Treasury Previews the EFTC Regulations: What SGOs Need to Know

On June 9, Treasury released a preview of the regulations it expects to propose under Section 25F, the Federal Scholarship Tax Credit (FSTC), which Treasury and the IRS refer to as the Education Freedom Tax Credit (EFTC). Proposed regulations are still expected in September, with final regulations to follow. The preview gives SGOs substantive answers on several questions that have been open for the past year, and gives shape to the ones that are not settled yet.

Treasury expects to generally measure the 90% scholarship spending requirement against an organization’s total receipts. However, organizations whose work is largely scholarship granting can use a safe harbor, a simpler compliance path, measured only against their dedicated federal scholarship account, including qualified contributions and earnings on those funds. For multi-state SGOs, the safe harbor applies separately to each state’s account. Organizations with substantial non-scholarship activities may want to evaluate whether a separate 501(c)(3)is the right structure to use the safe harbor cleanly.

A single SGO can operate in multiple participating states if it is authorized to do business in each state and complies with that state’s generally applicable charitable-organization rules, and if it maintains a separate federal scholarship account for each state. Most operational requirements apply at the state-account level. Certain organization-wide rules apply to the SGO as a whole. National SGOs and regional networks now know how multi-state structure will work.

Treasury indicated that participating states may not impose substantive SGO-specific requirements stricter than what Section 25F requires. SGOs will still be required to comply with the rules states already apply to all nonprofits, including those covering transparency, accountability, and fraud prevention. For organizations operating in multiple states, this creates a more predictable compliance picture. Faith-based SGOs watching state-level proposals can also be reassured that the federal baseline will hold.

Income verification will be supported through paystubs, tax returns, IRS transcripts, W-2 forms, crediting agencies, and commercial data sources. Treasury also signaled that students will automatically qualify if their household members participate in qualifying needs-based federal, state, or tribal programs at or below the specified income threshold. Foster children will automatically satisfy the income requirement without separate verification. Treasury is also considering automatic qualification for students attending schools in low-income areas.

All SGOs will need two annual audits: a financial audit covering organizational finances and a programmatic audit covering scholarship operations. Larger SGOs will obtain those audits from a qualified independent third party. Smaller SGOs will be able to use a streamlined alternative, where the audit is conducted by an internal committee unrelated to organization management, with the report signed under penalties of perjury. States can use audit findings when deciding whether an SGO continues to qualify.

The preview introduces a new donor reporting process. SGOs will issue annual contribution acknowledgements to donors that include the total amount of qualified contributions and a unique donor number generated through an IRS-provided method. SGOs will separately report donor and contribution information to the IRS using the same number, and donors will report that number on their federal returns when claiming the credit. The current model, where an SGO issues a tax receipt and the donor handles the rest, will be replaced by a more connected system in which the IRS sees both sides of the transaction.

The proposed rules will contemplate an IRS portal supporting SGO administration and reporting, with functionality likely developing in phases over time. Treasury also confirmed that scholarships may be used for additive academic tutoring and special needs services. Additional guidance on the full scope of qualified expenses will follow in a separate workstream under Section 530, the existing federal framework for education savings accounts.

Treasury’s framing paired broad opportunity with strong, administrable safeguards against fraud and abuse. Compliance requirements will be significant, and SGOs preparing for 2027 should plan accordingly.

The preview changes the planning picture. SGOs holding decisions on entity structure now have enough direction to move. Multi-state expansion has a clear structural framework. State-level legislation can be watched with more confidence that the federal baseline will hold.

We think income verification is one area to watch closely. Several of the methods Treasury identified may not consistently capture total prior-year household income, which could create inconsistent eligibility determinations across SGOs. This is likely to be debated as proposed regulations develop.

For the full preview, see the Treasury press release.

FACTS Compass is the scholarship program management capability within the FACTS platform, built to support SGOs as they prepare for the EFTC. To talk through what the Treasury preview means for your organization, request a Compass consultation.