Pennsylvania’s Educational Improvement Tax Credit (EITC) Changes
Certain legislative changes were made in 2008 to Pennsylvania's Educational Improvement Tax Credit (“EITC”) program. Although the EITC program has existed for several years, the 2008 changes expand the program to pass-through entities, and also increase the maximum credit amounts. Pass-through entities are now eligible for the credits, and unused credits may be transferred to such entities' shareholders, members or partners in accordance with their distributive shares for use on their personal returns. One of the major advantages of the EITC is that for Pennsylvania corporations, the taxpayer receives the benefit of both the credit AND the charitable contribution deduction, making the true out-of-pocket cost minimal in many circumstances.
Example: Assume a corporation agrees to donate $100,000 to a pre-kindergarten scholarship organization. The approved tax credit is $91,000 (100% of first $10,000 plus 90% of next $90,000). In addition to the $91,000 Pennsylvania tax credit, the company also receives a deduction of $100,000 on its Pennsylvania corporate net income tax return, worth $9,990 ($100,000 x 9.99%). The donor will also receive a federal tax deduction for the amount contributed.
The EITC is available to companies that make contributions to qualifying Pennsylvania scholarship organizations, educational improvement organizations and/or pre-kindergarten scholarship organizations. The credits may be used to offset the following taxes: corporate net income tax, capital stock/franchise tax, insurance premiums tax and personal income tax, among others. There are no carry forward or carry back provisions for unused credits, nor are unused credits refundable. “Contributions” from businesses may be in the form of cash, personal property or intangible property such as stock or bonds. Pennsylvania maintains a current listing of qualifying scholarship organizations, educational improvement organizations and pre-kindergarten scholarship organizations at the Department of Community and Economic Development (“DCED”) website: www.newPA.com/EITC.
Calculation of Credit
Generally, the credit is 75% of the taxpayer's contributions to scholarship organizations or educational improvement organizations. However, if the taxpayer submits a written commitment to make the same contribution for two consecutive years, the credit may be increased to 90% of the amount contributed. The maximum combined total of credits allowed to a single applicant for contributions to scholarship organizations or educational improvement organizations is currently $300,000 annually (previously $200,000). For contributions to pre-kindergarten scholarship organizations, the credit is 100% of the first $10,000 allowed, and 90% of additional amounts contributed up to a maximum credit of $150,000 (previously $100,000). Thus, a company that wishes to take advantage of this tax credit is eligible to donate up to a combined $450,000 for contributions to both types of organizations in a single year.
Credits are awarded on a first-come, first-served basis. It is important to plan on utilizing this program early in 2009. If the application is received on/before July 1st, it will be processed prior to any other application for tax credits received. If it is received after July 1st, the application will be processed on a first-come, first-served basis with all other business applications received for that year. Pennsylvania can only award a maximum dollar amount of Educational Improvement Tax Credits within a given tax year, so it is imperative to be timely in submitting the application to the DCED. Once the tax credit is approved and all documents are completed and submitted within the listed time constraints, the EITC will be applied to the taxpayer's account by the Pennsylvania Department of Revenue (DOR). To verify the posting of the approved credits to their account, taxpayers can call (717) 705–6225.
The application and related guidelines can be found at www.newPA.com under the heading entitled "where to apply." Businesses must submit the relevant applications to the DCED. Once a business receives notification that its application has been approved, contributions must generally be made within sixty days of the date of the letter. Also, proof of the contribution must be supplied to the DCED within ninety days of the date of the letter. Once the DCED receives proof of the contribution, it will notify the Department of Revenue (“DOR”) to apply the credits against the appropriate taxes as set forth in the business's application. The DOR will consider the tax credits to be effective on the first day of the taxable year in which the contribution was made. Applications must be renewed in the second year for the two-year credit.
In discussions with the DCED, we have learned that credits for K-12 organizations are still available from the state for 2009 under the state's fiscal year end June 30, 2009 budget if the applications are submitted by June 30th. If your company is ready to make a commitment, now is an opportune time.
The next round of funding from the state begins July 1, 2009 for the program's fiscal year ending July 2010. While this credit still applies to most 2009 tax returns, the availability of credits for Pre-K organizations is processed on a first-come, first-served basis so it is important to get your application in for this as close to July 1st as possible.
Act Now for Credit on Your 2009 Tax Return
As we approach July 1st of the 2009 tax year, please consult with your EisnerAmper tax advisor as soon as possible if your company is thinking about taking advantage of the Pennsylvania EITC opportunity on its 2009 tax returns. Businesses that wish to apply for Personal Income Tax Credits for S Corporation Shareholders, or Partners in a General or Limited Partnership, may not apply for credits until July 8, 2009. Any applications for Personal Income Tax Credits received prior to July 8, 2009 will be denied. This restriction does not apply to year 2 of a 2-year application. For additional information, please visit the Pennsylvania DOR website at www.newPA.com.
For more information, please contact a member of EisnerAmper's State and Local Tax Group