The Educational Improvement Tax Credit (EITC) encourages taxpayers to make donations to qualified organizations by providing tax credits. Applications for fiscal year 2008-09 EITC commenced on July 1, 2008 and will continue until the available tax credits are depleted.
The limit on the EITC is $300,000 for contributions to Scholarship Organizations (SO) or Educational Improvement Organizations (EIO) and $150,000 for Pre-Kindergarten Scholarship Organizations (PKSO). The tax credit is equal to 75% of the contribution to an SO or EIO, but can go as high as 90% if the business commits to the same contribution for two consecutive years. For a contribution to a PKSO, the tax credit is equal to 100% of the first $10,000 and 90% of the remaining contribution. A list of qualified organizations is available at the Pennsylvania Department of Community and Economic Development (DCED) website.
Recent information from the DCED has indicated that tax credits for the current fiscal year are no longer available for the EIO program, and very limited amounts remain for the PKSO program. There are still tax credits available for the SO programs.
Business That Might Benefit from the EITC Tax Credit Program
Companies authorized to do business in Pennsylvania which are subject to one or more of the following taxes are eligible to apply for the EITC:
- Corporate Net Income Tax
- Capital Stock Franchise Tax
- Bank and Trust Company Shares Tax
- Title Insurance Companies Shares Tax
- Insurance Premiums Tax
- Mutual Thrift Tax
- Personal Income Tax
Applications for the EITC differ based on the type of qualified organization to which the contribution will be made. The application must be signed by an authorized officer of the company and be submitted to the DCED. Once approved for tax credits by the DCED, the business must make its contribution within 60 days from the date of the approval letter. Proof of contribution must be submitted within 90 days of the date of the DCED approval letter.
The tax credits are effective on the first day of the taxable year in which the contribution was made. The DCED will notify the Department of Revenue to apply the tax credits once the proof of contribution has been received.
As of July 1, 2008, the EITC may be passed through to owners of a pass-through entity. The Department of Revenue has specified the process for pass-through entities to pass through the tax credit to owners. All EITC pass-through elections require the credit for each owner be in proportion to the share of income to which the owner is entitled. Depending on the election and utilization of the EITC by a pass-through entity, the EITC may be used in either the taxable year of contribution or the taxable year following the year of contribution. A separate election must be submitted for each year. All elections to pass through EITC are irrevocable and must be made in writing prior to the extended due date of the entity’s tax return or report.
In any one tax year, the EITC may not exceed the tax liability of the entity. If the EITC is not utilized, it may not be carried forward or back and is not refundable. Except in the case of pass-through entities, the EITC is not transferable.
Information for Organizations that Might Be Eligible for EITC Credits
With the increasing popularity of the EITC program, many organizations are hoping to be added to the list of approved entities eligible for contributions. To be included on the DCED’s list of Scholarship Organizations, Educational Improvement Organizations or Pre-Kindergarten Scholarship Organizations (collectively, “Organization”), the Organization must meet the following requirements:
1. The organization must be a nonprofit entity.
2. The organization must be exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code.
3. The organization must contribute at least 80% of its annual receipts* to a qualifying scholarship or innovative educational program, respectively.
* The term “annual receipts” means the total value of contributions received from businesses that received tax credits during the fiscal year.
In addition to the three requirements noted above, an organization must file an application with the DCED containing the organization’s profile and a copy of its 501(c)(3) exemption. Depending on the type of organization, information such as a descriptive narrative of the organization’s program or a letter of support may be required. Please see the DCED website for complete details.
Organizations wishing to remain on the DCED’s list of approved entities must submit a renewal application annually. The application period coincides with Pennsylvania’s fiscal year, which begins July 1. The DCED accepts renewal applications on or after May 1st.
All Organizations are required to submit annual reports to the DCED based upon their most recent fiscal year. These annual or monitoring reports provide information to the DCED on the organization’s fiscal and program performance. The DCED also tracks scholarship and contribution information by county from the reports.
For additional program details or to download EITC applications or documents, please visit http://www.newpa.com/eitc.
Schneider Downs provides accounting, tax and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh and Columbus.
This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.