New Tax Law a Win for PA Pass-Through Shareholders and Members

Individuals can mitigate the new $10,000 limit on the deductibility of personal and real estate taxes on their federal returns through a tax credit program provided by the state of Pennsylvania. How? Have the business entity make a charitable contribution through the Pennsylvania Educational Improvement Tax Credit Program (“EITC”). This program provides tax credits to eligible businesses contributing to a scholarship organization, an educational improvement organization, and/or a pre-kindergarten scholarship organization. While not a new program in Pennsylvania, the tax benefits may provide individuals with a vehicle to turn a non-deductible tax into a deductible contribution.

The EITC tax credits can be applied against the Pennsylvania tax liability of a business for the tax year in which the contribution was made. This unique treatment of a contribution to a qualified organization provides the pass-through organization (e.g., S corporation, partnership, LLC, etc.) a pass-through charitable contribution for federal purposes, as well as a tax credit for Pennsylvania purposes, which will then be passed through to the shareholders and members. These credits can offset the need to pay Pennsylvania estimated taxes, which may not be deductible under the new tax law.

The entity should begin by referring to the business guidelines listed on the Pennsylvania Department of Community and Economic Development (DCED) website. Follow the guidelines established for the program, and learn about the various requirements and restrictions.

Pennsylvania also has the Opportunity Scholarship Tax Credit Program that offers the same type of tax treatment of contributions and state tax credits. This program provides tax credits to eligible businesses contributing to an opportunity scholarship organization. Business contributions are then used by the opportunity scholarship organization to provide scholarships to eligible students residing within the boundaries of a “low-achieving school” to attend a private school or a public school outside of their district. A low-achieving school is defined by the state as a public elementary or secondary school ranking in the bottom 15% of its designation as an elementary or secondary school based upon combined math and reading under the Pennsylvania System of School Assessment scores. Businesses can find additional information, including a list of eligible underperforming schools, on the business guidelines at the DCED website.

The process for both programs begins by completing an electronic application on the DCED‘s website. Note:  Overfunding your contribution will not provide a tax credit that can be carried forward to a subsequent year. To maximize the benefit of your pass-through tax credit, you must commit to a two-year funding period.  Thus, avoid funding more than can be taken advantage of in any one year. It is important to follow all of the steps to be certain that the credit passes through to the shareholders and members. This way, the business will receive a charitable deduction for federal purposes, and the individual can take a Pennsylvania tax credit against his/her personal income taxes.