On October 1, 2026, Treasury and the IRS issued IR-2026-117, announcing proposed regulations for the Federal Scholarship Tax Credit under section 25F, also called the Education Freedom Tax Credit. Companion temporary regulations establish procedures for states and scholarship organizations preparing for the program.
What the IRS Announced
Beginning in 2027, eligible individual taxpayers may claim a nonrefundable federal income tax credit of up to $1,700 for qualified cash contributions to eligible Scholarship Granting Organizations (SGOs). The release says married taxpayers filing jointly may claim a combined credit of up to $3,400.
The credit applies to qualifying contributions to SGOs in states that voluntarily participate. Taxpayers may contribute to an eligible SGO regardless of their own state of residence. SGOs use qualifying funds to provide scholarships for eligible elementary and secondary school students.
What the Regulatory Package Covers
The proposed regulations address student eligibility, SGO operations, state administration, and safeguards against fraud and improper payments. They include rules for coordinating state and federal credits and carrying unused section 25F credits forward for up to five years.
The companion temporary regulations cover procedures needed to prepare for 2027, including state elections, SGO certification, electronic registration, donor acknowledgements, and reporting of qualified contributions.
These are proposed and temporary regulations, not an announcement that all proposed provisions have become final. The IRS release states that taxpayers, states, and SGOs may rely on the proposed regulations for qualified contributions beginning January 1, 2027.
What Donors Should Confirm
An SGO generally must be a section 501(c)(3) public charity, maintain qualified contributions separately, meet statutory scholarship and operational requirements, and appear on the applicable state’s SGO list.
Before planning a contribution, confirm the organization’s eligibility, the applicable contribution date, and how the nonrefundable credit and any state credit would apply to your circumstances. A gift to any educational organization does not automatically qualify for section 25F.
Why It Matters for Small Business Owners
A sole proprietor considering a qualifying personal contribution should distinguish this individual income tax credit from business expense deductions reported on Schedule C. This announcement is not a basis for treating a scholarship contribution as a deductible business expense.
Simple-C helps Schedule C filers keep business income and expenses organized; questions about personal credits and contribution treatment should be reviewed with a qualified tax professional.
This article provides general information, not tax advice. Eligibility and credit treatment depend on the applicable law, regulations, and individual circumstances. Review current IRS guidance before making tax decisions.