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Our team is built to serve you, specializing in a multitude of areas permitting us to better serve our clients.

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Charitable Contribution or PA Income Tax?

6/15/2018

Which would you rather do: Make a charitable contribution, or pay your PA income tax?

~ Author - Barbara Brecht, CPA, Deluzio & Company, Tax Supervisor ~

School Vans

Pennsylvania’s Educational Improvement Tax Credit program allows you to do just that:  make a charitable donation and receive direct credits against your PA income tax.

The Educational Improvement Tax Credit (EITC) offers Pennsylvania businesses and individuals the opportunity to receive Pennsylvania tax credits in exchange for contributions to designated scholarship organizations and/or educational improvement organizations.  The funds are required to provide scholarships for students of private and/or parochial schools who meet qualifying financial requirements under the EITC rules. 

The EITC program has been available to businesses since 2001, however in 2015, changes were made to the program to allow individuals to claim the EITC against their personal Pennsylvania state income tax via SPE (Special Purpose Entities).  Special Purpose Entities are pass-through entities created for the purpose of making contributions to these scholarship organizations to receive the EITC, and whose investors are owners of other business firms.

The business or SPE is required to apply for the education credit to the PA Department of Community and Economic Development (DCED), and once awarded, makes the contribution to the scholarship organization.  For corporations, the credit can be applied to their PA corporate net income tax.  For pass-through entities, including SPEs, the credit passes to the investor who reports the tax credit on their Pennsylvania income tax return.  The contribution made to the scholarship organization is a business deduction or, in the case of the individual taxpayer, an itemized deduction.

As a caution, the IRS is looking at these programs because other states have started their own “state sponsored” programs in an effort to mitigate the state and local taxes (SALT) itemized deduction cap. They have indicated that regulations will be issued this summer to address this issue.  Although similar in nature to the program noted above, it is our thought that the IRS is focusing on state programs that have or will enact their programs as a direct substitute to an individual’s tax payments to the states. This issue is the subject of Chief Counsel Advice 201105010.

For more information on this program, please contact our office.