85%: the number that decides how an SGO meets the §25F 90% rule

Two percentages sit at the center of Treasury's §25F rules for scholarship granting organizations, and they do different jobs. The 90% is the spending rule. It comes from the statute: an SGO must spend at least 90% of "the income of the organization" on scholarships for eligible students. The 85% is an activity test. It is new in the proposed regulations Treasury released on October 1, 2026, and it decides what the 90% is measured against. An organization whose activities are at least 85% scholarship granting measures the 90% against its §25F account. Any other organization measures it against everything it takes in.

Treasury's starting point is strict. The proposed rule reads "income of the organization" as "the total gross receipts of the organization from all sources," counted on the cash method and unreduced by any expenses. Many commenters had asked Treasury to count only the donations made for the credit, warning that an SGO might not be able to operate on 10% of its entire income. Treasury declined to make that the general rule, explaining that the statute's separate-account requirement "is a tracing and anti-commingling rule for qualified contributions" and does not shrink the income figure the 90% applies to.

The safe harbor is how Treasury answered the concern. If at least 85% of a single-state SGO's activities are scholarship granting, whether the scholarships come under §25F, a state tax-credit program, or anything else, it can apply the operating requirements to its §25F segregated account instead of the whole organization. For the spending rule, income then means "the total amount of qualified contributions received by, and earnings credited to, the section 25F segregated account during the taxable year." Administration, fundraising, governance, investment, compliance, and outreach count as scholarship granting when they support the scholarship work. Treasury states the purpose directly: the safe harbor allows SGOs "to raise funds for administrative costs that would not count toward the 90 percent of income spending requirement." Its economic analysis says the same thing in plainer terms: SGOs could spend more than 10% of their income on overhead "if such income is not part of the section 25F segregated account." In practice, at least 90% of what comes into the §25F account, the donations made for the credit plus their earnings, goes to scholarships, and separate gifts and grants can pay to run the organization.

Treasury's own data show why the line matters. Among SGOs already running state scholarship programs, program-related spending averaged 78% of total revenue in fiscal year 2024, and Form 990 data show 72% of existing SGOs spend less than 90% of revenue on programs. An organization-wide 90% test would have caught nearly three quarters of them, about 450 SGOs in participating states. Treasury estimates that without the safe harbor, SGOs would receive 18% fewer qualified contributions. After accounting for donors who shy away from organizations with higher overhead, it puts the net gain at up to $3 billion a year in scholarship funding and roughly 250,000 more scholarship recipients each year.

Organizations with more than 15% of their work outside scholarships do not get the safe harbor, so the 90% test applies to all of their receipts. That describes many school foundations and community nonprofits, including the public-school-side groups now planning for §25F. In July, AASA and twelve other education organizations asked Treasury to apply the test to the segregated account across the board. The proposed rule does that only past the 85% line, calling the safe harbor "a narrow administrative accommodation for organizations whose overall operations overwhelmingly consist of granting scholarships." Treasury expects the consequence, noting the safe harbor "may require the formation of new organizations to conduct section 25F activities," and the rules make room for it: a state may list an organization whose 501(c)(3) application is still pending, as long as the exemption takes effect on or before January 1 of the year the list covers. Our guide to turning an existing nonprofit into an SGO walks through that choice.

Multistate SGOs do not get a choice. An organization on more than one state's list must be at least 85% scholarship granting, keep a separate §25F account for each state, and meet the 90% test separately for each account. Donors choose which state's account receives their gift. SGOs using the safe harbor, and every multistate SGO, would also certify each year, alongside their Form 990, that at least 85% of their activities were scholarship granting.

Treasury left the measurement itself open. It asked for comments on how an organization should measure its scholarship-granting activities, "including whether the determination should be based on receipts, expenditures, staff time, program-service activity, or another administrable metric," and on whether 85% is the right threshold. Comments on the proposed rule are due December 1, 2026. Until final rules publish, SGOs may rely on the proposed rule for contributions made from January 1, 2027, as long as they follow it in full and consistently.

For an organization deciding its structure now, the first question is whether scholarships are at least 85% of what it does. If they are, set up the §25F segregated account and plan to spend 90% of each year's account income on scholarships by the end of the following year. If they are not, consider a dedicated organization formed before January 1, 2027. Our 90% rule compliance guide has the mechanics, the full breakdown of the rules covers everything else, the free SGO Builder walks through formation step by step, and the SGO directory shows who is already operating.