Business Consultants & Certified Public Accountants

Support Your Community & Reduce Your PA Taxes

By Luke Wischnowski, CPA

As a business owner or employee of a business in Pennsylvania, you have the opportunity to redirect your state tax liability to an educational organization of your choice.

The Pennsylvania Educational Improvement Tax Credit (“EITC”) program allows businesses to receive a tax credit for charitable contributions made to a qualifying educational organization. Eligible businesses include any company (including partnerships, single-member LLC’s, multi-member LLC’s and S-corporations) authorized to do business in Pennsylvania that is subject to the following:

  • Personal Income Tax
  • Capital Stock/Foreign Franchise Tax
  • Corporate Net Income Tax
  • Bank Shares Tax
  • Title Insurance & Trust Company Shares Tax
  • Insurance Premiums Tax
  • Mutual Thrift Tax
  • Malt Beverage Tax

PA Act 194 of 2014 made it possible for business owners or employees of a qualified business to create a “special purpose entity” (“SPE”) solely for the purpose of making donations under the EITC program. Only shareholders, partners, members or employees of business firms can create a special purpose entity that qualifies for the EITC program. As a result of this legislation, business owners can participate in the EITC program even if other owners in their firm are not interested. In addition, employees of qualified business firms can join SPE’s and make contributions under the EITC program. There are numerous SPE’s that have already been created throughout Pennsylvania and allow certain individuals wishing to participate in the EITC program to join. Most existing SPE’s require individual members to be “accredited investors,” which includes individuals with the following:

  • Earned income exceeding $200,000 in each of the prior two years (or $300,000 together with a spouse) and expects the same for the current year, or
  • Net worth greater than $1 million, either alone or with a spouse (excluding the person’s primary residence).

The requirement to be an “accredited investor” derives from the Securities and Exchange Commission (“SEC”) regulations that require a company that offers or sells its securities to register with the SEC or find an exemption from the registration requirements, one of which is selling its securities to “accredited investors” as defined above. In general, a company can offer its securities to 35 “non-accredited investors” without meeting the requirement to register with the SEC. Since most established SPE’s in Pennsylvania attract more than 35 investors, these organizations prefer to only secure financing from accredited investors.

To receive tax credits, a business or SPE must fill out a short application on the PA Department of Community & Economic Development (“Department”) website (http://dced.pa.gov/programs/educational-improvement-tax-credit-program-eitc/). Applications are approved by the Department on a first-come, first-served basis until the amount of allocated funds is exhausted. For the 2017-2018 fiscal year, the application process for companies applying for the first time began on July 3rd. Once approved, the business must contribute cash, personal property or services to a qualifying Scholarship Organization, Educational Improvement Organization or Pre-K Scholarship Organization within 60 days and provide the Department proof of the payment within 90 days of the approval date. Qualifying organizations are listed on the Department’s website. Many qualifying organizations, such as private schools, include a section on their website explaining how contributions can be made to their particular institution.

The state tax benefit that a business receives varies based on the number of years the business pledges to make the contribution. The tax credits awarded to a business that makes a one-time contribution is 75% of the total contribution, up to a maximum of $750,000 per taxable year. If a business agrees at the time of its application to make a contribution for two consecutive years, the amount of the tax credit is increased to 90% of the contributions, up to a maximum of $750,000 per taxable year. Tax credits can be applied to any type of PA tax liability and are considered effective on the first day of the taxable year in which the contribution is made. Married taxpayers may file a joint PA tax return and apply the EITC credit to the couple’s joint tax liability.

The charitable contribution made in connection with the EITC program does not affect the treatment of the donation for federal income tax purposes. The business can deduct the payment on its federal income tax return if it qualifies as a charitable contribution as defined in the Internal Revenue Code. In the case of a pass-through entity (i.e. partnership or S-corporation) or SPE, the contribution would pass through to the owner’s individual income tax return as an itemized deduction.

Participating in the EITC program is a great way to give back to your local community while simultaneously reducing your effective tax rate. If you wish to participate in the program during 2017, you should start the application process as soon as possible before the allocated funds in the state budget are depleted. Even if you do not meet the deadline for 2017, understanding more about the EITC program can help you plan your charitable giving arrangements for next year. As a reminder, the program requires approval from PA lawmakers on a yearly basis in conjunction with the passage of the state budget and has been running since its inception in 2001. As your trusted advisors, we at PBGW would be happy to assist you with determining the most effective way to participate in the EITC program and support your local community.