Tax Credits for Private Education Donors

Introduction

The recent changes to the OBBB Tax bill have implications for nonprofit organizations (NFPs), particularly those involved in education. These changes introduce new opportunities for individual donors to qualify for federal tax credits and outline essential steps that schools must take to prepare for these changes.

How an Individual Donor Can Qualify

Individual donors can qualify for federal tax credits by donating cash to a Scholarship Granting Organization (SGO). The SGO is an eligible 501(c)(3) public charity that primarily funds K–12 scholarships and are not considered a private foundation (not typically a school). Donors can specify which school they would like their donation to support and will receive a nonrefundable dollar-for-dollar federal tax credit of up to $1,700, which directly reduces the amount of tax owed. Qualifying SGOs are required to use at least 90% of their total income for scholarships, ensuring that the majority of donated funds go directly to helping students. Eligible students receive financial aid to cover tuition and related expenses at elementary or secondary schools, allowing them to enroll in private or nonpublic schools that best fit their needs.

What Schools Should Do to Prepare

Schools must operate in a participating state that has opted into the federal program (do not know at this time if Minnesota is participating). The state governor must formally designate eligible SGOs and submit them to the U.S. Secretary of the Treasury. Schools should partner with or be recognized by an SGO that meets federal criteria, including being a 501(c)(3) public charity, not a private foundation, spending at least 90% of its total revenue on scholarships, and awarding scholarships to at least 10 students. Scholarships must be used for K–12 educational expenses, including tuition, books and supplies, tutoring, and certain support services. Schools should plan to provide documentation to SGOs showing how scholarship funds are used and that students meet eligibility criteria (aimed at students from low to moderate income households). Promoting the program to families by sharing information about partner SGOs, assisting with application paperwork, and hosting info sessions or webinars can also help schools prepare.

Conclusion

The OBBB Tax bill changes present a valuable opportunity for individual donors to support education through SGOs and receive federal tax credits beginning after December 31, 2026. Schools must take proactive steps to partner with qualified SGOs, ensure compliance with federal and state rules, and promote the program to families. By doing so, schools can help students access the financial aid they need to succeed in their educational journey.