The Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) announced their intent to issue forthcoming proposed regulations to implement the new individual tax credit provision codified as § 25F of the Internal Revenue Code (Code). This section was added by § 70411 of Public Law 119-21, 139 Stat. 72 (July 4, 2025), commonly known as the One, Big, Beautiful Bill Act (OBBBA).

Notice 2025-70 requests comments regarding issues arising under § 25F, emphasizing those issues related to the annual certification by a State and Scholarship Granting Organization (SGO) requirements, where prompt guidance is needed. The Secretary is directed by § 25F(h) to issue regulations or other guidance deemed necessary to carry out the purposes of § 25F, including guidance for enforcement and recordkeeping/information reporting.

Overview of the Section 25F Credit

Section 25F provides a nonrefundable income tax credit (§ 25F credit) allowable against the tax imposed by chapter 1 of the Code. The credit is available to an individual who is a citizen or resident of the United States (within the meaning of § 7701(a)(9)) and who makes qualified contributions to an SGO.

A "qualified contribution" is defined as a charitable contribution of cash to an SGO that uses the contribution to fund scholarships for eligible students solely within the State in which the organization is listed pursuant to § 25F(g). For a contribution to be qualified, the State must have voluntarily elected to participate under § 25F and identified the SGO as satisfying the requirements of § 25F(c)(5) for the calendar year.

The credit is subject to two limitations:

The maximum amount of the § 25F credit allowed to any taxpayer for any taxable year cannot exceed $1,700 (§ 25F(b)(1)).
The allowed credit is reduced by the amount allowed as a credit on any State tax return of the taxpayer for qualified contributions made during the taxable year (§ 25F(b)(2)).

Furthermore, § 25F(e) prohibits a double benefit, specifying that any qualified contribution for which a § 25F credit is allowed cannot be taken into account as a charitable contribution for purposes of § 170. If the allowable § 25F credit exceeds the limitation imposed by § 26(a) (reduced by certain enumerated credits), the excess is carried to the succeeding taxable year and added to the credit allowable under § 25F(a) for that year (§ 25F(f)(1)). No credit may be carried forward beyond the fifth taxable year after the year in which the credit arose, and credits are treated as used on a first-in, first-out basis (§ 25F(f)(2)).

Scholarship Granting Organization (SGO) Requirements

To qualify as an SGO under § 25F(c)(5), an organization must satisfy several specific requirements:

Tax Status: The organization must be described in § 501(c)(3), exempt from tax under § 501(a), and not be a private foundation.
Fund Segregation: The organization must prevent the co-mingling of qualified contributions with other amounts by maintaining one or more separate accounts exclusively for qualified contributions.
State Listing: The organization must be included on the list submitted for the applicable covered State under § 25F(g) for the applicable year.
Operational Requirements (§ 25F(d)):
- Provide scholarships to ten or more students who do not all attend the same school.
- Spend not less than 90 percent of its income on scholarships for eligible students.
- Scholarships must be exclusively for qualified elementary or secondary education expenses (defined using § 530(b)(3)(A)).
- Provide scholarships with priority given first to students awarded a scholarship the previous school year, and second to eligible students who have a sibling who was awarded a scholarship from the organization.
- Cannot earmark or set aside contributions for scholarships on behalf of any particular student.
- Must verify the annual household income and family size of eligible students to ensure they meet the area median gross income requirement of § 25F(c)(2)(A), and limit awards to students whose household income does not exceed that amount.
- Cannot award a scholarship to any disqualified person (determined pursuant to rules similar to § 4946).

Key Issues for Comment and Guidance Development

The IRS is actively soliciting input from tax professionals and other stakeholders on several technical and administrative hurdles that the forthcoming proposed regulations will address.

State Election and Certification Process

Section 25F(g) requires that States voluntarily electing to participate must provide the Secretary a list of SGOs located in the State that meet the § 25F(c)(5) requirements. The election must be made by the Governor or a designated entity.

The Treasury Department and the IRS anticipate that the forthcoming proposed regulations will require the State election, list, and certification to be submitted electronically. The IRS anticipates requiring that the State list submission include a certification, under penalties of perjury, covering specific organizational details, tax-exempt status, compliance with co-mingling requirements, and compliance with all operational requirements under § 25F(d).

Reliance by a covered State on self-certifications by SGOs alone will not be sufficient.

