TL;DR
- The 90/10 rule (§25F(d)(1)(B)): an SGO must spend ≥90% of its income on scholarships; ~10% is left for everything else.
- Other hard requirements: 10+ students at more than one school, renewal then sibling priority, no earmarking, no self-dealing, separate accounts, and income verification against the 300% AMGI ceiling.
- Scholarships may only pay qualified K–12 education expenses (the §530(b)(3)(A) list).
- Several mechanics — joint-filer treatment, and whether 90% is measured per state or in aggregate — are still being worked out in IRS rulemaking.
This is the compliance companion to our SGO overview and how-to-start guide. Everything below traces to the text of IRC §25F.
What the 90/10 rule actually says
Section 25F(d)(1)(B) requires that a qualifying SGO “spends not less than 90 percent of the income of the organization on scholarships for eligible students.” In practice that creates a hard 10% ceiling on administrative spending — and that 10% has to cover everything: staff, technology, audits, legal, fundraising, donor stewardship, income verification, and reporting.
For comparison, charity watchdogs often treat 70–85% program spending as strong. The §25F standard is materially stricter, which is why operational efficiency isn’t a nice-to-have for SGOs — it’s a compliance requirement.
“Income,” not “donations”
The statute pegs the 90% to income, not donations received. That distinction matters: investment income, interest on held balances, and other receipts can fall within the base the 90% is measured against. Build your accounting so you can demonstrate the ratio on the correct base, and don’t assume “90% of gifts” is the same number as “90% of income.”
The 10-student rule
Section 25F(d)(1)(A) requires an SGO to provide scholarships to 10 or more students who do not all attend the same school. This blocks an organization from operating as a private conduit for a single school or family, and it shapes how narrowly an SGO can define its mission. A single-school “SGO” does not qualify.
Renewal and sibling priority
Awards aren’t purely discretionary. Section 25F(d)(1)(D) imposes a required priority order:
- Students awarded a scholarship the previous school year (renewals) come first.
- After renewals, eligible students who have a sibling who was awarded a scholarship from the same organization.
Your award engine has to encode this order before applying any of your own criteria. Families understandably plan around continuity, and the statute protects it.
Anti-earmarking
Section 25F(d)(1)(E) prohibits an SGO from earmarking or setting aside contributions for any particular student. A donor can choose which SGO to support — by geography or mission — but cannot direct a gift to a named child. Contributions flow into the general pool and are awarded under the priority rules and the SGO’s published criteria. “Give to help my nephew’s tuition” is exactly what the rule forbids.
Self-dealing and disqualified persons
Section 25F(d)(2) prohibits awarding a scholarship to any disqualified person, determined under rules similar to IRC §4946. That category generally captures substantial contributors, officers, directors, and their family members. Maintain a conflict-of-interest policy and screen applicants against your insider list so a board member’s child never receives an award.
Separate accounts
To qualify under §25F(c)(5)(B), an SGO must prevent co-mingling of qualified contributions by maintaining one or more separate accounts used exclusively for them. This is a definitional requirement — fail it and you’re not an SGO. Set up dedicated bank accounts and ledger structure before accepting a single dollar.
Income verification
Section 25F(d)(1)(F) requires the SGO to verify the annual household income and family size of applicants and to limit awards to households at or below 300% of area median gross income (the AMGI measure used in §42), using the prior calendar year’s income. This is recurring, document-heavy work — and it’s a prime candidate for automation, because doing it by hand at volume threatens the 10% cap.
Where software earns its keep: income verification, award prioritization, separate-account accounting, and per-donor receipts are exactly the repetitive, auditable tasks that blow past the 10% cap when done manually. SGO Software is built around these §25F requirements — collect, award, and disburse in one compliant pipeline.
sgosoftware.com →Donor substantiation & the double-benefit rule
Donors need documentation from the SGO to claim the §25F credit. Two coordination rules shape what you tell them:
- No double deduction (§25F(e)): a contribution for which the credit is claimed cannot also be taken as a §170 charitable deduction.
- State-credit offset (§25F(b)(2)): the federal credit is reduced by any state credit the donor claims for the same contribution.
The credit is also non-refundable, capped at $1,700 per return, with a 5-year carryforward on a first-in, first-out basis (§25F(f)). For the donor-side mechanics, see the federal tax credit explained.
Open questions in IRS guidance
Some compliance details aren’t final yet. Through Notice 2025-70, Treasury asked for comment on issues that directly affect SGO operations:
- Whether the 90% requirement applies state-by-state or in aggregate for multi-state SGOs.
- How “located in the State” is defined for an SGO.
- Recordkeeping, reporting, and income-verification methods.
- How donations from donors who don’t designate a state are handled.
Frequently asked questions
What is the 90/10 rule for SGOs?
Under §25F(d)(1)(B), a Scholarship Granting Organization must spend at least 90% of its income on scholarships for eligible students. The remaining 10% is the practical ceiling for all administrative costs combined. The statute says 'income,' which is broader than 'donations.'
Does the 90% apply per state or in aggregate for multi-state SGOs?
That's one of the open questions. IRS Notice 2025-70 specifically asked for comment on whether the 90% spending requirement should apply state-by-state or in aggregate for multi-state SGOs. Final proposed regulations are expected to resolve it.
Who is a 'disqualified person' an SGO can't fund?
§25F(d)(2) prohibits awarding scholarships to disqualified persons, determined under rules similar to IRC §4946 — generally substantial contributors, officers, directors, and their family members. The rule prevents insiders from steering funds to their own families.
Can a donor pick which student their gift helps?
No. §25F(d)(1)(E) prohibits earmarking or setting aside contributions for a particular student. Donations go into the general scholarship pool and are awarded under the SGO's criteria and the required priority order.
What income limit do scholarship recipients have to meet?
A recipient's household income for the prior calendar year must be at or below 300% of area median gross income (AMGI, as used in IRC §42). The SGO must verify household income and family size and limit awards accordingly.