Federal scholarship tax credit: what Oklahoma donors get

On October 1, 2026, the IRS announced proposed regulations for the federal scholarship tax credit, the new credit in section 25F of the Internal Revenue Code for cash gifts to organizations that fund K-12 scholarships. The proposal was published in the Federal Register the next day, alongside temporary regulations aimed mostly at states and the organizations themselves. Comments are due December 1, 2026, and a public hearing is set for December 15.

The IRS release, IR-2026-117, says the credit is "commonly known as the Education Freedom Tax Credit." We use the plainer label and take no position on the policy; this piece is about mechanics.

Two layers are worth keeping apart. Section 25F is enacted law, added in 2025 by Public Law 119-21, and it applies to taxable years ending after December 31, 2026. The regulations explaining how it works are only proposed, so the details below can change before final rules arrive.

For owners of closely held Oklahoma companies and their CPAs, the questions tend to arrive in a predictable order, and we've taken them that way.

Who can claim the federal scholarship tax credit, and how much is it?

The statute gives the credit to an individual who is a citizen or resident of the United States. The amount equals the individual's qualified contributions for the year, and it can't exceed $1,700.

It's nonrefundable. That means it can reduce your federal income tax, but it doesn't produce a refund once the tax is gone.

Married couples get more room under the proposal. The IRS release describes a combined credit of up to $3,400 on a joint return, and the preamble (the explanation Treasury publishes ahead of the regulatory text) reaches that figure by reading the $1,700 limit as applying to each individual taxpayer. The condition attached is that each spouse has made qualified contributions of up to $1,700.

Timing looks simple on its face: the IRS's page on the credit says individuals may be able to claim it for cash contributions beginning January 1, 2027.

Keep the number in proportion, though. A $1,700 ceiling is small next to the $100,000 ceiling Oklahoma's own scholarship credit sets for a business entity.

What counts as a qualified contribution?

Under the statute, a qualified contribution is a charitable contribution of cash to a scholarship granting organization, or SGO, that uses the money to fund scholarships for eligible students solely within the state where the organization is listed.

The proposed regulations fill in what "cash" means. It would include currency, checks, money orders, electronic transfers such as card payments, and after-tax payroll deductions, all in U.S. dollars. Digital assets would not count.

There's also a designation step that's easy to miss. Under the proposal, a gift is a qualified contribution only to the extent the donor designates it that way to the SGO at the time of the contribution, which in turn would require the SGO to deposit it in a segregated account. The preamble adds that neither the donor nor the organization would be permitted to revoke the designation.

Here's the wrinkle we'd flag. Most charitable giving gets characterized at return time, when the preparer goes through the receipts. This credit, as proposed, is decided the day the check is written.

What makes an organization an SGO?

The statute sets the tests, and proposed § 1.25F-3 restates and elaborates on them. Among other requirements, an SGO must:

• be a section 501(c)(3) organization that is not a private foundation;
• keep qualified contributions in one or more separate accounts, apart from other money;
• provide scholarships to 10 or more students who do not all attend the same school;
• spend at least 90 percent of its income on scholarships for eligible students;
• not earmark or set aside contributions for any particular student; and
• appear on the list its state submits to the Treasury.

An eligible student, under the statute, is one whose household income is not greater than 300 percent of the area median gross income and who is eligible to enroll in a public elementary or secondary school.

Two of those rules matter most to donors with school-age children. The SGO can't earmark a gift for a particular student, and the statute separately bars an SGO from awarding a scholarship to a "disqualified person," determined under rules similar to section 4946.

You don't have to audit the organization yourself. Proposed § 1.25F-2(b) would let a taxpayer generally rely on the IRS's published SGO list at the time of the contribution. That reliance falls away if the donor knew the organization didn't meet the requirements or was at least partly responsible for the conduct that got it removed from the list.

Nor does the donor have to live where the SGO operates. The preamble's example is a taxpayer in one state giving to an SGO on another state's list.

Can the company make the gift?

Not for the federal credit. The statute gives the credit to individuals, and the proposal would close the obvious side door.

