The uncertainty surrounding Pennsylvania’s Educational Improvement Tax Credits (EITC) program, triggered by this year’s state budget impasse, may be clearing. Under the EITC, businesses contribute to qualifying organizations and, in return, receive a state tax credit for their contributions. Typically, the tax credit is applicable to the tax year in which the contribution is made. On December 24, 2015, the Department of Community and Economic Development (DCED) sent conditional approval letters to EITC applicants. This late and conditional approval left many businesses with a week to make their contributions, if they wanted to utilize them for the 2015 tax year. In addition, it was unknown whether the budget would include adequate funding to support the tax credits.
With the passage of Governor Wolf’s line-item veto state budget in the last week of December, the conditional approvals are now authorized. According to the DCED, applicants that received a conditional approval can expect another letter confirming approval of their tax credits. The letters are expected to be sent by DCED to applicants in late January. Currently, businesses that received a letter on December 24, 2015 will be required to make their contribution within 60 days of the date of the conditional approval letter. Businesses in the second year of their two-year commitment that received a 90% tax credit in year one should be aware that, if they fail to make the second-year contribution, their first-year tax credit will be reduced to 75%. This tax credit reduction may result in underpaid state taxes for tax year 2014, which could lead to penalties imposed by the Department of Revenue.
There is legislation pending that would allow 2016 contributions to be applied to the 2015 tax year. At this point, it is unclear whether the legislation will go into effect. If you or your business applied for EITC in 2015, be sure to review forthcoming correspondence from DCED. The failure to act could have an impact on your tax planning and previous year’s tax return.