Editor’s note: On April 20, Governor Tom Wolf signed into law Act 15 of 2020. The law addresses a number of critical local and state government issues related to timing, access and process during the coronavirus pandemic, including two key updates to penalties related to the EITC program. First, Act 15 extends the time period approved organizations have to fund their commitments from 60 days after receipt of approval to the end of the business’ taxable year (with confirmation due to PA Department of Community and Economic Development within 30 days of contribution). Second, Act 15 removes the credit reduction penalty (only for 2020) if funding of the second year of a two-year commitment does not equal the first year. At the time of this post, EITC application commencement dates still remain 5/15 (returning applicants) and 7/1 (new applicants), but there is a push in the state Legislature to extend. We advise businesses submitting a returning EITC application prepare to submit May 15.
Education-related Pennsylvania nonprofits may be eligible to apply to the PA Department of Community and Economic Development (DCED) to receive contributions from the state’s Educational Improvement Tax Credit (EITC) program. Many organizations currently reap the benefits of this tax-advantaged funding mechanism, but recent changes to the EITC program increase the availability of these credits to businesses and their owners in ways that expand potential donor pools.
What is the EITC program?
The EITC program has long promoted expanded educational opportunities for Pennsylvania students by providing tax credits to eligible businesses that contribute to approved scholarship (including pre-kindergarten) and educational improvement organizations.
Once a nonprofit is approved by DCED to accept qualified contributions, businesses can support it with charitable donations and receive tax credits to offset certain Pennsylvania business and individual tax balances.
The EITC program encompasses two types of tax credits – Education Tax Credits and Opportunity Scholarship Tax Credits. Both of these tax credits can equal 75% of the value of the contributed amount up to a maximum of $750,000 per taxable year. The credit can be increased to 90% of the contribution if the contributor agrees to a two-year commitment. The threshold is different for using the EITC program for contributions to registered pre-kindergarten scholarship organizations. In this case, the tax credit is 100% of the first $10,000 contributed and 90% on any additional amount, up to a maximum contribution of $200,000 annually.
What types of organizations qualify to participate in the EITC program?
There are three categories of organizations registered for the EITC program: Scholarship, Educational Improvement and Pre-Kindergarten Scholarship. All three categories require an organization to be a nonprofit entity that is exempt from payment of federal income tax under IRC 501(C)(3). Beyond these criteria, each category has additional requirements, as outlined below.
Scholarship Organization:
- Must contribute at least 80% of its annual EITC receipts to a scholarship program, qualified under the requirements of Article XVII-F of the Tax Reform Code.
Educational Improvement Organization:
- Must contribute at least 80% of its annual EITC receipts as grants to a public school, charter school or private school for innovative educational programs. The grants can include costs incurred by these organizations to carryout innovative educational programs in conjunction with public schools.
Pre-Kindergarten Scholarship Organization:
- Must contribute at least 80% of its annual EITC receipts to aqualified Pre-K Scholarship Program.
- If the nonprofit serves as both a Scholarship Organization and a Pre-K Scholarship Organization, it must maintain separate funds for contributions to each category.
What’s changed with the EITC program?
In 2014, Pennsylvania amended its tax code to expand portions of the EITC in several key ways, including broadened definitions of entity types that can apply for the credit and the addition of more tax types to be offset by the credit.
The most significant adjustment is the expanded definition of a “business firm” to include a “Special Purpose Entity” (SPE). An SPE must be formed as a pass-through entity. The sole purpose of the SPE can be to receive capital from its members, apply for the tax credits and disburse funds to approved organizations. The members of the SPE can then receive EITC credits to offset their individual tax liabilities, based upon ownership percentages, which can be varied from the formal business entity.
How can my nonprofit leverage these changes for financial benefit?
Organizations can encourage SPEs to increase the funding received through the EITC program. If any potential donors are partners, shareholders, members or employees of another business firm and wish to maximize the amount of tax credits they may earn, they can pool their contributions into an SPE, which can serve as the vehicle to financially support a nonprofit and earn tax credits. Since Pennsylvania tax law does not allow individuals to use charitable contributions to offset taxable income, funding an SPE that contributes to an EITC-eligible organization allows individuals to receive a state tax credit to offset their individual PA income tax liabilities.
Nonprofits can take advantage of the boom in the craft brewing sector to find new corporate donors by incentivizing local small brewers that pay the malt beverage tax to contribute financial support via the EITC program.
RKL’s Not-for-Profit Industry Group can help currently registered organizations maximize the EITC expansion among potential or existing donors, and help interested organizations determine EITC eligibility and register for the program. Contact your RKL advisor or reach out using the form below for more information or assistance.