The IRS is seeking comments on:

Definition of "Located in the State": How should the requirement in § 25F(g)(1)(A) that SGOs be “located in the State” be defined? Specifically, should organizations authorized to operate in the State be considered located there, and what jurisdictional requirements apply in existing State-level programs?.
State Verification Procedures: What types of uniform policies, procedures, recordkeeping or other requirements would be reasonable to ensure a State can reliably verify that each listed SGO meets every requirement in § 25F(c)(5)?.
State Tax Credit Offset Information: What information can a State provide to the IRS, consistent with applicable State law, to ensure taxpayer compliance with the mandatory reduction of the § 25F credit required by § 25F(b)(2)?.

Definition of Organizational Income and Multistate Operations

The SGO requirement under § 25F(d)(1)(B) mandates that the organization spend “not less than 90 percent of the income of the organization on scholarships for eligible students”.

Definition of Income: The Treasury Department and the IRS anticipate proposing that the income of the organization includes all income, including unrelated business income, and is not limited to qualified contributions segregated in the separate accounts. The IRS is requesting comments on whether this interpretation poses practical challenges for SGOs and whether an alternative interpretation would be superior under the statute.
Multistate Organizations (MSOs): Since § 25F(c)(3) requires a qualified contribution to be used “solely within the State in which the organization is listed,” the IRS anticipates requiring MSOs to ask donors to designate the State where the contribution is to be used. The IRS seeks guidance on:
- Rules to apply if a donor does not designate a particular State.
- Whether requirements, such as the 10-student rule (§ 25F(d)(1)(A)), or the 90% spending rule (§ 25F(d)(1)(B)), should apply in the aggregate across all states or on a state-by-state basis (and if the latter, how organizational income should be allocated).
- Whether the requirements regarding qualified education expenses, scholarship priority, anti-earmarking, income verification/limits, and anti-self-dealing should be analyzed in the aggregate or state-by-state.

Disqualified Persons and Reporting Requirements

Disqualified Persons: Section 25F(d)(2) prohibits SGOs from awarding scholarships to any disqualified person, determined using rules similar to those in § 4946 (relating to private foundations). The IRS is considering modifying the definition of “substantial contributor” for § 25F purposes to mean any person who contributed an aggregate amount of more than 2 percent of the total contributions received by the SGO from its inception through the end of the taxable year in which the person’s contributions were received.

The IRS also expects to propose that an individual who is a member of the SGO’s selection committee, or part of the immediate family of such a member, is a disqualified person. The IRS is requesting comments on circumstances under which such an individual should not be considered a disqualified person.

Recordkeeping and Reporting: Pursuant to § 25F(h), the IRS anticipates issuing guidance requiring SGOs to report certain information to the IRS and retain certain records. This may include:

Filing an annual IRS form or schedule pertaining to § 25F.
Information on each qualified contribution, including the donor’s taxpayer identification number, to facilitate comparison with the credit claimed.
Information on each scholarship recipient to ensure compliance with § 25F eligibility rules.

These requirements would extend to charitable organizations not normally required to file an annual return under § 6033, and to subordinate organizations recognized under a group exemption.

The IRS is requesting comments regarding:

Income Verification: How should an SGO verify that an eligible student’s household income does not exceed 300 percent of the area median gross income (as used in § 42)? Specifically, should the SGO require a copy of the most recently filed Form 1040 for members of the household with a filing requirement, and how should income be verified for household members without a filing requirement?.
Segregation of Funds: What information should the SGO require to determine that cash is intended to be a qualified contribution requiring segregation into separate accounts, and should the donor be required to provide this information or should the SGO be required to provide written substantiation?.
Donor Notification: What information should an SGO be required to provide to donors (e.g., notifying the donor of the $1,700 credit limitation; the prohibition on taking the contribution as a § 170 deduction if the credit is allowed; and the requirement to reduce the § 25F credit by any corresponding State tax credit)?.

Administrative Timeline

Written comments on Notice 2025-70 must be submitted on or before December 26, 2025. Comments submitted after this deadline may still be considered if such consideration does not delay the issuance of guidance. Comments should be submitted electronically via the Federal eRulemaking Portal or by mail to the specified IRS address.

Analogy for Clarification: The implementation of § 25F is like building a multi-story structure where the States are the foundation layer and the SGOs are the beams and supports. Before the IRS (the building inspector) can approve the structure (the tax credit program), it needs comprehensive blueprints (the regulations). The Notice requests that CPAs and EAs, acting as structural engineers, provide input on the integrity of key load-bearing connections—like the verification processes, the definition of income for the 90% test, and the rules for multistate operations—to ensure the entire system is stable, compliant, and sustainable across all jurisdictions.

Prepared with assistance from NotebookLM.