A New Kind of Tax Credit Just Landed on the Federal Books
Quietly, in the middle of a sprawling piece of tax legislation, Congress created something the United States has never had before: a federal tax credit for donating to K-12 scholarships. Not a state program. Not a local voucher pilot. A nationwide credit, written into the Internal Revenue Code, that any taxpayer in a participating state can claim starting with the 2027 tax year.
If you're a small business owner, this is worth understanding now, well before the credit becomes available, because the mechanics are unusual, the state-by-state rollout is uneven, and the planning window is short. Here's what the Educational Choice for Children Act (ECCA) actually does, how the $1,700 credit works, and why it deserves a spot on your 2027 tax-planning checklist.
What the Educational Choice for Children Act Actually Created
ECCA was enacted in mid-2025 as part of a larger federal reconciliation bill, and it does one specific thing: it creates a new Section 25F of the tax code authorizing a federal income tax credit for individuals who donate cash to a Scholarship Granting Organization (SGO). SGOs are nonprofits that collect donations and award scholarships to K-12 students, who can then use the money for tuition, fees, books, tutoring, and other qualified education expenses at public, private, religious, or other eligible schools.
The Treasury Department and IRS followed up with Revenue Procedure 2026-6, which lays out how the program will actually operate — including a new "advance election" pathway (via Form 15714) that lets a state formally opt in before it has finished assembling its list of approved SGOs. That detail matters because it tells you the federal government expects most of the real activity — state elections, SGO approvals, first donations — to happen in 2026, ahead of the credit's January 1, 2027 start date.
How the $1,700 Credit Actually Works
This is the part worth sitting with, because it behaves differently from the charitable deductions you're used to.
It's a credit, not a deduction. A deduction lowers your taxable income; a credit lowers your tax bill dollar for dollar. Donate $1,700 to a qualifying SGO, and — assuming you have at least that much federal tax liability — your tax bill drops by $1,700. Functionally, your after-tax cost of the donation approaches zero.
It's nonrefundable, with a carryforward. If your tax liability is smaller than your credit, you don't get the difference back as a refund, but current guidance points to a five-year carryforward for the unused portion, so the credit isn't simply lost if a low-income year gets in the way.
It's cash-only. Unlike a typical charitable contribution under Section 170, where donating appreciated stock is often the tax-smart move, ECCA donations must be cash. No securities, no property, no donor-advised-fund transfers — a meaningful planning constraint if your instinct is to give appreciated shares.
The per-return cap is still being worked out for joint filers. The statute caps the credit at $1,700 per individual; whether married couples filing jointly get $1,700 or $3,400 combined is unresolved and awaiting further Treasury guidance, expected around September 2026. Don't lock in a giving plan around an assumption here — confirm before you write the check.
It depends entirely on your state opting in. This is the single biggest variable. A state must affirmatively participate — its governor or a designated authority submits an approved list of in-state SGOs to the Treasury — or the credit simply isn't available to that state's residents for donations to that state's organizations. As of mid-2026, roughly 30 states have opted in, a handful have declined or vetoed opt-in legislation, and the rest haven't decided. If you're a business owner in an undecided state, this is a live issue to watch through the rest of 2026, since your ability to claim the credit next year may hinge entirely on a decision your state hasn't made yet.
Who the Scholarships Are Actually For
The credit exists to fund students, not donors, so it's worth understanding the other side of the transaction. Eligible students are K-12, and eligibility is income-linked — households generally need to fall under a threshold tied to area median income, which SGOs will publish and apply when awarding scholarships. Scholarships can be used at a wide range of schools — public, private, religious, or other qualifying providers — for tuition and related costs like books, fees, and tutoring.
SGOs themselves are held to a strict pass-through requirement: at least 90% of every donated dollar has to reach scholarships, capping administrative overhead at 10%. That's a useful diligence checkpoint if you're evaluating which organization to support — ask directly what share of donations goes to actual scholarships versus overhead.
Why This Is Relevant to a Small Business Owner Specifically
ECCA is an individual tax credit, not a corporate one — there's no version of this for a C-corp or an LLC to claim directly. But that's exactly why it matters for the owners of pass-through businesses (S-corps, partnerships, sole proprietorships) whose business income flows onto their personal return and often produces meaningful federal tax liability. A $1,700 credit is small relative to many owners' total tax bills, but it's a rare instance of a dollar-for-dollar offset available simply for directing cash you were likely already planning to give somewhere.
There's also a quieter angle: if you run a business with employees, this is the kind of benefit worth mentioning during open enrollment or year-end planning conversations, particularly for employees with school-age kids. It costs you nothing as an employer — it's not a payroll benefit, just informational — but pointing people toward it is the kind of low-cost goodwill that a lot of owners overlook.
How to Actually Claim It
Assuming your state participates, the mechanics are straightforward:
- Confirm your state has opted in and identify SGOs on that state's approved list — donations only qualify for the credit if the recipient organization appears on a participating state's roster.
- Make a cash donation to the SGO, keeping the receipt or acknowledgment letter the way you would for any charitable gift.
- Claim the credit on your 2027 federal return (filed in early 2028), up to the $1,700 cap.
- Carry forward any unused credit for up to five years if your liability that year doesn't fully absorb it.
Because the credit doesn't become available until the 2027 tax year, there's no rush to act in 2026 — but there's real value in tracking your state's participation status and getting a shortlist of legitimate, high-pass-through SGOs ready before the window opens, rather than scrambling in December 2027.
Common Mistakes to Avoid
Assuming your state is automatically in. Participation is opt-in and state-specific. Don't assume the credit applies until you've confirmed your state's status.
Donating stock or property expecting the credit. ECCA only recognizes cash. If you want to give appreciated securities to a school-related cause, that's still a valid charitable deduction under separate rules — just not this credit.
Confusing this with a state-level scholarship tax credit. Many states already run their own scholarship tax credit programs with different SGOs, caps, and rules. ECCA is a new, separate federal layer on top of (or alongside) whatever your state already has — verify which program, or both, a given SGO participates in.
Forgetting to keep records. As with any credit tied to a third-party organization, the SGO's documentation of your donation is what substantiates your claim. Treat the receipt the way you'd treat any other tax document your bookkeeping system needs to retain.
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