Scholarship Granting Organizations (SGOs) have long played a vital role in expanding educational opportunities for students. With their recent inclusion in the “One Big Beautiful Bill Act” (OBBBA), SGOs are poised for an even greater impact, creating new avenues for private school access and offering significant tax incentives for donors. This article will delve into what SGOs are, how parochial and private schools stand to benefit, and the capabilities and limitations that define their operations under this new legislation. Importantly, the IRS is expected to issue detailed regulations and guidance to clarify implementation, including how states opt in, how SGOs qualify, and how taxpayers can claim the credit.
1. What is a Scholarship Granting Organization (SGO)?
A Scholarship Granting Organization (SGO) is a non-profit entity, typically a 501(c)(3) organization, whose primary mission is to provide scholarships to eligible K-12 students for attendance at qualified private schools. SGOs act as intermediaries, receiving contributions from individuals, corporations, foundations, or businesses and then distributing these funds as tuition assistance.
The defining characteristic of many SGOs, particularly those operating under state-level programs, is their tie to tax credit initiatives. Donors to certified SGOs often receive a dollar-for-dollar tax credit against their state income tax liability, incentivizing charitable giving to support private education. The OBBBA’s new federal tax credit further amplifies this incentive. Although New York and New Jersey do not currently offer state-level SGO tax credit programs, it is likely – but far from certain – that the states will allow participation in the newly passed tax-credit program included in the OBBBA.
2. How Parochial and Private Schools May Benefit
The inclusion of SGOs in the OBBBA is a significant boon for parochial and private schools, offering several key advantages:
- Increased Access to Funding: The new federal tax credit, a nonrefundable credit of up to $1,700 for donations to qualified SGOs, is expected to dramatically increase the pool of funds available for scholarships. This direct reduction in tax liability, rather than a mere deduction, makes donating to SGOs more attractive, potentially channeling billions of dollars into private education.
- Expanded Enrollment and Diversity: With more scholarships available, private and parochial schools can attract a wider range of students, including those from low- and moderate-income households who might otherwise be unable to afford tuition. This can lead to increased enrollment and a more diverse student body.
- Financial Stability: A consistent stream of scholarship funds through SGOs can contribute to the financial stability of private schools, allowing them to invest in faculty, facilities, and programs, ultimately enhancing the quality of education they offer.
- Reduced Tuition Burden for Families: For families, SGO scholarships significantly reduce the financial burden of private school tuition, making quality education more accessible and easing their household budgets. The OBBBA further sweetens the deal by making these scholarships excluded from gross income for federal tax purposes starting in 2027.
3. What an SGO Can Do & What are the Limitations
SGOs, particularly under the OBBBA, operate within a defined set of capabilities and limitations:
What an SGO Can Do:
- Award Scholarships: The core function of an SGO is to award scholarships to eligible K-12 students for tuition and other qualified educational expenses. These expenses can include curriculum materials, textbooks, tutoring, and special education services.
- Receive Tax-Creditable Donations: SGOs are authorized to receive donations that qualify for significant tax credits, both at the state level (in participating states) and now, under the OBBBA, at the federal level.
- Prioritize Low-Income Students: Most SGOs are required to prioritize scholarships for students from low- to moderate-income households, often defined as those with incomes at or below 300% of the Area Median Gross Income (AMGI) or the federal poverty level.
- Distribute Funds to Multiple Schools: Many SGOs serve a network of private schools, distributing scholarships to students attending various institutions. Some SGOs allow donors to designate a specific participating school for their contribution.
- Comply with Reporting and Audit Requirements: SGOs are typically subject to annual financial audits and must provide documentation to confirm the usage of contributions and student eligibility.
Limitations of SGOs:
- State Opt-In Requirement (for federal credit): A significant limitation of the OBBBA’s federal SGO tax credit is that states must “opt-in” to the program. Without state-level action, residents of non-participating states cannot benefit from the federal credit for donations to SGOs within their state, though regulations are expected to address how donations to SGOs in participating states from residents of non-participating states will be handled.
