Preface: “An investment in knowledge pays the best interest.” —Benjamin Franklin
The PA EITC Allows Pennsylvanians to Fund Schools and Reduce Taxes
Credit: Jacob M. Dietz
Many people do not like paying taxes. Some people, however, would joyfully donate to a good school that shared their values. Fortunately, the Pennsylvania Educational Improvement Tax Credit (EITC) allows qualifying businesses to enjoy a 90% tax credit to reduce various PA taxes on eligible donations to qualifying organizations.
The credit offsets PA corporate net income tax, PA personal income tax and various other taxes. For pass-through entities, REV-1123 can be filed to pass the credit down to the partners to claim on their personal tax returns. It does not offset sales tax or payroll taxes. Sole proprietorships do not qualify for the credit.
If your business structure does not qualify, or if you do not wish to give through your business, then you might consider using a special purpose entity (SPE) to make contributions. Faith Builders offers the opportunity to give through an SPE.
To be a qualified member of an SPE, you must be either:
1. An owner or partial owner of a PA business (not a sole proprietorship)
2. A W-2 employee of a PA for-profit business OR
3. A stockholder of a PA registered business.
The donor must give to an approved organization to get the credit. Pennsylvania’s Department of Community and Economic Development lists many organizations that can receive these donations. Faith Builders Scholarship Services is one of these organizations. They pass the donation on to the school of your choice, less an administrative fee. Before choosing a school, however, check with the school to make sure that they are willing to accept the donation.
How much is the credit worth? Generally, EITC donors receive 75% of the contribution as a credit, but it is increased to 90% if you agree to a two-year commitment to give. For Pre-Kindergarten Scholarship organizations, the credit is 100% for the first $10,000, and then 90% above that but not exceeding $200,000.
Let’s look at an example of how this could work. Suppose James and Kevin are both 50% members in Ironville Bicycle Seats, LLC. They ask their CPA what their normal PA personal income tax liabilities are, and he tells them that they both averaged a $3,000 liability for each of the last two years. They decide to estimate their future liabilities on the low side to avoid having an unusable credit. They agree to aim for a $1,800 credit per person each year. They therefore make a 2-year commitment from the LLC to give $4,000 to Faith Builders Scholarship Services, and have the money passed on to their local church school. They fill out the information and give it to Faith Builders, which electronically files the application at the right time. Since it is a 2-year commitment, 90% of the donation, or $3,600 per year, is available as a credit. Their CPA can file REV-1123 to pass an $1,800 credit down to both James and Kevin each year to be used on their personal income tax returns. Their church school doesn’t need to worry about receiving a check from the state because the money received by the school doesn’t come from the state. The money never touched the state’s coffers on its way to fund Christian education.
Now let’s suppose that Kevin and James are still 50% partners, but James wants to take the EITC because he has children in a school that accepts EITC funds, but Kevin does not want to participate since his church school doesn’t accept EITC funds. In that case, James could still apply for the EITC by applying to Faith Builders to join an SPE in his personal name. He could then contribute $3,000 (or more) and get a $2,700 PA tax credit.
If you currently pay personal PA income taxes and already joyfully give to Christian education, then you may want to consider the EITC. The EITC allows Pennsylvanians to give to education while paying less to the government.
This article is general in nature, and does not contain legal advice. Please contact your accountant to see what applies in your specific situation.