The Federal Scholarship Tax Credit’s Newly Released Regulations

Last week, the Department of the Treasury published the Proposed Rules for the Federal Tax Credits for Scholarships (FTCS). I read through all 51 pages so that you, our dear readers, don’t need to (although if you choose to do so anyway, you are definitely a nerd who can feel cool at a place like EdChoice). As always, please visit our dedicated FTCS page for updates as they come in. My aim is to inform you of what I thought were the most important provisions contained within the document. Here they are.

• Summaries of the proposed rules begin on the first page and end at page 36. Definitions begin on page 37 and conclude on page 39.
• The definition of “school” for purposes of FTCS is that which is defined as a “school” under relevant state law. (p. 3)
• SGOs are permitted to narrow certain categories of eligibility and focus on students interested in or requiring certain kinds of education (STEM-focused, performing arts, special needs therapies, etc.). SGOs, of course, are subject to Constitutional protections and limitations. (p. 3-4)
• Taxpayer-donors who are married couples filing federal taxes jointly may claim up to a $3,400 credit. (pp. 4, 40)
• A contribution made by a partnership or S corporation is not defined as a “qualified contribution” and is therefore ineligible for participation in FTCS. (p. 5)
• Carryforward of unused credits may allow a taxpayer-donor to receive a credit greater than $1,700 in a given tax year, provided that the individual did not receive a credit greater than $1,700 for any tax year. (p. 20)
• “Income of the organization” is defined as “the total gross receipts of the organization from all sources” (italics mine), (p. 7-8) and 90% of that income must be given to students in scholarships. This definition is important for charitable organizations that manage other programs besides granting scholarships to K-12 students. For example, a charitable nonprofit operating a food pantry would need to create a separate SGO to provide FTCS scholarships to children whose families may rely on their food pantry.
• The rules contain safe harbor provisions for SGOs who are mostly in the business of providing scholarships. If 85% of an SGO’s activity is providing scholarships, then that SGO may place into a segregated account all income received from donors for FTCS scholarships. Ninety percent of the income in this segregated account must go to students for FTCS scholarships, while other income received for other types of scholarships would be handled separately.
• Any child who is a member of a household with a family income at or below 300% of the region’s modified area gross income (MAGI) is eligible. “The Treasury Department and the IRS estimate that 96% of children located in States that have elected to designate SGOs under section 25F will be eligible to receive section 25F scholarship funds.” (pp. 24-25)
• SGOs may operate as multistate SGOs, but the Rules require that they maintain a segregated FTCS account for every state in which they are serving students. (pp. 27, 38)
• A taxpayer-donor will receive a donor ID number from their SGO, but the Rules confirm that the individual’s Social Security Number (SSN) will not be collected, circulated, or put at risk on account of participating in the FTCS, as a taxpayer.(p. 29)
• See pages 45-47 for SGO audit requirements. Large SGOs should know that there are additional specifications for those entities that disburse more than $500,000 in scholarships annually. (p. 47)
• The Internal Revenue Service (IRS) is the federal agency with supervisory power to check compliance from state officers. (p. 51)

These rules were hotly anticipated by educators, families, choice advocates, and tax professionals. Leaders of new learning sectors like microschools are also reviewing these rules and picking out what they find to be the most important details. The credit officially launches on January 1, 2027, meaning that SGOs planning on participating have just a couple of months to read and internalize these rules for a smooth rollout.

This was originally published on our Substack.