The state opt-in requirement is often the first significant planning constraint organizations encounter when exploring the SGO model. Understanding why the requirement exists and what it actually requires of states helps in interpreting your own state's situation.
Why state opt-in is required
The federal tax credit under Section 25F is available only for contributions to SGOs approved by states that have enacted qualifying legislation. This design reflects a policy judgment: the federal government creates the financial incentive, but states administer the program and are accountable for the organizations they approve.
A state that opts in takes on an oversight role. It establishes an approval process, reviews SGO applications, and monitors compliance with both the federal requirements and any additional state-level requirements. A state that does not opt in simply does not participate — organizations in that state cannot offer the federal credit to their donors.
What opt-in legislation must do
Qualifying state opt-in legislation must establish:
An SGO approval process. The state must designate an agency — typically the department of revenue or department of education — to receive and review SGO applications and grant approval to qualifying organizations.
Compliance with federal minimums. The state's program must require that approved SGOs meet the federal structural requirements: 501(c)(3) status with SGO primary mission, multi-student multi-school distribution, and no earmarking.
Annual reporting requirements. The statute requires that SGOs file annual reports with the approving state. States specify what those reports must contain — the federal statute does not prescribe the content.
States can add requirements above the federal baseline. Some states require additional financial disclosures, more frequent reporting, or specific procedures for income verification. Multi-state SGOs face potentially different requirements in each state where they operate.
What to do in non-opted states
If your state has not yet opted in, the formation timeline is uncertain — but preparation is not wasted. Use the time before your state's opt-in to:
Complete the federal formation prerequisites: 501(c)(3) status review, governing document analysis, board structure assessment, and scholarship program design. These steps are necessary regardless of your state's opt-in timeline.
Monitor your state legislature. Most states that will opt in during the program's first years will do so through their 2026 legislative sessions. Track any relevant bills, and understand the committee positions of key legislators.
Develop a formation timeline that accounts for the state approval period — typically four to eight weeks in states with established processes — after your state's opt-in legislation passes. Legislation passing in June 2026 does not mean you can be operational by January 2027 if you have not done the preparatory work.
Course outline
Module 02