Two years to hit 90%: how the §25F rules time an SGO's scholarship spending

The §25F statute requires a scholarship granting organization to spend at least 90% of its income on scholarships, but it never says by when. Treasury's proposed regulations, released October 1, 2026 as part of the full §25F rules package, supply the deadline. An SGO "must meet the 90 percent of income spending requirement as of the last day of the taxable year following the taxable year in which such income is received." The rule spells out what that means for a new organization: the requirement "for the SGO's first year of operation does not need to be met until the end of its second year of operation."

That answer came out of the comment record. Stakeholders told Treasury that a same-year test would squeeze SGOs in their startup phase, when many administrative costs are fixed, and pointed out that many SGOs run on a fiscal year while state SGO lists run on the calendar year. Some asked for a rolling average or a phase-in; others argued against any smoothing at all. Treasury chose a single carry window of one extra year. It runs on the SGO's own taxable year, including a short first year, so an organization on a fiscal year measures against its fiscal year. Money that arrives late in a year does not have to go out the door before that year ends.

What counts as spent. Amounts are treated as spent when they are paid, under the cash method of accounting. A scholarship promised for future years counts only in the year each payment actually goes out, which Treasury ties to the statute's annual checks: household income and in-state residence are tested as of the time a scholarship is paid. Treasury's explanation adds one accommodation for how scholarship money moves: if an SGO transfers funds to a third party for disbursement through a qualified digital wallet and does not keep ownership of them, the funds count as spent on the date of the transfer.

Which dollars go first. The proposed rule uses a first-in, first-out ordering: payments come from contributions and other income received in the earliest year first, then later years in order. If a school or vendor sends money back because it exceeded the student's costs or went out in error, the refund is treated as new income in the year it comes back, and the SGO has until the end of the following year to spend it again. And no dollar can count toward the 90% in more than one year.

The clock applies to whatever base the 90% is measured against, and that base depends on how the SGO is set up. For most organizations it is total gross receipts from every source. For a single-state SGO whose activities are at least 85% scholarship granting, and for each state account of a multistate SGO, it is the qualified contributions received by, and earnings credited to, the §25F segregated account. Our 90/10 rule guide walks through the 85% test that decides which base applies.

The timing rule also shapes the annual reporting. Under the proposed rule, each SGO would report the total it spent on scholarships for in-state students during the year, how much of that counted toward the prior year's 90% and how much toward the current year's, and the percentage of each year's income spent so far. In practice that means tracking §25F receipts by year from the first donation and tagging each payment to the year it satisfies. The SGO compliance calendar lays out where those reports fall.

These are proposed rules. Treasury says SGOs, donors, and states may rely on them for qualified contributions made on or after January 1, 2027, and comments are due December 1, 2026; the full text is in our archive of the proposed regulations. If you are forming an SGO now, build the year-by-year spending ledger in from the start: the free SGO Builder covers formation step by step, and the SGO directory shows who is already operating.