Frequently Asked Questions — a Guide for the Business Community
What is the Educational Improvement Tax Credit (EITC)?
The EITC, established by Act 4 (H.B. 996, P.N. 1878, Session 2001), potentially allows businesses to significantly reduce their state tax liability by contributing/donating (cash, personal property, or services) to a nonprofit educational improvement or nonprofit scholarship organization.
The EITC program is administered by the Department of Community and Economic Development (DCED) on a first-come-first-serve basis.
What businesses qualify?
Businesses authorized to do business in PA who are subject to one or more of the following taxes:
- Personal Income Tax of principals of a “pass-through entity”
- Corporate Net Income Tax
- Capital Stock Franchise Tax
- Bank and Trust Company Shares Tax
- Title Insurance Companies Shares Tax
- Insurance Premiums Tax
- Mutual Thrift Institution Tax
In 2012, the legislation was passed that removed the requirement that a pass-through entity first be subject to a corporate tax benefit before the credit may be passed to the owners. Prior to 2012, general and limited partnerships were effectively denied eligibility for EITC credits.
What is a pass-through entity?
Sole proprietorships, partnerships, LLCs and S corporations are pass-through entities for federal income tax purposes. This means these entities are not subject to income tax. Rather, the owners are directly taxed individually on the income, taking into account their share of the profits and losses. This avoids double taxation.
How much of a tax credit can I get for my business?
The tax credit is 75% (of the amount donated). However, if a company provides a written two-year commitment of equal funding, the credit becomes 90% (existing charitable deductions still apply with this credit, increasing the value of the tax credit.) Eligible companies may take up to $750,000 in tax credits per year.
How are Educational Improvement Tax Credits (EITC) applied to taxpayer accounts?
A business firm, including a pass-through entity that is granted an EITC is entitled to a credit in the taxable year in which the contribution is made. A pass-through entity may choose to pass through the credit to shareholders, members or partners (“owners”) in the following manner(Each option includes the owners receiving the credit in proportion to the share of the entity’s distributive income to which the owners are entitled):
- Make an irrevocable election in writing to pass through the entire EITCto its owners for use by the owners in the taxable year in which the contribution is made or in the taxable year immediately following the year in which the contribution is made.
- Apply all or a portion of the EITCto the entity’s tax liability for use in the taxable year in which the contribution is made and make an irrevocable election in writing to pass through the remaining EITC to its owners for use by the owners in the taxable year in which the contribution is made or in the taxable year immediately following the year in which the contribution was made.
An election to pass through an EITC must be made by the pass-through entity on or before the due date, including extensions, of the report for the pass-through entity for the year in which the contribution is made. A separate election must be submitted for each year. If an election is not made to pass through any unused EITC to the owners, the EITC will expire.
Can a business that receives a state tax credit through EITC still take a charitable deduction for their donation on both their state and federal tax returns?
Yes. A business that receives a state tax credit through the EITC/OSTC program may still take a charitable deduction for their gift on both their federal and state tax returns as allowed by law. This is in addition to the EITC & OSTC tax credits they will receive against their state tax liability. Please consult your tax advisor on specifics to your business.
How does my company benefit by utilizing the EITC Tax Credits?
These programs allow the business to direct where a portion of their tax dollars are spent. These are dollars that your business would already be paying to the state of Pennsylvania. It also allows the business to support the schools and local community in the footprint of their business.
How do you apply for an Educational Improvement Tax Credit?
A business must complete and submit an EITC application annually with DCED, which will then determine whether the firm qualifies for the credit. Applications are processed by DCED on a first-come, first-serve basis by day submitted. All applications received on a specific day will be processed by DCED on a random basis before moving onto the next day’s applications. A confirmation letter will be sent by DCED to confirm the business’s status (approval or disapproval). After approval, the business must make their contributions within 60 days.
When should I apply?
- May 15– Business applicants who have fulfilled their 2-year commitment and wish to reapply in FY 17/18 to renew their 2-year commitment.
- May 15– Businesses who are in the middle of their 2-year commitment.
- July 3– All other businesses including initial applicants.
How does a school benefit?
Your donation contributes to scholarship funds at the school of your choice. The School then designates which qualified students are provided assistance.
To which organizations can businesses contribute in order to receive credit?
Organizations eligible to receive EITC contributions must be a recognized 501(c)(3) and use 80% of their annual receipts on approved programs.
How do I know which organizations are listed?
The DCED website (www.newpa.com/eitc) holds a list. Search EITC and view the Educational Improvement Organization List.
