Preface: This blog highlights the realistic feasibility study of Ironville Bicycle Seats, LLC entrepreneurs turning required Pennsylvania income tax payments into charitable contributions funding K-12 education.
Pennsylvania EITC Allows Tax Payments on Businesses to Fund K-12 Schools
Credits: Jake Dietz, CPA
Many people do not like paying taxes. Some people, however, would cheerfully donate to a good school that shared their values. Fortunately, the Pennsylvania Educational Improvement Tax Credit (EITC) allows qualifying businesses to get a 75%-100% tax credit against various PA taxes on eligible donations to qualifying organizations.
What businesses qualify? Businesses must be authorized to do business in PA to qualify for the credit. The credit offsets PA corporate net income tax, PA personal income tax for Single Member LLC’s and pass-through entities, and various other less common 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 have partners that do not want to make contributions, then you might consider creating a special purpose firm to make contributions under the Tax Reform Code of 1971.
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, and they will even file the application electronically for you. They pass the donation on to the school of your choice, less a 5% 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 up to $750,000, but it is increased to 90%, still subject to the $750,000 cap, 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.
When to file varies depending on the situation. May 15 is the earliest date businesses who have fulfilled a 2-year commitment and want to make a new commitment can file, as well as businesses in the middle of a 2-year commitment. On July 3, 2017, any business can file.
Let’s look at an example of how this could work. Suppose Reuben and Justin 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, who 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 Reuben and Justin each year to be used on their personal income tax returns. The LLC wrote a check to Faith Builders, Faith Builders wrote a check to the church school, and therefore Reuben and Justin transfer required PA tax payments to fund education. The money never touched the state’s coffers, and Christian education was funded.
If you run an eligible business, pay personal income taxes, and like Reuben and Justin, cheerfully give to Christian education, you may want to consider the EITC, too. The EITC allows business owners to give to K-12 education, with a tax credit that pays Pennsylvania taxes on business revenues. For more details, contact your CPA today.