The triple-threat tax credit is a great opportunity for businesses
Pennsylvania has two state tax-credit programs that allow businesses to invest in educational institutions.
The more common of the two is the educational improvement tax credit. The Pennsylvania legislature approved the EITC in 2001. In the early stages of the program, businesses had the opportunity to partner with educational institutions to provide either project-based or scholarship-based support.
The overall credit program has been successful, and in 2012 the scholarship opportunity was separated out and expanded to become the opportunity scholarship tax credit. The OSTC, with up to $50 million in approved tax credits available for businesses, focuses on improving educational opportunities for students. Unlike the EITC program, where the tax credit funds are assigned rapidly, the OSTC still has funds available for businesses looking for an alternative method to fulfill their tax obligation.
The OSTC provides benefit in the following three areas:
• Pennsylvania tax credit on the corporate or individual level.
• Federal tax deduction opportunity.
• Aid to students and communities in need .
Corporate and individual state tax credit: A business can review the list of approved scholarship funds provided on the Pennsylvania Department of Community and Economic Development website (dced.state.pa.us). Once a fund is identified, a credit application is submitted to the DCED. OSTC applications can be submitted any time after July 1, and credits are issued on a first-come, first-served basis.
Businesses electing to make a one-year contribution will receive a tax credit up to 75 percent of the contribution. A business can increase the credit to 90 percent of the contribution if it is willing to commit to two years of contributions. Once approved, the business has 60 days to make the contribution and provide support to the DCED. After all the support documentation is submitted, the credit will be assigned to the business's Pennsylvania tax account.
As outlined below, the credit can be used to offset both corporate and personal income taxes. Any unused credits at the corporate level can be passed through to the shareholders, members or partners. The business entity must be taxed as a partnership or S corporation for the credit to pass through to the business ownership.
The credit may be applied to the following state taxes:
• Capital stock and franchise tax
• Corporate net income tax
• Bank shares tax
• Title insurance and trust company shares tax
• Insurance premiums tax
• Mutual thrift institutions tax
• Gross receipts tax
• Personal income tax
Federal tax deduction: The OSTC benefits extend beyond the credit against Pennsylvania business and individual taxes. Contributions to scholarship funds usually qualify as a charitable contribution. As such, the contribution is permitted as a tax deduction on a business's federal tax filing.
This deduction will yield benefits equal to the corporation's effective tax rate. C corporations will get potential tax savings up to 35 percent, while pass-through business entities (S corporations and partnerships) may yield up to 39.6 percent in tax savings, depending on the individual tax rates of the owners.
When the federal tax deduction and the credits are added together, it is not uncommon for a business to see greater than 100 percent tax savings on the contribution amount.
A caution must be noted: The OSTC is considered a “use it or lose it” credit, as any unused credit cannot be carried forward. Businesses must carefully consider contribution amounts to make sure they understand what, if any, of the credit may go unused.
Impact on communities and students: In addition to the tax benefits, the OSTC provides an arguably greater benefit to the community by providing students with improved educational opportunities. Organizations provide Pennsylvania students in low-achieving schools with a way to attend better performing schools. Within Pennsylvania, there are more than 400 elementary and secondary schools that qualify as low-achieving, according to the most recent 2014-15 list compiled by the Pennsylvania Department of Education.
This is a great opportunity for businesses operating within Pennsylvania, including new or small-business owners, to take advantage of this triple benefit.
Please consult your tax adviser with any questions regarding the OSTC or EITC.
Jeremy M. Allen, CPA, MST, is a principal with Walz Group in Lancaster. He is a member of the PICPA's State Taxation Committee.