Can businesses contribute to more than one organization?
Yes. Businesses can donate to as many eligible organizations as they choose.
What category does The Camphill School fall under?
The Camphill School is listed as a Scholarship Organization.
How soon will my donation be distributed?
Donations received prior to June 30 will be allocated for the fall semester of that school year. Monies received after July 1 will be distributed for fall of the following school year.
Can I donate directly to a student?
You cannot designate your donation to a specific student. You do however, have the option to designate the money to a specific school. Businesses may designate up to 100% of their donation, and LLC members may designate up to 75% of their donation. The schools, not BLOCS, each have the ability to designate funding to qualified students.
Must I Contact the PA Department of Revenue upon receipt of notification of the credit?
No, DCED will acknowledge the credit following confirmation of the qualified contribution. DCED will simultaneously provide the PA Department of Revenue with a copy of your confirmation letter.
The PA Department of Revenue will immediately post the credit to the taxable year in which the contribution was made and will consider tax credits awarded under this program to be effective on the first day of the taxable year. Therefore, the credit will generally be on record well before the filing of the applicable tax report.
How do I claim the credit when filing a Corporate Tax Report?
On the face page of the Corporate Tax Return there is a matrix in which you record the tax liability, payments and credits of record. You may include the EITC in the payment/credit column.
Must I adjust Federal taxable income for the amount of approved EITC in the calculation of Pennsylvania taxable income?
No. Unlike Employee Incentive Tax Credit, there is no provision in the statute requiring an adjustment to Federal taxable income for the amount of EITC for purposes of calculating Pennsylvania taxable income. However, questions regarding how an EITC might affect Federal taxable income for Federal taxation purposes should be addressed to the Internal Revenue Service (IRS).
Which is used first to pay the tax, the EITC or cash?
Generally, the EITC will be employed first, to offset taxes owed for the year in which the qualifying contribution occurred. The remaining tax deficiency (if any) will then be resolved using cash monies on deposit in the account.
I had submitted cash payments to satisfy quarterly prepayment requirements. Can the EITC be used to substitute for the cash payments?
Yes, any cash payment submitted as prepayment of taxes is available for refund or transfer upon written request to the PA Department of Revenue, Bureau of Corporation Taxes, Accounting Division, Department 280701, Harrisburg, PA 17128-0701, ATTN: Refund Section.
May I assign all or a portion of the EITC to another account?
No, this credit is nontransferable and nonrefundable. Application of the EITC is limited to taxes due in the year in which the qualified contribution occurred. The PA Department of Revenue will monitor business’s account and evaluate the appropriate application of the credit upon receipt of the appropriate tax report. Any EITC in excess of the self-assessed tax value will be removed from the account. The PA Department of Revenue will again revisit the business’s account following settlement (review of the tax report) at which time the PA Department of Revenue will reinstate the credit, if appropriate, or remove further amounts of credit should the business’s tax be reduced.
May I transfer all or a portion of the EITC within a business’s account for a prior or future year tax liability?
No, the credit is limited to the taxable year in which the qualified contribution was made. Unused portions of the credit may not be carried forward or backward.
Who can I call to verify postings of credits approved by DCED?
You can call the PA Department of Revenue, Bureau of Corporation Taxes, Accounting Division to review the status of the business’s tax account. The telephone number is (717) 705-6225.
I promise to provide the same contribution to a qualified organization for 2 consecutive years and receive a credit for 90 percent of the qualified contributions made in the first year. Subsequently I do not fulfill my promise to sustain the same level of contribution in the second taxable year. Is the amount of EITC credit adjusted in year one?
Yes, to sustain the 90 percent level, the business must fulfill its promise to sustain the same level of contribution to a qualified organization for two consecutive years. The PA Department of Revenue will be notified by DCED if this promise is not fulfilled. Upon notification, the PA Department of Revenue will adjust the amount of credit awarded in year one to be 75 percent of the qualified contribution. Should that adjustment create an unpaid tax balance, you, the taxpayer, will be subject to satisfying that unpaid tax by cash payment or the transfer of other available credits within your business’s tax account. Interest on the late payment will be imposed from the annual due date of the tax period to the date repaid.
It is also possible that you will be subject to an underpayment penalty for failure to adequately and/or timely prepay your taxes.
The PA Department of Revenue will not make an adjustment where DCED has waived the repayment requirement based on the finding that the failure to make the 2nd. year payment is deemed to be due to unusual circumstances beyond the control of your business.