Provision 70411 of the recently adopted P.L. 119-21, also known as the Republicans’ “One Big Beautiful Bill Act” has created the federal tax credit for education program that offers individual taxpayers with a dollar-for-dollar tax credit.
The law, which was approved by president Trump on the 4th of July, 2025 introduced new sections of the Internal Revenue Code (IRC) applicable to tax years that end on or after December 31st, 2026. IRC Section 25F permits the tax credit for eligible elementary and secondary education scholarships as well as IRC Section 139K permits those scholarships to be tax-free for those who qualify.
IRC Section 25F
The newly established IRC Section 25F permits tax credits as high as $1,700 for individual citizens or residents of the United States. The credit amount is the amount of qualified contributions paid from the taxpayer’s account to a scholarship-granting organisation (SGO) during the tax year.
The amount claimed as a tax credit cannot be considered a deduction for charitable contributions, and will be decreased by the value of state tax credit claimed in qualified distributions taken by the taxpayer throughout the tax year. Any credit not utilized that is federal level, could be carried forward for five years from now and is applied on a first-in, first out basis.
To be eligible for the federal tax credit, the contribution must meet:
- 1.) A Qualified contribution: contributions are cash donations to an SGO that makes use of the contribution to provide scholarships to eligible students in the state where the organization is listed.
- 2.) Awarded to an eligible student via a scholarship granting organization: The definition of an eligible student is a person whose household income isn’t higher than 300% of the area median gross income during the calendar year prior to the date of the scholarship application. The applicant must also be able to attend the public secondary or elementary schools.
The usage for an SGO is mandatory. In general, an SGO is a 501(c)(3) entity that is exempt from taxation under IRC Section 501(a) and is not a private foundation. SGOs aren’t permitted to combine funds and must keep at least one separate account specifically for qualified contributions.
To be classified as an SGO, an organization must award scholarships to at least 10 students who do not all attend the same school. The company must also spend at minimum 90% of their earnings on scholarships for students who qualify. These scholarships should be used to pay for eligible elementary or secondary education costs that include all expenses for a qualified student for example:
- Tuition
- Fees
- Books
- Supplies
- Room and Board
- Uniforms
- Transportation
- Computer Technology or Equipment
- Internet Access
The complete list of eligible expenses is provided within IRC Section 530(b)(3)(A).
Priority award requirements also need to be fulfilled. SGOs must first offer priority to students who were awarded a scholarship during the previous school year, then to those who have siblings who have received a scholarship from the SGO. The earmarking or setting aside of the scholarships of a particular student is not permitted, nor are the acts of granting scholarships to people who are disqualified according to IRC Section 4946.
Additional responsibilities for an SGO includes confirming the household income of the applicant to receive the award, and ensuring that the applicant is an eligible student and the household income is not more than the area median of 300% gross income amount.
The classification of SGO status starts at the state level. A state that is covered must voluntarily choose to be a part of the program by January 1st of every calendar year and identify SGOs to operate within the state that meet all requirements to the Secretary of the Treasury. Typically, governors from the state are required to make the decision on their own. Additional guidelines for governors of the electing states will be given when the Secretary of the Treasury decides on the enforcement actions required to fulfill these responsibilities.
IRC Section 139K
Furthermore, IRC Section 139K was made through the Act to exempt the amount of gross income paid to individuals as grants for eligible secondary or elementary education expenses that are provided from an SGO.
Implications and Planning Opportunities
While the Act allows for the expansion of education opportunities for students of secondary and elementary school however, many of the details remain unclear in the midst of awaiting additional guidance from both Federal and State levels. Common questions include:
- Is it necessary to establish an entity that is considered an SGO as a subsidiary to private schools?
- What criteria are required for the successful administration of the scholarships?
- Is a committee mandated to verify that the selection isn’t discriminatory, that the student is in compliance with the requirements of the Act and is not considered a disqualified person?
- Which states are willing to choose to be part of the program?
- How can states that have similar scholarship programs work alongside Federal programs?
Luckily, there is time before the effective date to allow additional guidance to be issued, hopefully to answer some of the questions above.
Private schools must now plan on how they can promote this tax-free incentive to their donors and communities, as well as how to work with other non-profit organisations to broaden their reach.
How Parr & Ibarra Can Help
To learn more about the impact these changes have on your company and to devise an appropriate strategy, get in touch with Parr & Ibarra CPA in Keller, Texas. Our team is prepared to assist you in navigating the tax landscape of today with confidence and clarity.
