Federal Scholarship Tax Credit, Temporary Regulations, TD 10057, RIN 1545-BS17, 91 Fed. Reg. [page] (published Oct. 2, 2026) (codified at 26 C.F.R. pt. 1).

Federal Scholarship Tax Credit, Notice of Proposed Rulemaking and Notice of Public Hearing, REG-117199-25, RIN 1545-BR97, 91 Fed. Reg. [page] (prop. Oct. 2, 2026) (to be codified at 26 C.F.R. pt. 1).

On October 1, 2026, the Department of the Treasury and the Internal Revenue Service released a comprehensive regulatory package implementing the new nonrefundable Federal Scholarship Tax Credit under Internal Revenue Code (Code) Section 25F. This statutory credit was enacted by Section 70411 of Public Law 119-21, 139 Stat. 72 (July 4, 2025), commonly known as the One, Big, Beautiful Bill Act (OBBBA). Section 25F allows individual taxpayers a nonrefundable tax credit of up to $1,700 annually for qualified cash contributions made to certified scholarship granting organizations (SGOs) in taxable years ending after December 31, 2026. Concurrently, OBBBA Section 70411(b) enacted Section 139K, which excludes from gross income any scholarship amounts received by eligible students or their dependents from SGOs.

To establish the necessary administrative, operational, and procedural infrastructure prior to the January 1, 2027 effective date for taxpayer contributions, Treasury and the IRS simultaneously published Temporary Regulations under Treasury Decision 10057 (TD 10057, RIN 1545-BS17) and a Notice of Proposed Rulemaking under REG-117199-25 (RIN 1545-BR97). Published pursuant to the mandatory cross-referencing requirement of Code Section 7805(e)(1), the temporary and proposed regulations establish binding guidelines for individual contributors, SGOs, and participating States.

This technical article provides tax practitioners—CPAs, Enrolled Agents, and tax attorneys—with an exhaustive analysis of the regulatory framework. It examines the legal justifications articulated by Treasury, the structural additions and modifications to the Income Tax Regulations (26 CFR Part 1), the economic and administrative rationale underlying key choices, proposed effective dates, taxpayer reliance provisions, and a subsection-level analysis of each regulatory provision.

Statutory Rationale and Reasons for Immediate Regulation Release

The primary objective of this regulatory release is to operationalize Code Section 25F for calendar year 2027. Congress established a complex, multi-tiered framework under Section 25F that depends on voluntary State participation, State certification of eligible SGOs, electronic IRS portal interactions, strict SGO spending and anti-commingling rules, and precise donor substantiation mechanisms.

Treasury and the IRS determined that good cause existed under the Administrative Procedure Act (5 U.S.C. Subchapter II) to issue temporary regulations effective immediately without prior notice and comment. As explained in the preamble to TD 10057, “failure to do so would be impracticable, contrary to the public interest, and against the intent of Congress.” Congress intended for taxpayers to begin making creditable contributions on January 1, 2027. However, before any contribution can qualify for the credit:

States must voluntarily elect to participate and submit certified lists of qualifying SGOs located within their borders pursuant to Section 25F(g).
Tax-exempt public charities seeking SGO status must establish segregated Section 25F accounts, adapt operational procedures, and register electronically through the newly established IRS SGO portal.
The IRS must build and deploy two distinct electronic web portals—the IRS State Section 25F Portal and the IRS SGO Portal—to process State elections, manage SGO registrations, issue unique donor numbers, and facilitate automated tax return matching.

Without immediate temporary regulations, States and SGOs would lack the regulatory certainty needed to complete required filings, conduct financial audits, and establish donor tracking systems prior to January 1, 2027. Furthermore, Treasury emphasized that issuing temporary regulations provides crucial market certainty for newly formed non-profit SGOs, observing that “these temporary regulations will provide those organizations certainty in their formation and operations and will reduce the costs of uncertainty that would result if final regulations are not issued prior to taxpayers making contributions.”

