The 90/10 Rule: How to Maintain Compliance From Your First Scholarship Cycle

One of the compliance requirements that most surprises organizations early in their SGO planning is the 90/10 spending rule. The rule requires that an SGO spend at least 90% of its annual revenues on qualified scholarships — leaving only 10% for administrative costs, fundraising costs, and any other operating expenses.

For organizations accustomed to operating nonprofits with overhead ratios in the 20-30% range, this constraint is real and requires deliberate planning from the first day of operations.

What the Statute Says

Section 25F requires that at least 90% of the SGO's annual revenues be expended on qualified scholarships. The 10% maximum overhead applies to the combination of administrative costs and fundraising expenses.

The statutory calculation is annual: the 90/10 ratio is tested against each year's revenues and expenditures. An SGO that falls below 90% in year one does not get to "make it up" in year two. A violation in year one is a compliance failure with consequences for that year.

The consequences of a 90/10 violation are significant. Depending on the severity and circumstances, a state may suspend or revoke the SGO's approved status. Loss of approved status means donors cannot claim the federal tax credit for contributions made while the SGO was out of compliance — a liability that creates significant risk for both the organization and its donor relationships.

The Hidden Complexity: Start-Up Costs

The most common 90/10 violation risk is in the start-up year. Formation costs — legal fees, state filing fees, platform setup, training — can be significant. If these costs are treated as operational expenses in the first year, they can push the overhead ratio above 10% before the scholarship program has had time to build to scale.

Several strategies help manage this risk:

Front-load formation costs before the operating year begins. Costs incurred before the SGO is an approved operating organization are not operational costs of the SGO — they are pre-operating formation costs. If formation and state approval are completed in 2026, and the SGO begins accepting contributions on January 1, 2027, the costs of formation properly belong to 2026, not to the 2027 operating year.

Structure platform and infrastructure costs as multi-year. Software licensing, platform access fees, and similar costs that are paid on a recurring basis are operational costs distributed across multiple years. A one-time platform setup fee, if it can be structured as a multi-year contract, may be spread across those years rather than treated as a single-year expense.

Plan the first year's fundraising to create sufficient scholarship volume. The 90/10 ratio is a ratio, not an absolute dollar amount. $100,000 in revenues with $10,000 in overhead and $90,000 in scholarships meets the requirement. $50,000 in revenues with $10,000 in overhead and $40,000 in scholarships does not (overhead would be 20%). A small scholarship program can meet the ratio if overhead is correspondingly small — but a small program with startup-year overhead is the most common failure pattern.

What Counts as Overhead

The statute does not comprehensively define which costs count as overhead for 90/10 purposes — this is one of the areas where IRS guidance will matter. But based on the statutory language and analogous state-level scholarship tax credit programs, the general categories are:

Overhead (subject to the 10% limit): - Management and administrative salaries and benefits - Office space and utilities attributable to administrative functions - Accounting, auditing, and compliance services - Legal fees for ongoing operations (not formation) - Technology and platform costs for organizational management - Fundraising costs, including staff, events, and marketing

Scholarships (counting toward the 90% requirement): - Scholarship disbursements to eligible students for qualified expenses - The cost of income verification (arguably a scholarship-related cost, though IRS guidance may classify this differently) - Scholarship application processing (same classification uncertainty)

Organizations should work with their advisors to document their overhead classification methodology now. When IRS guidance issues, having a clear methodology makes any required adjustments straightforward.

Building Operational Discipline Around the Ratio

The most important thing an SGO can do to maintain 90/10 compliance is track the ratio in real time, not just at year end.

An SGO that reaches October of its first operating year with $300,000 in revenues and $50,000 in overhead has a 16.7% overhead ratio — and only two months to receive enough additional contributions to drive the ratio below 10%. That is a recoverable situation, but a stressful one that creates pressure on the organization's fundraising.

An SGO that tracks the ratio monthly and sees it creeping toward 10% in Q2 has time to take corrective action: accelerate fundraising, reduce discretionary overhead, or understand that the program is on a compliance boundary and plan accordingly.

Real-time 90/10 monitoring is one of the most important operational requirements of an SGO — not because violations are easy to accumulate, but because they are hard to reverse once they occur, and the consequences of a violation are severe.

The Ratio and Program Scaling

One of the structural advantages of scale in the SGO model is that the 90/10 ratio becomes easier to manage as the program grows. A program with $1 million in annual revenues can sustain $100,000 in overhead — enough to fund meaningful administrative capacity. A program with $100,000 in annual revenues can only sustain $10,000 in overhead, which is a very thin administrative budget.

This scaling dynamic has several implications for early-stage SGOs:

Keep early-year overhead minimal. Resist the impulse to build administrative capacity in advance of the scholarship program. Hire and invest as scholarship revenue grows.

Use infrastructure partners to defer overhead. A managed infrastructure model — in which a platform partner provides compliance, reporting, and administrative services — can convert variable overhead costs (percentage-based fees) into costs that scale with scholarship volume. A $3,000/month flat administrative cost is a 36% overhead rate for a $100,000 program. A 5% platform fee is a 5% overhead cost at any volume. Structure matters.

Plan for 2027 with realistic fundraising projections. Before committing to your operational budget for 2027, build a bottom-up fundraising projection based on your identified donor relationships. Design your overhead budget to be below 10% of that projection. If the projection is uncertain, design for a conservative case.

The 90/10 rule is manageable with the right planning. The organizations that get into trouble are those that discover the constraint at year end, not at the beginning of their planning process.