Provision 70411 within the recently enacted P.L. 119-21, or Republicans’ “One Big Beautiful Bill Act” (the Act), created a federal education tax credit program that offers individual taxpayers a dollar-for-dollar tax credit.
The legislation, signed by President Trump on July 4, 2025, created new sections of the Internal Revenue Code (IRC) effective for tax years ending after December 31, 2026. IRC Section 25F allows the tax credit for qualified elementary and secondary education scholarships, while IRC Section 139K allows those scholarships to remain tax free for eligible students.
IRC Section 25F: SGO Tax Credits for Contributors
Newly created IRC Section 25F allows for a tax credit up to $1,700 for an individual citizen or resident of the United States. The credit is equal to the total qualified contributions made by the taxpayer to a scholarship granting organization (SGO) during the taxable year.
Any amount claimed as a credit cannot be taken as a charitable contribution deduction, and shall be reduced by the amount of state tax credit claimed for qualified distributions made by the taxpayer during the year. Any unused credit at the federal level can be carried forward to five future tax years and must be applied on a first-in, first-out basis.
SGO Tax Credit Contribution Requirements
To claim the federal tax credit, a contribution must be:
- 1) A qualified contribution: Qualified contributions are cash contributions to an SGO that uses the contribution to fund scholarships for eligible students within the state in which the organization is listed.
- 2) Given to an eligible student through a scholarship granting organization: An eligible student is an individual whose household income is not greater than 300% of the area median gross income during the calendar year prior to the date of the scholarship application. The student must also be eligible to enroll in public elementary or secondary schools.
The use of an SGO is required. Broadly, an SGO is a 501(c)(3) entity exempt from tax under IRC Section 501(a) and not a private foundation. SGOs are not permitted to co-mingle funds and must maintain one or more separate accounts exclusively for qualified contributions.
Furthermore, to qualify as an SGO, the organization must provide scholarships to 10 or more students who do not all attend the same school. The organization must spend at least 90% of its income on scholarships for eligible students.
Qualified SGO Scholarship Expenses
SGO scholarships must be used for qualified elementary or secondary education expenses, which include any expense of an eligible student, such as:
- Tuition
- Fees
- Books
- Supplies
- Room and Board
- Uniforms
- Transportation
- Computer Technology or Equipment
- Internet Access
A full list of eligible expenses can be found in IRC Section 530(b)(3)(A).
SGO Responsibilities
Priority award requirements must also be met. SGOs must first give priority to students awarded a scholarship in the previous school year, and second to those students who have siblings awarded a scholarship from the SGO. Earmarking or setting-aside scholarships for a particular student is prohibited, as are acts of awarding scholarships to disqualified persons, as defined in IRC Section 4946.
Additional responsibilities of an SGO include verifying the annual household income of the student applying for the scholarship, ensuring that the student qualifies as an eligible student and that the household income does not exceed the 300% area median gross income requirement.
SGO Status Classification
Classification of SGO status begins at the state level. A covered state must voluntarily elect to participate in the program no later than January 1 of each calendar year and identify SGOs to operate within the state that meet all requirements to the Secretary of the Treasury. Typically, the governors of the state must make this voluntary election.
Further guidance to those electing states will be issued as the Secretary of the Treasury determines the enforcement acts necessary to carry out these purposes and responsibilities.
IRC Section 139K: Tax-free SGO Scholarships
Additionally, IRC Section 139K was created by the Act to exclude from gross income amounts received by individuals in the form of scholarships for qualified elementary or secondary education expenses provided by an SGO.
Implications and Planning Opportunities
Although the Act provides for expanding educational opportunities for elementary and secondary education students, many details remain outstanding as we await further guidance from both the federal and state levels. Common questions include:
- Will it be necessary to create a separate entity to be classified as an SGO as a subsidiary to individual private schools?
- What criteria will be necessary to successfully administer the scholarships?
- Will a committee be required to ensure that selection is non-discriminatory, that the student meets the criteria outlined in the Act, and is not considered a disqualified person?
- Which states will voluntarily elect to participate?
- How will states that already have similar scholarship organization programs operate with the federal program?
Luckily, there is time before the effective date to allow additional guidance to be issued, hopefully to answer some of the questions above.
Private schools should plan now on how to promote this tax incentive to their donors and their communities, and how to partner with other not-for-profit organizations to expand outreach.
How Cherry Bekaert Can Help
To understand how these changes affect your organization and to develop a tailored strategy, contact your Cherry Bekaert professional. Our team is ready to help you navigate the new tax landscape with clarity and confidence.
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