Proposed § 1.25F-2(a)(3) addresses partnerships and S corporations directly. When one of them gives to an SGO, the gift may still be a separately stated charitable contribution that the partner or shareholder deducts under section 170, but it would not be a qualified contribution by that partner or shareholder for section 25F. The preamble calls that reading consistent with the purpose of section 25F, which it describes as providing a credit for qualified contributions made by individuals.

This runs against habit. In many closely held companies, charitable checks come out of the operating account because that's where the cash is, and the tax result gets sorted out later on the K-1, the schedule that reports each owner's share. We've covered how Oklahoma taxes pass-through entities separately.

What happens to the charitable deduction?

You get the credit or the deduction for a given dollar, not both. Section 25F(e) says a qualified contribution for which a credit is allowed isn't taken into account as a charitable contribution under section 170, and proposed § 1.25F-2(f) follows it.

The preamble adds a taxpayer-friendly clarification: the portion of a qualified contribution that isn't taken into account in determining the credit may still be deductible if it meets the section 170 requirements.

What if the credit is larger than the tax it can offset? Because the credit is nonrefundable, the statute carries the excess forward to the next year. No credit may be carried past the fifth taxable year after the year it arose, and credits are treated as used first-in, first-out; proposed § 1.25F-2(e) would supply the operating rules.

How does Oklahoma's own scholarship credit fit in?

Oklahoma already has a state income tax credit for contributions to scholarship-granting organizations, and the federal statute reduces the federal credit by state credits. That gives Oklahoma donors more to think about than most.

What Oklahoma offers

The Oklahoma Tax Commission's 2025 Form 511-CR describes the state credit on line 20, citing 68 O.S. § 2357.206 and Rule 710:50-15-114. The credit is 50 percent of the amount contributed, not to exceed $1,000 for an individual, $2,000 on a married filing joint return, or $100,000 for a legal business entity.

A taxpayer who makes a written commitment to contribute the same amount for an additional year gets 75 percent instead. Unused credit carries over for three years.

Those percentages aren't fixed. The form explains that the credit has an overall cap, and if total credits exceed it, the percentage allowed is reduced. The OTC publishes the figure, and the organization notifies contributors of it annually.

One caution on dates. That description comes from the 2025 form, and the OTC's 2026 legislation summary reports that HB 3590 amends § 2357.206 effective January 1, 2027, modifying student eligibility thresholds and qualification definitions. The same summary, in describing HB 3704, restates the 50 percent rate and the $1,000, $2,000 and $100,000 ceilings.

How the federal reduction works

Section 25F(b)(2) reduces the federal credit by the amount allowed as a credit on the taxpayer's state return for qualified contributions made during the year. The OTC's summary says the same thing in plain terms: the federal credit is reduced by the credit amount on the Oklahoma return.

The proposed regulations make two choices that favor donors. First, proposed § 1.25F-2(c)(1) would subtract state credits from the donor's qualified contributions before applying the $1,700 limit, not after. Second, only state credits count; the preamble says a state deduction generally wouldn't affect the federal credit.

Then comes the ordering rule. A year's giving can include some dollars designated as qualified contributions and some not. Proposed § 1.25F-2(c)(2) would treat a state credit as allowed first from the donor's contributions that are not qualified contributions, and only after that from the qualified ones.

A simplified illustration helps. Assume a single donor and an organization that qualifies under both the Oklahoma program and the federal list, with the Oklahoma credit at the full 50 percent. A $1,700 gift, all of it designated, would generate an $850 Oklahoma credit, and the federal computation would start at $1,700 and subtract that $850, leaving an $850 federal credit.

Now change one fact. The same donor gives $3,700, designating $1,700 and leaving $2,000 as an ordinary gift, and Oklahoma's credit reaches the $1,000 individual ceiling. As we read the proposed ordering rule, that $1,000 would be treated as coming first from the undesignated $2,000, leaving the $1,700 of qualified contributions unreduced.

Both illustrations are our arithmetic, not IRS examples, and they rest on a proposal whose regulatory text may attribute a state credit to particular dollars differently. The government's side deserves a fair statement too: the preamble says the reduction exists to prevent combined federal and state tax benefits from exceeding the value of the qualified contributions, and final rules could tighten the ordering.