The legal authority for these regulations derives from Code Section 25F(h), which expressly delegates authority to the Secretary to issue regulations or guidance necessary to carry out the purposes of Section 25F—specifically including rules for enforcement of operational requirements under Section 25F(d) and (g), recordkeeping, and information reporting—as well as the general rulemaking delegation under Code Section 7805(a).

Structural Revisions, Additions, and Interplay with Existing Code Provisions

The regulatory package introduces major structural additions to 26 CFR Part 1 by promulgating Treasury Regulations §§ 1.25F-0 through 1.25F-5 (proposed) and Temporary Treasury Regulations §§ 1.25F-1T, 1.25F-4T, and 1.25F-5T. The text of the temporary regulations is identical to the corresponding proposed regulations (§§ 1.25F-1, 1.25F-4(b)-(c), and 1.25F-5), satisfying Section 7805(e)(1).

Rather than operating in isolation, the Section 25F regulations interact directly with, modify the application of, or incorporate standards from several established Code sections:

Code Section 170 (Charitable Contributions): Section 25F(e) and Proposed § 1.25F-2(f) enforce a strict denial of double benefit. Any portion of a qualified contribution for which a Section 25F credit is allowed (or carried forward) cannot be claimed as an itemized charitable deduction under Section 170. However, to the extent a contribution exceeds the Section 25F credit cap or is disallowed under Section 25F, the excess portion remains eligible for deduction under Section 170, subject to standard Section 170 rules.
Code Section 26(a) (Tax Liability Limitation): Under Proposed § 1.25F-2(d), the Section 25F credit is nonrefundable and limited to the taxpayer’s regular tax liability plus alternative minimum tax under Section 55(a), reduced by nonrefundable personal credits allowable under Subpart A (specifically Sections 21, 22, 24, 25, 25A, 25B, 25C, and 25E).
Code Section 530(b)(3) (Coverdell ESAs): Section 25F(c)(4) incorporates the Coverdell ESA definitions for “qualified elementary or secondary education expenses” under Section 530(b)(3)(A) and “school” under Section 530(b)(3)(B) (kindergarten through grade 12, as determined under State law).
Code Section 42 & Section 8 Housing Act (Area Median Gross Income): Section 25F(c)(2)(A) defines student income eligibility by referencing Area Median Gross Income (AMGI) “as such term is used in section 42.” Section 42(g)(4) cross-references Section 8 of the United States Housing Act of 1937 (24 CFR Part 5). Proposed § 1.25F-3(c)(6) adapts these HUD rules for family size adjustments and household income calculations.
Code Section 4946 (Disqualified Persons): Section 25F(d)(1)(G) prohibits awarding scholarships to disqualified persons under rules similar to Section 4946. Proposed § 1.25F-3(d) adapts the private foundation self-dealing rules, establishing a 2 percent and $5,000 threshold for “substantial contributors,” but applies this test at the individual Section 25F segregated account level.
Code Section 6033 (Returns by Exempt Organizations): Proposed § 1.25F-4(d)(4) integrates SGO annual compliance reporting directly into Form 990 filings as a mandatory attachment.

Treasury Analysis and Legal Justification of Positions

In both the preambles to TD 10057 and REG-117199-25, Treasury and the IRS provided extensive legal analysis justifying their regulatory positions across eleven key technical areas:

Definition of “Located in a State”

Code Section 25F(g)(1)(A) requires electing States to submit a list of qualifying SGOs that are “located in the State.” Stakeholders submitted divergent comments: some argued that “located in” requires physical headquarters or a physical presence, while others urged that registration to do business and compliance with State charitable laws should suffice.

Treasury adopted Proposed § 1.25F-1(a)(10) and § 1.25F-1T(a)(10), defining an organization as “located in a State” if it is authorized to do business in the State and complies with generally applicable State charitable laws, including transparency, accountability, and fraud prevention provisions. Treasury rejected a physical presence mandate, reasoning that defining “located in” based on corporate qualification and charity registration aligns directly with the statutory purpose of Section 25F to maximize student access to scholarship funds while respecting State oversight authority over entities soliciting donations within their borders.

