TL;DR
- The 90/10 rule (§25F(d)(1)(B)): an SGO must spend ≥90% of its income on scholarships; ~10% is left for everything else.
- Other hard requirements: 10+ students at more than one school, renewal then sibling priority, no earmarking, no self-dealing, separate accounts, and income verification against the 300% AMGI ceiling.
- Scholarships may only pay qualified K-12 education expenses (the §530(b)(3)(A) list).
- Treasury’s June 2026 guidance preview answered key mechanics: the 90% test gets a segregated-account safe harbor, applied per state for multistate SGOs, plus an annual audit requirement. Proposed regulations are due by the end of September 2026; joint-filer treatment is still open.
This is the compliance companion to our SGO overview and how-to-start guide. Everything below traces to the text of IRC §25F.
What the 90/10 rule actually says
Section 25F(d)(1)(B) requires that a qualifying SGO “spends not less than 90 percent of the income of the organization on scholarships for eligible students.” In practice that creates a hard 10% ceiling on administrative spending, and that 10% has to cover everything: staff, technology, audits, legal, fundraising, donor stewardship, income verification, and reporting.
For comparison, charity watchdogs often treat 70-85% program spending as strong. The §25F standard is materially stricter, which is why operational efficiency isn’t a nice-to-have for SGOs, it’s a compliance requirement.
“Income,” not “donations”
The statute pegs the 90% to income, not donations received. That distinction matters: investment income, interest on held balances, and other receipts can fall within the base the 90% is measured against. Build your accounting so you can demonstrate the ratio on the correct base, and don’t assume “90% of gifts” is the same number as “90% of income.”
Treasury’s June 2026 guidance preview confirmed this reading, and gave SGOs a practical way to manage it. The proposed rules are expected to measure the 90% requirement against the organization’s total receipts, unreduced by expenses. But an organization whose activities are largely scholarship-granting could instead use a safe harbor that measures “income of the organization” by the amount held in a §25F segregated account, including qualified contributions and earnings. For a multistate SGO, the safe harbor must be satisfied separately for each state-specific account. Full text: Treasury’s preview of the §25F proposed regulations.
The 10-student rule
Section 25F(d)(1)(A) requires an SGO to provide scholarships to 10 or more students who do not all attend the same school. This blocks an organization from operating as a private conduit for a single school or family, and it shapes how narrowly an SGO can define its mission. A single-school “SGO” does not qualify.
Renewal and sibling priority
Awards aren’t purely discretionary. Section 25F(d)(1)(D) imposes a required priority order:
- Students awarded a scholarship the previous school year (renewals) come first.
- After renewals, eligible students who have a sibling who was awarded a scholarship from the same organization.
Your award engine has to encode this order before applying any of your own criteria. Families understandably plan around continuity, and the statute protects it.
Anti-earmarking
Section 25F(d)(1)(E) prohibits an SGO from earmarking or setting aside contributions for any particular student. A donor can choose which SGO to support, by geography or mission, but cannot direct a gift to a named child. Contributions flow into the general pool and are awarded under the priority rules and the SGO’s published criteria. “Give to help my nephew’s tuition” is exactly what the rule forbids.
Self-dealing and disqualified persons
Section 25F(d)(2) prohibits awarding a scholarship to any disqualified person, determined under rules similar to IRC §4946. That category generally captures substantial contributors, officers, directors, and their family members. Maintain a conflict-of-interest policy and screen applicants against your insider list so a board member’s child never receives an award.
Separate accounts
To qualify under §25F(c)(5)(B), an SGO must prevent co-mingling of qualified contributions by maintaining one or more separate accounts used exclusively for them. This is a definitional requirement, fail it and you’re not an SGO. Set up dedicated bank accounts and ledger structure before accepting a single dollar. How scholarship funds move out to schools and families, kept audit-clean.
Income verification
Section 25F(d)(1)(F) requires the SGO to verify the annual household income and family size of applicants and to limit awards to households at or below 300% of area median gross income (the AMGI measure used in §42), using the prior calendar year’s income. This is recurring, document-heavy work, and it’s a prime candidate for automation, because doing it by hand at volume threatens the 10% cap.
Where software earns its keep: income verification, award prioritization, separate-account accounting, and per-donor receipts are exactly the repetitive, auditable tasks that blow past the 10% cap when done manually. SGO Software is built around these §25F requirements, collect, award, and disburse in one compliant pipeline.
sgosoftware.com →Donor substantiation & the double-benefit rule
Donors need documentation from the SGO to claim the §25F credit. Two coordination rules shape what you tell them:
- No double deduction (§25F(e)): a contribution for which the credit is claimed cannot also be taken as a §170 charitable deduction.
- State-credit offset (§25F(b)(2)): the federal credit is reduced by any state credit the donor claims for the same contribution.
The credit is also non-refundable, capped at $1,700 per return, with a 5-year carryforward on a first-in, first-out basis (§25F(f)). For the donor-side mechanics, see the federal tax credit explained.
Open questions in IRS guidance
Some compliance details aren’t final yet. Through Notice 2025-70, Treasury asked for comment on issues that directly affect SGO operations, and on June 10, 2026 it previewed how the proposed regulations will answer most of them, ahead of publication by the end of September 2026:
- Whether the 90% requirement applies state-by-state or in aggregate for multi-state SGOs. Previewed answer: per state, a separate §25F account for each state, with the segregated-account safe harbor satisfied separately for each.
- How “located in the State” is defined for an SGO. Previewed answer: authorized to do business in the state and compliant with its generally applicable charitable-organization rules, and states may not impose SGO-specific requirements stricter than §25F’s own.
- Recordkeeping, reporting, and income-verification methods. Previewed answer: direct income documentation (paystubs, tax returns, IRS transcripts, W-2s, commercial data), categorical eligibility via needs-based program participation, a foster-child safe harbor, an annual audit, and a unique-donor-number reporting system.
- How donations from donors who don’t designate a state are handled, still open, along with joint-filer cap treatment and AMT coordination.
Frequently asked questions
What is the 90/10 rule for SGOs?
Under §25F(d)(1)(B), a Scholarship Granting Organization must spend at least 90% of its income on scholarships for eligible students. The remaining 10% is the practical ceiling for all administrative costs combined. The statute says 'income,' which is broader than 'donations.'
Does the 90% apply per state or in aggregate for multi-state SGOs?
Per state, under Treasury's June 2026 preview of the proposed regulations. A multistate SGO would maintain a separate §25F account for each state it is listed in, and most operational requirements, including the 90% test when measured under the segregated-account safe harbor, would be satisfied separately for each state-specific account. The proposed regulations, expected by the end of September 2026, are intended to formalize this.
Who is a 'disqualified person' an SGO can't fund?
§25F(d)(2) prohibits awarding scholarships to disqualified persons, determined under rules similar to IRC §4946, generally substantial contributors, officers, directors, and their family members. The rule prevents insiders from steering funds to their own families.
Can a donor pick which student their gift helps?
No. §25F(d)(1)(E) prohibits earmarking or setting aside contributions for a particular student. Donations go into the general scholarship pool and are awarded under the SGO's criteria and the required priority order.
What income limit do scholarship recipients have to meet?
A recipient's household income for the prior calendar year must be at or below 300% of area median gross income (AMGI, as used in IRC §42). The SGO must verify household income and family size and limit awards accordingly.
