For tax years ending after December 31, 2026, a new federal income tax credit for donations to Scholarship Granting Organizations (SGOs) will impact nonprofit fundraising strategies, compliance requirements, and donor communications – particularly for education-focused organizations.
Unlike a charitable deduction, this provision offers a nonrefundable federal income tax credit of up to $1,700 per year for cash donations to qualified SGOs. Donors benefit from dollar-for-dollar tax liability reduction, and unused credits may be carried forward for up to five years. Organizations must carefully review SGO eligibility and operational requirements to take advantage of this credit.
Overview of the Credit
For tax years that end after December 31, 2026, a new federal income tax credit for donations to Scholarship Granting Organizations (SGOs) will impact nonprofit fundraising strategies, compliance requirements, and donor conversations – particularly for education-focused organizations.
Unlike a charitable deduction, the new provision offers a nonrefundable federal income tax credit of up to $1,700 per year for cash donations to qualified SGOs. A tax credit reduces tax liability dollar-for-dollar, making it especially attractive to donors with sufficient tax owed. Any unused credit may be carried forward for up to five years.
SGO Eligibility Requirements
To qualify, organizations must meet strict requirements:
- SGOs must be public charities (not private foundations)
- Maintain segregated accounts for scholarship funds
- Award scholarships to at least 10 students attending multiple schools
- Avoid earmarking for specific individuals
- Spend at least 90% of total income on scholarships for eligible students
Because “income” is broadly defined, many organizations may need to reevaluate their operating models to comply.
State Participation
State participation is critical:
- States must opt into the program, certify eligible SGOs annually, and notify the IRS when organizations no longer qualify
- If a state also offers a scholarship tax credit, the federal credit is reduced dollar-for-dollar
Student Eligibility
To be eligible for a scholarship, a student must:
- Be a U.S. citizen or resident
- Have a household income not exceeding 300% of the area median income, adjusted for family size
- Not be a substantial contributor to the SGO, including family members (spouses, ancestors, descendants)
- Not be family members of the SGO’s officers, directors, or trustees
If a business is a substantial contributor, any owners, partners, beneficiaries, and their families who own more than 20% of the business are also ineligible. These restrictions prevent donors from indirectly funding scholarships for themselves or their families.
Safeguards and Compliance
The law includes strong safeguards against self-dealing:
- Scholarships may not benefit donors, their family members, or organizational insiders
- Requires robust conflict-of-interest controls and documentation
- Additional IRS guidance is expected, particularly around reporting requirements
- Organizations considering SGO status should anticipate increased compliance, reporting, and internal control obligations
Strategic Questions for CFOs and Executive Directors
The new credit presents opportunities – but only for organizations that are structurally prepared. Leadership teams should begin discussing:
- Does our mission and operating model align with SGO requirements?
- Can we realistically meet the 90% scholarship spending threshold?
- How would segregated accounts and reporting affect our finance systems?
- Are we prepared for increased donor scrutiny and state oversight?
- Should we create a separate affiliate or new entity to pursue SGO status?
Bottom line: the scholarship tax credit presents meaningful opportunities, but only for organizations prepared to meet demanding operational and governance standards. CFOs and Executive Directors should assess feasibility, educate boards, and monitor state participation.
Final Thoughts
The new federal scholarship tax credit offers a significant opportunity for education-focused nonprofits; but success depends on preparation, governance, and operational rigor. Organizations that evaluate feasibility, strengthen internal controls, and align their structures with SGO requirements will be best positioned to benefit.
Han Group partners with nonprofits to navigate complex regulatory changes and implement effective governance structures. Our professionals help clients assess feasibility, design compliant processes, and support long-term operational resilience. To learn how we can help your organization evaluate and pursue SGO status, Contact Us.
