What Is an SGO, and What Does the One Big Beautiful Bill Act Change?

If you have been connected in any way to a private school, you may have recently been hearing about SGOs and wondering to yourself, “What is an SGO?” SGOs, or Scholarship Granting Organizations, have long been used in certain states to support K–12 education. But, with the recent passage of the One Big Beautiful Bill Act (OBBBA), charitable donations to SGOs will have new tax implications at the Federal level for the 2027 tax year – tax credits. And that has private schools, nonprofit organizations, and taxpayers talking and planning!

This article explains what an SGO is, what SGOs may and may not do under the law, and what schools and donors should be considering as federal and state guidance continues to develop.

What Is a Scholarship Granting Organization, and How Does That Affect Tax Credits?

A Scholarship Granting Organization, or SGO, is a nonprofit organization set up to receive contributions and use those funds to award scholarships to eligible K–12 students for qualified elementary or secondary education expenses.

SGOs are often associated with private school tuition assistance, but the federal rules are broader. Depending on state design and federal guidance, SGO scholarships may be used for a wider range of qualifying elementary or secondary education expenses, which could include certain public-school-related options like extended care fees.

SGOs act as intermediaries between donors and students and must operate independently from the schools whose students receive scholarships. Most SGOs are structured as 501(c)(3) public charities, which means they must follow detailed rules governing how they operate, how they are managed, and how they report their activities.

Beginning with the 2027 tax year, SGOs will serve as the vehicles through which individuals may claim a federal income tax credit for qualifying K–12 scholarship contributions made in participating states. Learn more by reading our blog about the SGO tax credit.

What Are the Rules an SGO Has to Follow?

Not every nonprofit in a participating state can operate as a Scholarship Granting Organization. To qualify under the federal program, an SGO must meet a specific set of legal and operational requirements. In general, a qualifying SGO must:

• Be a 501(c)(3) public charity, not a private foundation
  
• Operate within a single state
  
• Award scholarships to at least 10 students, who do not all attend the same school
  
• Limit scholarships to eligible students, meaning students who are eligible to enroll in a public elementary or secondary school, and live in households with income at or below 300% of the area median gross income
  
• Keep qualified contributions separate from other funds
  
• Use at least 90% of its income to fund scholarships, based on IRS guidance
  
• Prohibit donations from being earmarked for specific students
  
• Exclude disqualified people like board members, substantial donors, and their immediate family members from receiving scholarships.
  

Meeting these requirements is essential. If an organization falls short, it may lose its ability to operate as an SGO, and donors could lose access to the associated federal tax credit.

Can a Private School Be an SGO?

In most cases, the answer is no. An SGO must be primarily organized and operated to award scholarships to eligible students attending multiple schools. Because private schools typically carry out a wide range of educational activities beyond administering scholarships, they generally do not qualify as SGOs themselves.

Schools can partner with an existing SGO or create a separate entity that satisfies the SGO rules. In either case, proper governance, independence, and self-dealing rules must be carefully considered.

Once an SGO is properly structured or identified, the next practical consideration may be what types of education-related expenses scholarships are allowed to cover under the new federal rules.

Which Education Expenses Can SGO Scholarships Cover?

When an SGO scholarship is awarded to an eligible student, it may be used to pay qualified education expenses. The law looks to Section 530(b)(3)(A) to define those expenses, which generally include:

• Tuition and mandatory school fees
  
• Books, supplies, and required equipment
  
• Tutoring and other instructional services
  
• Educational therapies and supplementary services
  

These rules apply only within the SGO framework and only to scholarships awarded to students who meet the household income limits set out in the federal program.

What to Consider Before Creating or Partnering With an SGO

For organizations considering an SGO, careful planning is essential. Creating or supporting an SGO involves more than forming a nonprofit—it requires systems and processes that can withstand ongoing scrutiny. Important factors to consider include:

• A properly organized 501(c)(3) with a scholarship-focused purpose
  
• Reliable processes for verifying student eligibility, segregating funds, and tracking compliance
  
• Scholarship criteria and application procedures that reflect the program’s statutory requirements
  
• Donor-facing communications that clearly explain tax credit mechanics, limitations, and compliance risks

Since participation in the federal SGO tax credit program depends on state opt-in, it’s also important to note that states that choose to participate may impose additional certification, reporting, or operational requirements. A non-profit lawyer can help you navigate this process as it evolves.

SGO FAQs

Looking Ahead to 2027 and Beyond

The new SGO provisions under the One Big Beautiful Bill Act open the door to expanded scholarship funding, but they also introduce new questions. Though the law has already been passed, the most practical changes will be felt starting in 2027, as the federal tax credit and related rules come into effect.

Because states must opt in and federal guidance is still developing, it’s important to proceed thoughtfully. If you are a school, nonprofit organization, or donor exploring whether to create, support, or partner with an SGO, a nonprofit lawyer or tax attorney at Gammon & Grange can help. Our attorneys work with nonprofits nationwide and regularly advise on the tax and governance issues these programs raise. We welcome the opportunity to talk through your questions and help you understand your options.

This blog provides general information about tax and related topics and is for informational purposes only. It is not legal advice, does not create an attorney-client relationship, and should not be relied upon to make decisions about your specific situation. Readers should consult an attorney or other appropriate professional for advice tailored to their particular facts and circumstances.

Tax laws and thresholds change, and application of the law depends on individual facts; for guidance on your situation, please confirm current figures and seek personalized legal counsel from a licensed professional in your jurisdiction.