Scholarship Granting Organizations: A New Benefit for Public, Private, and Religious School Students

Eligible K-12 students in public (including charter public), private, and religious schools may benefit from scholarships granted by “scholarship granting organizations" (“SGOs”) for their “qualified elementary and secondary expenses.” SGOs are funded through donations and through a new federal tax credit (the “Federal Scholarship Tax Credit”) available to individual U.S. citizens and permanent residents for their cash contributions to SGOs.

States must opt in to participate in the Federal Scholarship Tax Credit program, and it is reported that 28 states have opted in to date. Massachusetts has not yet opted into this program. A state can opt in with either an order signed by its governor or through legislation adopted by the state legislature. 26 U.S.C. § 25F(g)(1)(B).

Scholarship Granting Organizations

States that opt into this program must certify a list of eligible SGOs to give to the Secretary of the Treasury by January 1 of each calendar year, beginning in 2027. 26 U.S.C. § 25F(g). The Internal Revenue Service (“IRS”) has issued Revenue Procedure 2026-6, which sets forth a procedure for a state to make an advanced election to be a “covered state” prior to identifying SGOs in the state, giving SGOs additional time to prepare for the commencement of the Federal Scholarship Tax Credit in 2027.

Each state may determine which SGOs are eligible to receive donations and administer student scholarships based on the federal criteria described below.

An SGO must:

• Be an organization exempt from federal income tax under Section 501(c)(3) of the Code and must not be a private foundation; 
• Allocate not less than 90% of the organization’s income to scholarships for eligible students (defined below)² 
• Not co-mingle qualified contributions to the SGO for scholarships with other funds of the SGO;
• Limit scholarships to “eligible students,” who are students that:
• are members of a household with income not greater than 300% of the area’s median gross income, as determined by the U.S. Department of Housing and Urban Development³ (which must be verified by the SGO); and
• are eligible to enroll in a public elementary or secondary school (but may attend a public, private, or religious school);
• Provide scholarships to 10 or more students who do not all attend the same school; 
• Provide scholarships to eligible students with the following priority: first to students who were awarded a scholarship in the previous year, then to siblings of such students, followed by other qualifying students;
• Not earmark contributions to specific students; and
• Exclude “disqualified persons” from scholarship eligibility, which term includes, but is not limited to, the SGO’s officers and directors, substantial contributors to the SGO, and certain parties related to substantial contributors.

26 U.S.C. §§ 25F(c)(5), (d).

SGOs must award scholarships only for “qualified elementary and secondary education expenses,” which includes expenses for:  tuition, fees, academic tutoring, special needs services, books, supplies, and other equipment incurred in connection with a student’s attendance at an elementary or secondary school (whether public, private, or religious);

• room and board, uniforms, and transportation which are required by the public, private, or religious school; and
• the purchase of any computer technology or equipment or Internet access, to be used by the student and their family during any of the years the student is in school.

26 U.S.C. § 25F(c); 26 U.S.C. § 530(b)(3)(A).

A fact sheet issued jointly by the U.S. Department of Education and the U.S. Department of Treasury indicates that the scholarships may also be used for private tutoring, after school enrichment programs, and other educational opportunities.

Commencing with amounts received after December 31, 2026, scholarships provided by SGOs will not be included in the recipient’s gross income for federal tax purposes. 26 U.S.C. § 139K.
The National Alliance for Public Charter Schools and other groups have requested clarification from the U.S. Department of the Treasury regarding whether SGOs may award scholarships to students attending charter schools. Krokidas & Bluestein believes that public charter schools in Massachusetts are included in the term “public schools.”  We note that the Massachusetts charter school statute (M.G.L. Ch. 71, § 89) provides as follows:

“A commonwealth charter school shall be a public school, operated under a charter granted by the board. . . A Horace Mann charter school shall be a public school or part of a public school operated under a charter approved by the school committee and the local collective bargaining unit in the district in which the school is located; provided that all charters shall be granted by the board of elementary and secondary education. . . .”

Federal Scholarship Tax Credit for SGO Contributions

Individual U.S. citizens and permanent residents are eligible to qualify for the Federal Scholarship Tax Credit. To qualify for the credit, the individual must donate to a state-recognized SGO, which need not be located in the same state as the donor. Beginning January 1, 2027, an individual may claim a nonrefundable, dollar-for-dollar federal tax credit of up to $1,700 for cash contributions to SGOs. 26 U.S.C. §§ 25F(a), (b)(1). The amount allowed as a credit will be reduced by any state credit allowed for the same contribution. 26 U.S.C. § 25F(b)(2). To avoid double tax benefit, any qualified contribution for which a Federal Scholarship Tax Credit is allowed cannot be deducted as a charitable contribution on an individual’s annual return. Unused credits may be carried forward for up to five years. 26 U.S.C. § 25F(f).

More to Come

The One Big Beautiful Bill Act directs the Secretary of the Treasury to issue regulations to further implement this law, in particular as it relates to the SGO criteria described above and the state certification process. The IRS issued IRS Notice 2025-70⁴, which solicited comments on the Federal Scholarship Tax Credit program by December 26, 2025. As described above, on December 12, 2025, the IRS issued Revenue Procedure 2026-6¹, which provides a process for states to make an advance election to opt into the program. On January 27, 2026, the U.S. Department of Education and the U.S. Department of the Treasury issued a joint fact sheet⁵ on the Federal Scholarship Tax Credit program, which summarizes the statute and promotes the program. The U.S. Department of the Treasury and IRS are expected to issue regulations and further guidance this year.

Please reach out to Krokidas & Bluestein Education and Nonprofit / Tax Exempt attorneys Elka Sachs (esachs@kb-law.com), Bettina Toner (btoner@kblaw.com), Eric Jordan and Erica Hudson with any questions about SGOs or the Federal Scholarship Tax Credit program.

Krokidas & Bluestein LLP’s Education Law Practice provides a full array of advice and guidance to charter schools and other educational entities on a wide range of legal matters, including student discipline, specifical education, employment, governance, tax, regulatory and compliance matters, real estate, financing and litigation.

Krokidas & Bluestein LLP’s Nonprofit / Tax Exempt Practice provides advice and guidance to all types of nonprofit organizations, including with respect to tax exemption, nonprofit governance, public charities law, mergers, acquisitions and corporate affiliations, regulatory and compliance matters, employment, real estate, financing and litigation.

[1] Available at: https:/www.irs.gov/pub/irs-drop/rp-26-06.pdf.
[2] Given this requirement, schools themselves likely would not qualify as SGOs unless nearly all of their income was directed to scholarships. For this reason, schools may choose to partner with or create a separate nonprofit SGO.
[3] Area gross median income data is accessible on the U.S. Department of Housing and Urban Development’s portal.
[4] Available at: https://www.irs.gov/pub/irs-drop/n-25-70.pdf.
[5] Available at: https://www.ed.gov/media/document/education-freedom-tax-credit-fact-sheet-113147.pdf.