Prepare Your SGO for 2027

Be a tax-exempt charitable organization under § 501(c)(3) of the Internal Revenue Code but not be a private foundation as defined in § 509. Every 501(c)(3) organization has a charitable purpose, is exempt from taxes under § 509, and accepts various reporting and audit obligations.

To become a 501(c)(3) organization, groups must submit an IRS Form 1023, the Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.

Applicants will need a federal employee identification number (EIN). They also will need to properly set up a nonprofit corporation with a board of directors.

It often takes the IRS months to review a group’s application for 501(c)(3) status. Many organizations retain tax attorneys to help with the process.

Set up one or more segregated bank accounts for FSTC donations to prevent co-mingling with other donations and revenue. An SGO may need multiple accounts if it plans to provide K-12 scholarships in multiple states or raise funds for different types of scholarships.

501(c)(3) organizations already have many requirements around tax filings, audits, reporting, and recordkeeping. Treasury is expected to require additional reporting of SGOs beyond those required of most 501(c)(3) organizations (see IRC § 25F(h)).

The law lays out two conditions that all scholarship recipients must meet. It is the SGO’s responsibility for verifying:

• Enrollment Eligibility. Scholarship recipients must be “eligible to enroll in a public elementary or secondary school.”
• Income Eligibility. Scholarship recipients must reside in a household with an “income which, for the calendar year prior to the date of the application, … is not greater than 300 percent of the area median gross income” (AMI), a metric created annually by the U.S. Department of Housing and Urban Development. EdChoice offers a county-by-county breakdown of 300 percent of AMI for 2026, which will apply to the 2027 scholarship year.

In its June 2026 preview, Treasury announced its intention to make it easier to verify the incomes of low-income families, including proof of eligibility in government benefit programs like SNAP. Foster children would be automatically deemed income-eligible. Details will be included in the final rule.

The law refences IRC 530(b)(3)(A), Coverdell education savings account for its long list of allowable educational expenses.

• Treasury suggested in its June 2026 rule preview that it might interpret the list in Coverdell in a way that would give “schools” the power to anoint some education providers as eligible and veto others. The FSTC Coalition is seeking clarification, because we believe these are decisions that families and SGOs should be making, not potential competitors. Among other consequences, their implied approach would preempt students in home, micro, co-op, hybrid, and other innovative school models in 28 states from benefiting from scholarships.

• Provide scholarships to 10 or more qualified students at more than one school.
• Prioritize previous scholarship recipients for scholarships in 2028 and beyond, followed by siblings of those previous recipients.

In its June 2026 rule preview, Treasury clarified that it will create a safe harbor for groups that largely provide scholarships to calculate this 90 percent solely based on FSTC contributions, which already must be held in segregated accounts to prevent co-mingling of funds. It has not yet clarified the time period for the calculation.

Ensure that there is no self-dealing or other unethical behavior. For example:

• Donors may not allow earmarking of contributions to specific students. SGOs can, however, give donors the opportunity to restrict their donations to specific communities and uses.
• Preclude the awarding of scholarships to a “disqualified person.” Treasury will define “disqualified person” pursuant to rules similar to those in IRC § 4946, which relate to private foundations.