The OBBBA & Section 25F Explained

The One Big Beautiful Bill Act, enacted in 2025, made significant changes to federal tax law. Among those changes was the creation of Section 25F of the Internal Revenue Code — a new federal tax credit for individual taxpayers who make qualifying contributions to state-approved Scholarship Granting Organizations.

Section 25F is effective January 1, 2027. This means that the first qualifying donations — and the first claims for the federal tax credit — can occur in tax year 2027, filed with returns due in 2028. But because state approval processes and organizational formation take time, organizations that want to accept qualified donations on January 1, 2027 need to have completed formation and state approval before that date.

The creation of a federal scholarship tax credit is a significant development in education policy. For the first time, there is a federal financial mechanism — not a state-level program — that provides tax relief specifically for donations to organizations funding private and supplemental education. This nationalized what had previously been a patchwork of state-level scholarship tax credit programs.

The Section 25F credit is a non-refundable personal income tax credit. It reduces federal income tax liability dollar-for-dollar, up to the statutory maximum. Key terms:

Maximum credit amount: $1,700 per taxpayer per year. For married couples filing jointly, each spouse may claim up to $1,700, for a combined maximum of $3,400. This is the credit against federal taxes owed — not a deduction from income.

Non-refundable: The credit can reduce a taxpayer's federal income tax liability to zero but cannot create a refund. A taxpayer with $500 in federal income tax liability and $1,700 in potential credit can only use $500 of the credit for that year. Unused non-refundable credits do not carry forward.

Interaction with deductions: A taxpayer who claims the Section 25F credit for a qualifying donation generally cannot also claim a charitable deduction for the same amount under Section 170. The statutory framework is intended to prevent double benefit from the same contribution.

Qualifying contributions: Only donations to SGOs that have been approved by a state that has opted into the program qualify for the federal credit. An SGO that has completed federal compliance requirements but has not yet received state approval — or that operates in a state that has not opted in — cannot offer donors the Section 25F credit.

The state opt-in requirement is one of the most important structural features of the Section 25F program and one of the most frequently misunderstood.

The federal tax credit is available only for contributions to SGOs approved by states that have enacted qualifying opt-in legislation. This means the program is federally created but state-administered. A state that chooses not to opt in effectively excludes its SGOs from participating in the federal credit program.

States opt in by enacting legislation that:

• Formally establishes the state's participation in the federal SGO tax credit program
• Creates a state approval process for SGOs seeking to operate in the state
• Specifies any state-level requirements beyond the federal minimums
• Establishes annual reporting requirements for approved SGOs

The content and process of opt-in legislation varies significantly by state. States with pre-existing school choice programs and scholarship tax credit frameworks have adapted those frameworks to incorporate Section 25F. States without pre-existing infrastructure have needed to build approval processes from scratch.

As of early 2026, approximately half of states have enacted or are actively advancing opt-in legislation. The political dynamics of school choice legislation mean that the opted-in universe is likely to grow, but the pace varies by state and is not guaranteed.

The Section 25F program reflects a long-running policy debate about the role of private and supplemental education — and about who should bear the cost of expanding access to those options for families who cannot afford them.

Prior to the OBBBA, school choice policy was primarily a state matter. Many states had enacted scholarship tax credit programs, education savings account programs, and various forms of publicly funded vouchers. The design, eligibility rules, and scale of these programs varied enormously. A child in Florida had access to one of the most expansive scholarship programs in the country; a child in a state without school choice legislation had access to none.

The Section 25F federal credit does not federalize school choice in the sense of mandating what any student must or can do. It creates a federal financial incentive — the tax credit — that increases the effective value of donations to qualifying organizations in participating states. The policy judgment embedded in the program is that the federal government should help facilitate private scholarship funding, while leaving the educational choices themselves to states, localities, families, and organizations.

For organizations considering an SGO, the policy context matters primarily because the regulatory environment is still forming. The IRS is still finalizing regulations under Section 25F. States are still enacting opt-in legislation and building approval frameworks. The first operational year of the program is 2027 — and organizations that are operational in 2027 will be navigating a still-developing regulatory landscape.

Section 25F imposes specific structural and operational requirements on qualifying SGOs. These requirements are set at the federal level and are not waivable by states.

501(c)(3) status with primary SGO mission. The SGO must be a Section 501(c)(3) organization whose primary mission is to provide scholarships to eligible students. This primary mission requirement has real consequences: organizations with broad educational missions may need to amend their governing documents, and organizations that pursue other charitable activities alongside scholarship programs need to ensure their primary mission remains scholarship-focused.

State approval. As described above, the SGO must receive approval from a state that has enacted qualifying opt-in legislation. State approval is on the critical path to accepting qualified donations.

Multi-student, multi-school distribution. Scholarships must be awarded to ten or more students who do not all attend the same school. This requirement reflects the policy intent that SGOs serve a diverse student population across multiple schools — not function as a subsidy mechanism for a single institution.

No earmarking. Donors cannot direct their contributions to specific students or specific schools. Award decisions must be made through an independent process that is not conditioned on donor preferences. This requirement is explicit in the statute and is one of the most operationally significant compliance requirements.

90/10 spending ratio. At least 90% of the SGO's annual revenues must be spent on qualified scholarships. The remaining 10% may be used for administrative and fundraising costs. This constraint requires careful operational planning, particularly for early-stage programs that are building to scale.

IRS-compliant receipts. The SGO must provide donors with receipts that meet the requirements for claiming the Section 25F credit. The specific content requirements for qualifying receipts have not yet been fully specified in IRS guidance — a regulatory gap that SGOs need to monitor.

Section 25F was enacted in 2025. The IRS has not yet issued final regulations interpreting it. This means there are genuine areas of regulatory uncertainty that affect formation and operational decisions.

The most significant areas of uncertainty include:

Income verification methodology. The statute uses the phrase "area median gross income" — a term that is not identical to the HUD area median income figures commonly used in housing programs. Until the IRS provides guidance, SGOs must make a documented methodology choice about which data source to use.

Qualified expense line-drawing. Coverdell ESA expense categories provide the statutory framework for what qualifies, but the application in specific contexts — faith-based enrichment programs, public school supplemental services, multi-campus private school arrangements — requires case-by-case analysis that final regulations will eventually provide.

Receipt content requirements. The specific information required on a Section 25F tax credit receipt differs from charitable contribution receipt requirements under Section 170. Until the IRS specifies receipt content, SGOs are designing their receipt systems based on statutory language and analogous state program guidance.

Multi-state operation rules. The statute is primarily designed around SGOs operating in a single state. Multi-state operations create questions about approval requirements, reporting obligations, and the geographic scope of donor eligibility that final regulations will need to address.

Organizations that begin formation before final regulations issue — which is the only viable path to 2027 operational status — should document their methodology decisions carefully and maintain the flexibility to update their systems as guidance issues.