There's a timing problem underneath all of it. The designation is made with the gift, while the Oklahoma percentage for the year may not be known until the OTC publishes it, so a donor labels the dollars before the number that drives the federal reduction is settled.

Which pocket gives

Oklahoma's credit is open to a legal business entity, up to $100,000 on the 2025 form, while the federal credit is open only to individuals, up to $1,700 each. So a company gift and a personal gift do different jobs.

A partnership's or S corporation's contribution can't create a federal credit for its owners under the proposal, though it may still support a state credit and a federal deduction, each under its own rules and limits. A personal gift, designated when made, is the only kind that reaches section 25F.

Whether an entity-level Oklahoma credit reduces an owner's federal credit for a separate personal gift is the question we'd expect CPAs to ask next. The preamble says only state credits based on qualified contributions are taken into account, and a credit allowed for a contribution that isn't a qualified contribution is not.

That language points toward no, since an entity's gift isn't a qualified contribution. We'd treat it as a reading of a proposal and not a settled answer, particularly where a pass-through's Oklahoma credit lands on the owner's individual return.

Are Oklahoma's organizations on the federal list?

Not automatically. The Oklahoma program and the federal program are separate, and the preamble uses this very case as an example: a contribution to an organization that qualifies for state tax credits but isn't included on a state SGO list doesn't give rise to the federal credit.

Oklahoma itself has elected in. The IRS's page lists 30 states that made an advance election to participate for 2027, as of September 14, 2026, and Oklahoma and Texas are both on it.

State law speaks to that election too. The OTC's summary reports that HB 3704, effective November 1, 2026, adds 68 O.S. § 2357.901, requiring Oklahoma to participate and directing the OTC to coordinate the federal credit with the existing state credit. It belongs alongside our rundown of new Oklahoma tax laws and their effective dates.

An election isn't a list, though. The temporary regulations say that, for calendar year 2027 only, a state may perfect its advance election by submitting its SGO list on or before February 15, 2027, and that the IRS publishes its SGO list on irs.gov. The IRS's page adds that a state must provide its list before an individual can donate to an SGO in that state and claim the credit.

In practical terms, January 1, 2027 is the first day a contribution can count, but it isn't necessarily the first day an Oklahoma organization is on the IRS list to receive one.

What paperwork does the donor need?

The proposal builds substantiation, meaning the proof that supports the credit, into the process from both ends. Proposed § 1.25F-4(c)(1) would require the SGO to generate a unique donor number and provide it to the donor in a written acknowledgment no later than January 31 of the year after the contribution.

On the donor's side, proposed § 1.25F-2(g)(1) would require the taxpayer to substantiate the credit on Form 8525, Federal Scholarship Tax Credit, or a successor form. Because the rule is only proposed, that form number is provisional.

What do donors and their CPAs typically check first?

We can't tell you what to do with your own facts in an article. The review a careful donor and preparer typically run before a check is written looks something like this:

• Whether the organization appears on the IRS SGO list on the date of the gift, not merely on Oklahoma's state-credit roster.
• Whose money it is. A personal account and an entity account produce different federal answers under the proposal.
• Whether the gift was designated as a qualified contribution when made, and whether the acknowledgment reflects that.
• What state credit is expected for the same dollars, and how the proposed ordering rule would treat it.
• Whether there's enough federal income tax for a nonrefundable credit to offset, or whether the five-year carryforward comes into play.
• Where the regulations stand. The IRS release says taxpayers, states, and SGOs may rely on the proposed regulations for qualified contributions beginning January 1, 2027, but final rules may differ.

None of these is exotic. Together they explain why a $1,700 credit can take more than one conversation, ideally with advisers who are working from the same set of facts.

If you own an Oklahoma or Texas business and you're weighing how a scholarship gift fits with your entity structure and your state credits, we're glad to talk it through. You can reach us through the contact page or at our Oklahoma City office. Sorting out which pocket gives before the money moves usually costs less than untangling it afterward.

This article is general information about Oklahoma, Texas, and federal law, not legal advice, and it does not create an attorney-client relationship. Facts matter; talk to a lawyer about yours.