit, subject to applicable statutory requirements and forthcoming Treasury and IRS guidance.
The credit is designed to support scholarships for K–12 education expenses. The Treasury and the IRS are developing proposed regulations to provide clear rules for implementation, compliance, reporting and program integrity before the credit’s expected 2027 launch.
“Under President Trump’s leadership, we are taking a transformative step toward an education system that fits the student rather than the other way around,” said Treasury Secretary Scott Bessent in a statement last week. “At Treasury, we take seriously the work of implementing this federal tax credit faithfully and effectively. We are committed to providing certainty to states, scholarship-granting organizations, taxpayers, and families alike, as well as making certain that this process is easy to navigate.”
The Treasury previewed the guidance during a roundtable discussion last week with scholarship-granting organizations, education stakeholders, technology providers, state representatives and other partners to discuss implementation of the new credit.
Treasury deputy assistant secretary for tax policy Kevin Salinger discussed several issues in the forthcoming guidance, including a 90% spending requirement.
“As many of you know, an eligible SGO must spend at least 90% of the income of the organization on scholarships for eligible students,” he said. “We expect the proposed rules will generally measure the 90% 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. For a multistate SGO, that safe harbor would have to be satisfied separately for each state-specific segregated account.”
The next issue involves what it means for an SGO to be located in a participating state. “We expect the proposed rules will define an SGO 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,” said Salinger. “At the same time, states may not impose substantive SGO-specific requirements that are more restrictive than Section 25F’s requirements.”
He pointed to a multistate SGO definition and eligibility standard: “We also recognize that some SGOs may want to operate in more than one participating State, and the proposed rules are expected to provide a path for that. An SGO may be listed on more than one participating state SGO list as long as it is located in that State and maintains a separate section 25F account for that state. Most operational requirements would be applied separately to the state account, while certain organization-wide rules would apply to the multistate SGO as a whole.”
The Treasury also expects to address the types of schools that may be served by scholarships under the program.
“We expect the proposed rules will define ‘school’ consistent with section 530 to include public, private and religious schools providing K–12 elementary or secondary education as determined under state law,” said Salinger. “Accordingly, a home school would be treated as a school if it is treated as a school under state law. We expect the proposed rules will clarify that K–12 schools operated by a federally recognized tribe or tribal organization qualify as elementary or secondary schools.”
When it comes to verification of a student’s income qualification through direct income verification, categorical eligibility, foster child safe harbor, and additional safe harbors, further guidance is expected.
“We expect the proposed rules will allow SGOs to verify a student’s household income directly through documents such as paystubs, tax returns, IRS transcripts, Forms W-2, or through crediting agencies or commercial data sources,” said Salinger. “They also would allow determination of eligibility based on recent documentation that a household member participates in a needs-based federal, state or tribal program with income limits at or below the specified threshold, and would treat foster children as satisfying the income requirement without separate income verification. We are also considering other safe harbors for students attending schools in low-income areas.”
An Education Freedom Tax Credit Fact Sheet can be found here.
