Nicholas J. Stock II

Introduction

The One Big Beautiful Bill Act (Act) establishes a new federal tax credit for individual donations to Scholarship Granting Organizations (SGOs) serving U.S. elementary and secondary school students.

It is important that SGOs and donors understand the requirements of the Act. This update outlines the new credit under IRC § 25F and its interplay with IRC § 139K.

New IRC Section 25F Credit (Donors)

IRC § 25F introduces a nonrefundable credit equal to 100% of qualified contributions capped at $1,700 per taxpayer annually.

The contribution must be cash and directed to a 501(c)(3) SGO that distributes scholarships within the SGO’s state for qualified elementary or secondary education expenses and is not a private foundation.

The credit is only available to U.S. citizens or residents under § 7701(a)(9). The credit is offset (reduced) by any state tax credit claimed on the same contribution.

The credit applies to contributions in taxable years ending after December 31, 2026.

Interplay with IRC Section 139K (Students)

Under IRC Section 139K, scholarships received by eligible students are excluded from gross income for qualified elementary or secondary education expenses.

This exclusion aligns with § 25F by ensuring that the same contribution that is creditable to the donor does not constitute taxable income to the student recipient.

Discussion

1. Effect of Credit. A credit is more advantageous than a deduction because it reduces tax liability dollar-for-dollar instead of the taxpayer’s applicable marginal tax rate. From a tax perspective, creditable contributions will therefore be more attractive to taxpayers than deductible contributions and Section 25F may encourage these contributions.
2. Compliance.
   1. SGOs must distribute at least 90% of contributions as scholarships to eligible in-state students and may not set aside donations for specific individuals.
   2. SGOs must confirm contribution usage and student eligibility through an annual audit. Since contributions must be distributed in the state of taxpayer’s residence to be creditable, SGOs must document student residency and report through filing with state treasurer.
   3. SGOs will need to provide appropriate documentation to allow donors to substantiate their contributions and eligibility requirements.
3. State Tax Interplay. The federal tax credit under Section 25F coordinates with applicable state tax credits to avoid double crediting. Taxpayers should consider the comparative overall tax benefit in determining whether to claim available credits under federal or state law.

Further guidance is expected regarding the eligibility, verification procedures, and reporting requirements for individuals and SGOs.

If you have questions about the new credit for contributions to SGOs or other questions about changes in tax law affecting tax exempt organizations, contact Nick Stock at Foster Swift Collins & Smith, PC (NStock@FosterSwift.com).

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References:

1. 26 USC § 25F, Qualified Elementary and Secondary Education Scholarships.
2. 26 USC § 139K, Scholarships for Qualified Elementary or Secondary Education Expenses of Eligible Students.
3. 26 USC § 7701(a)(9), Definition of Resident and Nonresident Aliens.
4. IRS Publication 970, Tax Benefits for Education (2024).