- Cannot Earmark for Specific Students: SGOs are generally prohibited from accepting contributions earmarked for specific students or families. This ensures fairness and prevents potential abuse of the tax credit system.
- Cannot Award Scholarships to Board Members or Donors’ Families: To maintain impartiality and prevent conflicts of interest, SGOs are typically restricted from providing scholarships to their board members, substantial donors, or their immediate family members.
- Percentage of Funds for Scholarships: To ensure that the vast majority of donated funds directly benefit students, SGOs are often required to distribute a high percentage of their contributions as scholarships (e.g., at least 90% under OBBBA).
- Nonrefundable Federal Credit: While the OBBBA’s federal tax credit is a dollar-for-dollar reduction in tax liability, it is nonrefundable. This means it cannot exceed a taxpayer’s total federal tax liability.
- Coordination with State Credits: The federal credit is reduced by any state tax credit claimed for the same contribution, preventing “double-dipping” on tax benefits. Donors must consider the comparative overall tax benefit when choosing between federal and state credits.
- Operational and Compliance Burden: SGOs must adhere to precise operational requirements, including verifying family income and household size, and maintaining meticulous records of donations and scholarship awards. This can present a compliance burden, especially for smaller organizations.
4. The Critical Importance of School Alignment with SGOs
For private and parochial schools, actively aligning with one or more SGOs is no longer just an option; it’s becoming a strategic imperative in the evolving landscape of educational funding. Here’s why:
- Direct Access to Scholarship Funds: The most immediate and tangible benefit is gaining direct access to the scholarship funds that SGOs distribute. By partnering, schools ensure their eligible students can apply for and receive these critical tuition assistance funds, directly impacting enrollment and accessibility.
- Enhanced Marketing and Recruitment: SGO partnerships provide schools with a powerful recruitment tool. They can clearly communicate to prospective families that financial aid is available through these organizations, potentially attracting a broader and more diverse applicant pool, particularly from families seeking affordable private education options.
- Streamlined Financial Aid Process: Rather than managing complex individual financial aid programs entirely on their own, schools can leverage the expertise and infrastructure of SGOs. SGOs often handle the donor solicitation, fund management, and initial eligibility verification, reducing the administrative burden on schools and allowing them to focus on their core educational mission.
- Increased Donor Engagement and Stewardship: Partnering with an SGO connects schools to a broader network of potential donors who are specifically motivated by the tax credits. Schools can collaborate with SGOs on fundraising initiatives, tapping into new philanthropic channels and fostering relationships with individuals and businesses passionate about educational choice.
- Compliance and Best Practices: SGOs operate under strict federal and, where applicable, state guidelines. Aligning with reputable SGOs ensures that a school’s scholarship programs are compliant with all relevant regulations, reducing legal and financial risks. SGOs often provide guidance on best practices for student eligibility, scholarship distribution, and reporting.
- Community and Advocacy: By participating in an SGO network, schools become part of a larger movement advocating for educational choice. This collective voice can strengthen efforts to promote private education and influence future policy decisions that benefit all participating institutions.
- Long-Term Sustainability: For many private schools, tuition revenue alone may not be sufficient to ensure long-term sustainability. SGO scholarships provide a crucial, stable, and growing revenue stream that can help schools balance their budgets, invest in improvements, and secure their future.
The inclusion of Scholarship Granting Organizations in the OBBBA marks a pivotal moment for private and parochial education. By offering a robust federal tax credit for donations, the legislation is set to unlock significant new resources, empowering more families with educational choice and strengthening the landscape of K-12 education across the nation. For schools, proactively aligning with SGOs is not merely advantageous; it is an essential strategy for enhancing accessibility, securing financial stability, and thriving in this new era of expanded educational opportunity.
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This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
