The Arizona Legislature recently passed S.B. 1496, amending the Qualifying Charitable Organization (QCO) statute effective October 1, 2025. These changes to the QCO qualification rules are significant for nonprofits that rely on Arizona’s tax credit program to attract donations. Below we break down what changed, why it matters, and what your organization should do next.
What Changed in the QCO Law
- “Direct or Spend” Requirement – Previously, QCOs had to spend at least 50% of their budget on qualifying services for low-income residents, TANF recipients, or individuals with a chronic illness or physical disability. Now, they may direct or spend those funds. “Direct” is defined as providing money, financial assistance, or in-kind support to another 501(c)(3) that directly delivers qualifying services.
- Expanded Definition of Services – The law now recognizes a broader range of services as qualifying, including:
- Behavioral health services
- Workforce readiness services
- Workforce development programs
- Traditional basics such as food, clothing, shelter, child care, medical care, job training, and job placement
- Clarification of Basic Needs – The statute now requires services to meet “basic needs” (previously “immediate basic needs”), a subtle but important shift that allows greater flexibility.
Why It Matters
For many nonprofits, especially umbrella or fundraising organizations, this change is a game-changer. Previously, groups like community foundations, auxiliary boards, or nonprofits that raised funds for partner agencies struggled to qualify because they did not directly provide services themselves. With the “direct or spend” language, those organizations may now count dollars they pass through to other qualifying 501(c)(3)s toward the 50% budget requirement.
For example:
- A nonprofit that raises money for a local food bank can now count those directed funds toward its QCO qualification.
- Organizations funding scholarships for children from low-income families may now include those directed amounts in meeting the 50% test.
This expands the pool of organizations that may qualify as QCOs and broadens the reach of Arizona’s charitable tax credit.
What Nonprofits Should Do
- Review your budget – Determine whether at least 50% is spent directly or directed to another 501(c)(3) providing qualifying services.
- Update your certification – The Arizona Department of Revenue (ADOR) will issue updated guidance and certification forms. Expect revisions before the next filing cycle.
- Document your pass-throughs – If you plan to count funds directed to other nonprofits, maintain clear records showing the recipients are 501(c)(3)s providing qualifying services in Arizona.
- Communicate with donors – Highlight how your new or continued QCO status strengthens your ability to offer donors the Arizona tax credit.
Key Takeaway
Arizona’s new QCO law makes it easier for nonprofits that raise and distribute funds to other service providers to qualify. It also recognizes the evolving ways nonprofits meet community needs, from behavioral health to workforce development. If your organization struggled to qualify in the past, it may be worth taking another look under the updated statute.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.