The §25F proposed regulations: what Treasury has previewed, and what it means for SGOs and donors

On June 10, 2026, Treasury published a preview of the forthcoming §25F proposed regulations , remarks delivered by Deputy Assistant Secretary for Tax Policy Kevin Salinger to a roundtable of SGOs, state representatives, and education stakeholders, alongside a press release officially branding the program the Education Freedom Tax Credit. This is the closest thing to the rulebook anyone has seen, and it answers questions SGO founders have been building around blind since enactment. This article walks through each item and what it means in practice. (For the news story, see our coverage.)

The timeline: September 2026

Treasury expects to issue the proposed regulations “no later than the end of September” 2026 , and, critically, says states, SGOs, and taxpayers will be able to rely on the proposed regulations for tax year 2027. That reliance commitment matters more than the date: it means the program launches January 1, 2027 on the proposed rule even if the final rule takes longer, so the September document is effectively the operating manual for year one. Publication in the Federal Register will also open a public comment period.

The 90% test and its safe harbor

§25F(d)(1)(B) requires an SGO to spend at least 90% of its income on scholarships, and “income” has been the single most consequential undefined term in the statute. The preview answers it twice over. The general rule: the 90% is measured against the organization’s total receipts, unreduced by expenses, the broad reading. The safe harbor: an organization whose activities are largely scholarship-granting can instead measure “income of the organization” by the amount held in a §25F segregated account, including qualified contributions and their earnings.

The practical effect is to reward clean fund segregation. An SGO that keeps its §25F money in a dedicated account, and runs its scholarship program from that account, gets a defined, provable base for the 90% ratio instead of arguing about what “total receipts” includes. For the full compliance picture around the rule, see our 90/10 compliance guide.

“Located in” and the multistate path

A donation only generates the credit if it goes to an SGO on a covered state’s list, and §25F requires a listed SGO to be “located in” that state, without saying what that means. The preview defines it: an SGO is located in a state if it is authorized to do business there and complies with the state’s generally applicable charitable-organization rules (transparency, accountability, fraud prevention). Notably, states may not impose substantive SGO-specific requirements more restrictive than §25F’s own, a ceiling on state-level gatekeeping.

That definition unlocks the multistate answer. An SGO may appear on more than one state’s list, as long as it is located in each state and maintains a separate §25F account for each. Most operational requirements, including the 90% safe harbor, apply separately to each state account, while certain organization-wide rules apply to the SGO as a whole. One nonprofit, several state programs, several segregated accounts.

What counts as a school

The preview defines “school” consistent with §530: public, private, and religious schools providing K–12 education as determined under state law. Two clarifications matter for families. A home school is treated as a school wherever state law treats it as one, so homeschool eligibility will vary by state, following each state’s own definitions. And K–12 schools operated by a federally recognized Tribe or tribal organization qualify.

Income verification: three routes

Scholarships may only go to students in households at or below 300% of area median gross income, and the SGO must verify it. The preview lays out a layered system:

• Direct verification, paystubs, tax returns, IRS transcripts, Forms W-2, or crediting agencies and commercial data sources.
• Categorical eligibility, recent documentation that a household member participates in a needs-based federal, state, or tribal program with income limits at or below the §25F threshold.
• Foster-child safe harbor, foster children satisfy the income requirement with no separate verification at all.

Treasury is also considering additional safe harbors for students attending schools in low-income areas. The design goal it stated, reliable but “not unnecessarily burdensome for families”, suggests the final mechanics will look more like school-lunch categorical eligibility than a mortgage application.

Audits and fraud prevention

Every SGO would need an annual financial and programmatic audit by a qualified independent third party, furnished to each state on whose list it appears. Smaller SGOs get a streamlined alternative: an audit by an internal committee unrelated to management, signed under penalties of perjury. The audit is designed to carry the state’s oversight load, states can use it to verify §25F compliance and decide whether removal from the list is warranted, rather than building their own review apparatus.

States would still be expected to take reasonable steps against fraud, including preventing duplicate awards to the same student for the same expense, possibly via a formal scholarship acceptance certifying no other award covers the same expense.

Unique donor numbers

On the donor side, the preview describes a matching system built around a unique donor number: the SGO issues each donor a written acknowledgment of annual contributions carrying a number generated under an IRS-provided method, reports contributions to the IRS under that number, and the donor reports the same number on their federal return. The IRS can then match every claimed credit to a real donor, a real SGO, and reported contributions, without the donor ever giving the SGO a Social Security number. For donors, expect the acknowledgment letter to become the key tax document; for SGOs, donor-number issuance and IRS contribution reporting become core annual workflows.

The planned IRS portal

The proposed rules will contemplate an IRS portal for SGO administration and reporting, a user-friendly interface meant to streamline SGO–IRS interactions. Treasury was explicit that functionality may arrive in phases rather than all on day one, so SGOs should plan to operate their own systems first and integrate as the portal matures.

What’s still open

• Joint-filer treatment of the $1,700 cap, the $1,700-vs-$3,400 question. See the donor guide for why the conservative reading is $1,700 per return.
• AMT coordination for the credit.
• The 2027 state SGO-list deadline, §25F(g) says “as early as practicable” for the startup year, and the mechanics remain to be set.
• Scope of eligible expenses under §530, including tutoring and special-needs services, which Treasury says it “fully intend[s]” scholarships to support. This is a separate guidance workstream that follows the §25F regulations.

What to do before September

For anyone forming or running an SGO, the preview converts to a short checklist:

• Open a segregated §25F account now, one per state you plan to serve, and run all qualified contributions through it. The safe harbor makes that account your 90% compliance proof.
• Budget for an annual audit (or, if small, stand up an independent internal audit committee).
• Design income verification around the three routes, collect direct documentation, but build the categorical-eligibility path, which is far lighter for families.
• Plan donor acknowledgments as a system, not a mail-merge: unique numbers, IRS reporting, and per-donor records.
• Confirm state-law status in each target state: authorization to do business plus charitable registration is the “located in” test.

We’ll publish the full text and a plain-English analysis the day the proposed regulations land, watch the proposed-regulations page and the news feed.

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