Individual Taxpayer Limitation and Married Filing Jointly Treatment

Section 25F(a) allows a credit for qualified contributions made by an “individual,” while Section 25F(b)(1) states that the credit allowed to “any taxpayer” shall not exceed $1,700. Commenters requested clarification on whether a married couple filing jointly is limited to a single $1,700 cap or may claim up to $3,400.

Treasury analyzed Code Section 7701(a)(14), which defines a “taxpayer” as “any person subject to any internal revenue tax,” and Section 7701(a)(1) defining “person” to include “an individual.” Citing long-standing precedent under Treasury Regulation § 1.151-1(b), Treasury concluded that a joint return consists of two individual taxpayers. Consequently, under Proposed § 1.25F-2(a)(2), married taxpayers filing jointly are treated as separate taxpayers for purposes of Section 25F(b)(1). Each spouse may claim a credit of up to $1,700 based on their own qualified contributions, enabling a combined credit of up to $3,400 on a joint return.

Disallowance of Pass-Through Entity Credits

Treasury evaluated whether partners in partnerships or shareholders in S corporations could claim Section 25F credits for contributions made by pass-through entities. Interpreting the statutory text of Section 25F(a), Treasury determined that the credit is strictly restricted to individual taxpayers making direct qualified contributions to SGOs. Proposed § 1.25F-2(a)(3) explicitly provides that pass-through entity contributions cannot generate Section 25F credits for partners or shareholders. However, such contributions retain their character as pass-through charitable deductions under Section 170.

Calculation Methodology and Favorable State Tax Credit Ordering Rule

Section 25F(b)(2) reduces the federal credit by any State tax credit allowed for the same contribution, while Section 25F(b)(1) imposes the $1,700 annual cap. Treasury addressed a critical statutory ambiguity regarding the mathematical sequence of these reductions.

If the $1,700 cap were applied before the State credit reduction, a taxpayer making a $2,500 contribution who receives a $500 State credit would have their creditable amount capped first at $1,700, then reduced by $500, yielding a federal credit of only $1,200. Treasury rejected this restrictive interpretation. Instead, Proposed § 1.25F-2(c)(1) establishes that the State tax credit reduces the aggregate qualified contributions before applying the $1,700 limitation:

Allowed Credit = Lesser of (Aggregate Qualified Contributions minus State Tax Credits Allowed) or $1,700

Under Treasury’s favorable formula, the $2,500 contribution is reduced first by the $500 State credit to $2,000, which then caps out at the maximum $1,700 federal credit. Treasury justified this position by observing that Section 25F(b)(2) was intended solely to prevent double tax recoveries exceeding 100 percent of the contribution, not to penalize taxpayers in States with existing tax credit programs or discourage States from maintaining state-level incentives.

Furthermore, Proposed § 1.25F-2(c)(2) creates a pro-taxpayer ordering rule for mixed contributions: when a taxpayer receives a State credit for a contribution containing both qualified and non-qualified portions, the State credit is deemed absorbed first by the non-qualified contribution, preserving the maximum possible qualified contribution amount for the Section 25F credit.

Operational Requirement Safe Harbor (85 Percent Activity Test)

Section 25F(d)(1)(B) mandates that an SGO spend at least 90 percent of its income on scholarships for eligible students. SGOs expressed severe concern that entity-wide overhead, fundraising, and compliance costs would make compliance impossible for existing charities operating broader educational programs.

To resolve this, Proposed § 1.25F-3(c)(2) creates an operational safe harbor. If at least 85 percent of a single-State SGO’s overall activities consist of scholarship granting activities (broadly defined to include administrative, governance, and fundraising activities conducted in support of scholarships), the SGO may satisfy the 90 percent spending requirement and other operational rules exclusively at the level of its Section 25F segregated account, rather than across the entire organization.

