Treasury and the IRS have issued temporary regulations (T.D. 10057) implementing the new Federal Scholarship Tax Credit created by the One Big Beautiful Bill Act. The temporary regulations focus largely on the administrative machinery needed to get the Federal Scholarship Tax Credit program running. A state must elect to participate in the program and certify the organizations that will conduct the program within its jurisdiction qualify as Scholarship Granting Organizations (SGOs). For 2027, a state must make an advance election by January 1, 2027, and may perfect that election by submitting its SGO list by February 15.
For nonprofits hoping to operate as SGOs, the regulations create several important compliance requirements. Organizations must register electronically with the IRS, maintain a separate account for contributions designated for the federal credit, and generate unique donor numbers that taxpayers will use to substantiate their credits. SGOs must provide donors with written acknowledgments by January 31 of the following year and report donor and contribution information to the IRS by February 28.
The rules also make multistate participation easier. An organization is considered “located” in a state if it is authorized to do business there and complies with generally applicable state nonprofit laws; it does not necessarily need a physical headquarters or staff in that state.
For practitioners with nonprofit clients that hope to operate as SGOs, meeting the definition of an SGO under the rule means more than awarding scholarships, as discussed above. The temporary rule adds new layers of federal and state certification, accounting, donor-substantiation, and reporting requirements. As such, nonprofits interested in the program should be working with their counsel now (or, ideally, even before the release of the temporary rules late last month) to segregate accounts, achieve state qualification, set up donor systems, and establish reporting procedures.
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