How to start an SGO for the Education Freedom Tax Credit

1. Become a 501(c)(3) public charity

An SGO must be described in section 501(c)(3), exempt from tax, and not a private foundation. A new organization applies for recognition of exemption with the IRS. Under the proposed regulations, States check that the organization’s exempt status is effective on or before January 1 of the year their list covers, so leave time for the IRS determination.

2. Be located in the State

An SGO is listed by a State and funds scholarships only in that State. Under the proposed regulations, an organization is located in a State if it is authorized to do business there and complies with the State’s requirements for soliciting charitable contributions. A physical office is not required, and one SGO can be listed in more than one State.

3. Open a separate account

Qualified contributions must be kept out of the SGO’s other money, in one or more accounts used only for them. An SGO listed in several States also has to track qualified contributions separately for each State.

4. Write award policies that follow §25F

• Fund 10 or more students who don’t all attend the same school.
• Award only to eligible students: household income at or below 300% of area median gross income, verified, and eligible to enroll in a public school.
• Pay only for qualified elementary and secondary education expenses.
• Give priority to last year’s recipients, then to their siblings.
• Never earmark or set aside contributions for a particular student.
• Never award a scholarship to a disqualified person, such as board members, substantial donors, or their families.

5. Get on the State’s SGO list

Each participating State decides how SGOs get onto its list. For 2027, lists are due to the IRS by February 15, 2027. Under the proposed regulations, States cannot add requirements stricter than the federal ones. See which States are participating.

6. Set up donor numbers and IRS reporting

Every donor gets a unique donor number from the SGO on a written acknowledgement, due by January 31 after the year of the gift. By February 28, the SGO reports to the IRS the contributions made under each donor number. Donors enter the number on Form 8525 to claim the credit.

7. Track the 90% test all year

An SGO has to spend at least 90% of its income on scholarships for eligible students. That leaves at most 10% for everything else, including staff, audits, and software. Watching the ratio as the year goes, rather than discovering it at year end, is the easiest way to stay inside it. What SGO software has to handle covers the systems side.