Cash-Only Definition of Household Income

Section 25F(c)(2)(A) restricts scholarship eligibility to students whose household income does not exceed 300 percent of Area Median Gross Income (AMGI) under Section 42 rules, which incorporate HUD Section 8 regulations (24 CFR 5.609). The strict HUD definition includes non-cash items, such as imputed returns on net assets exceeding $50,000 (e.g., home equity).

Treasury recognized that while HUD’s imputed asset rule impacts few renters, it would disproportionately disqualify middle-income homeowners whose children need educational scholarships. In Proposed § 1.25F-3(c)(6)(ii)(C), Treasury modified the Section 8 definition for Section 25F purposes by excluding all non-cash imputed returns on net assets and focusing exclusively on cash sources of income. Economic analysis conducted by Treasury revealed that this single modification expands student eligibility from 64 percent to 96 percent of all K-12 students in participating States while drastically reducing documentation burdens for SGOs.

Categorical Eligibility and Income Verification Safe Harbors

To alleviate verification burdens, Proposed § 1.25F-3(c)(6)(iii) provides SGOs with three streamlined income verification safe harbors:

Categorical Eligibility: A student is automatically income-eligible if any household member receives benefits under specified needs-based public assistance programs (SNAP, TANF, WIC, Section 8, or SSI).
Low-Income Area Tutoring and Special Needs Safe Harbor: Students receiving individual academic tutoring or special needs services selected by a school located in a Qualified Census Tract (QCT)—or a school where 80 percent of students reside in a QCT—are treated as meeting income limits without direct verification, provided the SGO obtains an annual independent audit certifying compliance.
Foster Care Safe Harbor: School-age foster children are treated as categorically income-eligible without documentation.

Construction of “Students Solely Within the State”

Section 25F(c)(3) requires qualified contributions to be used for scholarships for eligible students “solely within the State.” Treasury analyzed whether “solely within” modifies the student’s residence or the physical location of the school attended.

Proposed § 1.25F-3(c)(7) clarifies that “solely within the State” refers strictly to the student’s legal residence under State law. A student residing in a covered State may receive a Section 25F scholarship even if attending a school in a neighboring State. Two statutory exceptions allow dual-residency status for: (1) dependents of active-duty U.S. Armed Forces personnel (treated as resident in both domicile and duty station States), and (2) dependents residing on Indian Lands under 25 U.S.C. 3501(2) (treated as resident in both home and school States).

Disqualified Person Rules and Substantial Contributor Safe Harbor

Proposed § 1.25F-3(d) adapts Section 4946 private foundation self-dealing rules to SGOs. Disqualified persons include SGO officers, directors, trustees, scholarship selection committee members, substantial contributors, and family members (spouses, ancestors, descendants, siblings, and spouses of descendants/siblings).

A “substantial contributor” is defined as any person contributing over $5,000 during the SGO’s taxable year if that amount exceeds 2 percent of total contributions received. Crucially, Treasury applies this test at the Section 25F segregated account level. Furthermore, Proposed § 1.25F-3(d)(2)(ii) provides an “excepted scholarship” safe harbor: if an SGO awards a scholarship to a student whose parent later becomes a substantial contributor due to year-end donations, the scholarship is not treated as an illegal award to a disqualified person if, at the time of the award, the donor was not a substantial contributor and the SGO had no reasonable expectation of the subsequent gift.

Unique Donor Numbers and Donor Privacy Protection

In response to stakeholder privacy concerns regarding collecting donor Social Security Numbers (SSNs) or Taxpayer Identification Numbers (TINs), Proposed § 1.25F-4(c) establishes a unique donor number system. SGOs must register via the IRS SGO Portal to obtain standard formatting instructions for generating a unique donor number for each contributor. SGOs provide this donor number on a Timely Written Acknowledgement furnished to the donor by January 31. The donor then reports the unique donor number on Form 8525 attached to their Form 1040, enabling automated IRS return matching without exposing sensitive TINs to non-profit entities.

