June 09, 2011
Pennsylvania Educational Improvement Tax Credit Program
The Pennsylvania Educational Improvement Tax Credit (EITC) can be very beneficial to companies conducting business in Pennsylvania by reducing tax liability. This program awards tax credits to businesses that make contributions to qualified Scholarship and Educational Improvement Organizations. Businesses can apply for a tax credit of up to $300,000 for making a contribution to an organization that is on the current list of Scholarship Organizations or Educational Improvement Organizations maintained by Pennsylvania (the current list of eligible donor organizations is located at www.newPA.com/EITC).
How to Apply for the Credit:
Pennsylvania Businesses subject to any of the following taxes are eligible to participate in the EITC Program:
- Corporate Net Income Tax
- Capital Stock Franchise Tax
- Personal Income Tax of S Corp shareholders or partners in a general or limited partnership (see below for required election to pass through EITC to shareholders or partners)
- Bank and Trust Company Shares Tax
- Title Insurance Companies Shares Tax
- Insurance Premiums Tax
- Mutual Thrift Institutions Tax
Businesses may receive a tax credit equal to 75% of their contribution to a Scholarship Organization and/or Educational Improvement Organization, up to a maximum of $300,000 per taxable year. The tax credit may be increased to 90% of the contribution, up to the maximum of $300,000 per taxable year, if the business agrees to provide the same amount of contribution to an organization for two consecutive years. In addition, the taxpayer may enjoy tax savings attributable to the federal tax benefit of a charitable contribution which when combined with the EITC savings can significantly reduce the cash outlay for the contribution.
The contribution to a qualified organization must be cash, personal property, or services. Activities that are part of an applicant's normal course of business do not qualify as contributions for the EITC. Tax credits are applied against the tax liability of a business for the tax year in which the contribution was made.
S corporations and partnerships can elect to pass through the tax credit to shareholders or partners. A separate election must be filed by the company each year an EITC is awarded and passed through to the owners. The EITC granted for any one taxable year may not exceed the combined tax liability of the entity and its owners. An EITC not used in the taxable year in which the contribution was made may not be carried back or carried forward, nor is it refundable or transferable. The one exception to this rule is if there is an approved election to apply the unused EITC to the tax liability of the owners in the taxable year immediately following the year in which the contribution is made. A pass-through EITC can be applied to all classes of income earned by the owners.
The EITC is awarded on a first come, first served basis by the Pennsylvania Department of Community and Economic Development. Applications are processed in order of the day they are received by the state until the available tax credits run out. It is important for businesses to apply for the EITC early to ensure the credit is available.
For the state fiscal year 2011-2012 (July 1, 2011 through June 30, 2012) applications are being accepted beginning July 1, 2011. If the business were approved for a two year commitment, then the application for the second year would be accepted as early as May 15th the following year and should be received by June 30th to guarantee the credit. If the second year application is received after June 30th, it will be processed on a first come, first served basis with all of the other applications submitted. July 8th is the first day applications are accepted if the business plans to pass the credit through to its shareholders or partners.
Once a business is approved by Pennsylvania for the tax credit, the business has within 60 days of the date on the approval letter to make the contribution to a qualified Scholarship or Educational Improvement Organization. Within 90 days of the approval letter, the business must provide written proof of the contribution from the organization to which the contribution was made. There are special guidelines for services that will not be donated to the organization within the 60 days. If the business does not follow these guidelines, the EITC will be rescinded.How to Become a Qualified Scholarship Organization or an Educational Improvement Organization
To become a qualified Scholarship Organization or an Educational Improvement Organization, the organization must go through certain application procedures and meet the eligibility requirements. Rules differ slightly depending on the classification under which the entity wishes to qualify. Complete details can be found in the guidelines on Pennsylvania's EITC website.
To be considered a Scholarship Organization, the organization must be a nonprofit entity, must be exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code, and must contribute at least 80% of its annual EITC receipts to a scholarship program that meets the requirements of the Act. Pennsylvania requires the scholarship program to demonstrate other characteristics that can be found at www.newPA.com/EITC.
To be considered an Educational Improvement Organization, the organization must be a nonprofit entity, exempt from paying federal income tax under section 501(c) (3) of the Internal Revenue Code, and must contribute at least 80% of its annual EITC receipts as grants to a public school for innovative educational programs that meet the requirements of the Act which can be found on Pennsylvania’s website.
The Scholarship or Educational Improvement Organization must submit an application to the Department. The applicant is notified within 60 days whether or not the organization has met the requirements of the EITC guidelines. If the applicant is approved, the organization will be included on the Department's list of Scholarship Organizations and Education Improvement Organizations for the fiscal year in which the application was received. The list is posted on PA’s EITC website. The organization is required to submit an annual report between May 1st and September 1st which should reflect information on the most recently completed fiscal year of the organization. The organization must submit a renewal application each state fiscal year and must continue to meet the eligibility requirements required by Pennsylvania.
More information on EITC can be found on Pennsylvania’s EITC website at www.newPA.com/EITC.
The application can be found at: http://www.newpa.com/sites/default/files/uploads/EITC_Business_2011_F.pdf
If your business, Scholarship Organization and/or Educational Improvement Organization needs assistance with any of these applications or guidelines, please contact your Marcum professional.