Limitations on State Administrative Preemption

Under Proposed § 1.25F-5(e)(2), covered States are expressly prohibited from imposing administrative requirements on SGOs that are more restrictive than Section 25F(c)(5), such as restricting the types of schools recipients may attend or limiting permissible educational expenses. Treasury emphasized that State participation is voluntary, and States cannot use certification authority to subvert federal statutory choices or discriminate against qualifying educational providers.

Proposed Effective Dates, Expiration, and Taxpayer Reliance Rules

The effective dates and reliance guidelines governing TD 10057 and REG-117199-25 are structured as follows:

Temporary Regulations (TD 10057): Under Treasury Regulations §§ 1.25F-1T(b), 1.25F-4T(f), and 1.25F-5T(f), the temporary regulations are effective September 1, 2026, providing the immediate legal basis for IRS portal development, State advance elections, and SGO registrations. In accordance with Code Section 7805(e)(2), the temporary regulations expire three years after issuance, on October 1, 2029.
Proposed Regulations (REG-117199-25): Under Proposed Treasury Regulations §§ 1.25F-1(b), 1.25F-2(i), 1.25F-3(e), 1.25F-4(f), and 1.25F-5(f), the proposed regulations will formally apply to taxable years ending on or after the date final regulations are published in the Federal Register.
Taxpayer Reliance Rule: Section VI of the Explanation of Provisions in REG-117199-25 establishes an explicit reliance doctrine. Taxpayers, SGOs, and covered States may rely on the proposed regulations for qualified contributions made on or after January 1, 2027, in taxable years ending before final regulations are published in the Federal Register, provided that taxpayers, SGOs, and States follow the applicable proposed regulations in their entirety and in a consistent manner.

Subsection Level Analysis of Regulatory Provisions

Section 1.25F-1 and Section 1.25F-1T Definitions

(a)(1) Advance Election: Defines State advance submission procedures under § 1.25F-5(c)(3).
(a)(2) Covered State: Defines a State electing to participate under Section 25F for a calendar year.
(a)(3) Disqualified Person: Cross-references Section 4946 adaptations under § 1.25F-3(d).
(a)(4) Eligible Student: Establishes the 300 percent AMGI income ceiling and public school enrollment eligibility.
(a)(5) Foster Child: Defines foster children and authorized placement agencies for categorical eligibility.
(a)(8)-(9) IRS Portals: Establishes the electronic IRS SGO Portal and IRS State Section 25F Portal modules.
(a)(10) Located in a State: Sets qualification standard based on business authority and charitable compliance.
(a)(11)-(12) Multistate SGO & Qualified Contribution: Defines multistate entities and restricts qualified contributions to irrevocable U.S. dollar cash gifts (excluding digital assets).
(a)(13) Qualified Digital Wallet: Defines third-party electronic payment platforms managing scholarship disbursements.
(a)(18) Section 25F Segregated Account: Defines required separate accounts maintained exclusively for qualified contributions.
(a)(22) State Credit: Defines State tax credits allowed for SGO gifts, including carryforward/carryback amounts.
(a)(25) Timely Written Acknowledgement: Defines mandatory SGO donor substantiation statement.

Section 1.25F-2 Federal Scholarship Tax Credit for Qualified Contributions

(a)(1)-(3) Allowance & Entity Rules: Authorizes nonrefundable credit against Sections 1 and 55(a); grants separate $1,700 limits for joint filers ($3,400 total); disallows pass-through credits from partnerships/S-corps.
(b)(1)-(2) Donor Reliance: Authorizes donor reliance on the published IRS SGO List, subject to exceptions for donor knowledge of non-compliance or involvement in SGO delisting.
(c)(1)-(2) Credit Calculation & Ordering: Establishes credit as lesser of net contribution (after State credits) or $1,700; applies State credit absorption first to non-qualified contribution amounts.
(d) Tax Liability Limitation: Caps credit at Section 26(a) net tax liability after Subpart A nonrefundable credits.
(e)(1)-(3) Carryforward Rules: Grants 5-year FIFO carryforward for unused credit amounts.
(f) Denial of Double Benefit: Disallows Section 170 charitable deduction for creditable or carried-forward contribution amounts.
(g)(1)-(2) Substantiation & Presumption: Mandates Form 8525 filing with unique donor numbers; establishes rebuttable presumption of credit disallowance if donor numbers are omitted.

Section 1.25F-3 and Section 1.25F-3T Scholarship Granting Organizations

(b)(1)-(6) SGO Qualifying Criteria: Requires 501(c)(3) public charity status, segregated accounts, operational compliance, lack of self-dealing, State list inclusion, and IRS reporting.
(c)(1) General Operational Requirements: Mandates 10+ student awards across multiple schools, 90 percent spending rule, expense verification, income verification, student residency, award priorities, and prohibition on earmarking.
(c)(2)-(3) Safe Harbors for Single/Multistate SGOs: Grants 85 percent activity safe harbor allowing account-level testing for single-State and multistate SGOs.
(c)(4) 90 Percent Spending Requirement: Defines cash-method gross receipts income; grants two-year window (end of second taxable year) to disburse 90 percent of income; enforces FIFO spending order.
(c)(5) Expense Verification & Digital Wallets: Mandates anti-fraud procedures; prohibits direct payments to families except verified receipts; requires direct tuition payments to schools; authorizes qualified digital wallets.
(c)(6) Income Verification Methods: Establishes cash-only household income rules; authorizes direct verification, categorical public assistance eligibility, QCT tutoring safe harbor (with required audit), and foster care safe harbor.
(c)(7) Residency Requirements: Defines “solely within the State” based on student legal residence; enacts military dependent and Indian Lands exceptions.
(c)(8) Award Priorities: Requires priority for prior-year recipients, followed by siblings of prior recipients.
(d)(1)-(5) Disqualified Persons: Defines self-dealing categories; sets 2 percent / $5,000 account-level substantial contributor threshold; provides inadvertent contributor safe harbor.

Section 1.25F-4 and Section 1.25F-4T Reporting and Recordkeeping Requirements for SGOs

(b)(1)-(4) Mandatory Portal Registration: Requires electronic IRS SGO Portal registration prior to soliciting gifts or appearing on State lists.
(c)(1)-(2) Donor Acknowledgements & IRS Reporting: Requires written acknowledgements with unique donor numbers furnished by January 31; mandates annual IRS portal contribution reporting by February 28.
(d)(1)-(4) Annual Compliance Certifications: Requires annual compliance schedules attached to Form 990 (or filed separately by May 15) detailing applicant counts, award statistics, spending percentages, and operational certifications.
(e)(1)-(4) Independent Audit Mandate: Requires annual financial and programmatic third-party audits provided to covered States; permits committee audits for SGOs with annual receipts under $500,000.

Section 1.25F-5 and Section 1.25F-5T State Elections, Certifications, and SGO Lists

(b)(1)-(4) State Portal & Special EIN: Mandates registration in the IRS State Section 25F Portal using a assigned special-purpose EIN.
(c)(1)-(5) State Elections & Advance Procedure: Restricts State elections to single calendar years; establishes Advance Election procedures (Form 15714 due January 1, 2027 for 2027; perfected by February 15, 2027).
(d)(1)-(9) State SGO Lists & Removal Due Process: Outlines required SGO list details; provides transition rules for new SGOs and pending 501(c)(3) applicants; mandates fair administrative due process for State SGO removals; establishes grounds for IRS delisting (appeals via IRS Independent Office of Appeals under Section 7803(e)(3)).
(e)(1)-(3) State Administrative Standards: Limits State oversight to general charitable law and Section 25F enforcement; prohibits restrictive State-imposed rules; establishes IRS federal review authority.

Prepared with assistance from Gemini Notebook.