Tax credits for scholarships in PA
These programs allow companies to provide school choice scholarsips for eligible students INSTEAD OF PAYING INCOME TAXES otherwise owed to PA.
Educational Improvement Tax Credit Program (EITC) and Opportunity Scholarship Tax Credit Program (OSTC)
Both EITC and OSTC programs provide incentives to certain corporations and pass-through entities to make donations to qualified schools through state approved scholarship organizations. For many years, it was open only to C Corporations or to S Corporations; however, in the last couple of years it has been expanded to pass-through entities, including partnerships and Limited Liability Companies.
The program works like this:
* Entity makes a commitment to what is called a Scholarship Organization.
* The commitment is for one or two years
* If it’s a one-year commitment, 75% of the amount is offset against Pennsylvania taxes – for partnerships, it would be the partner’s PA income tax from ANY source – interest, dividends, salary, etc.
* If the commitment is for two years, 90% is offset against the PA taxes
EXAMPLES: Partnership commits to contribute $10,000 for each of two years
* Each partner gets his/her share of a credit against PA tax of $9,000 (e.g., a 50% partner would get $4,500 credit for each year)
* The contribution is ALSO deductible for Federal tax as a charitable contribution
* If the partners are in the 35% tax bracket, there would be a reduction of U.S. income tax of $3,500.
EXAMPLE ONE: Assume same as above, and partners’ PA tax is $10,000
If no contribution made- Partners pay $10,000 in PA tax, deductible (as a tax) for Federal tax; Total cash outlay is $6,500 ($10,000 less $3,500 U.S. tax reduction)
When partners do participate, contribution is $10,000- Partners pay $1,000 in PA tax ($10,000 less $9,000 credit), U.S. tax reduction is $3,850 (35% x [$10,000 contribution + $1,000 PA tax]); Total cash outlay is $7,150 ($10,000 contribution + $1,000 PA tax less $3,850 U.S. tax reduction);
In essence, a $10,000 contribution has been made for $650 increase in cash outlay
EXAMPLE TWO: Assume same facts as Example One, except that taxpayers are subject to Alternative Minimum Tax (taxes paid are not deductible for U.S. tax):
* If no contribution made- Partners pay $10,000 in PA tax, not deductible due to AMT, Total cash outlay is $10,000
* When partners do participate, contribution is $10,000- Partners pay $1,000 in PA tax ($10,000 tax less $9,000 tax credit), U.S. tax reduction is $3,500 (35% x $10,000 contribution), Total cash outlay is $7,500 ($10,000 contribution + $1,000 PA tax, less $3,500 U.S. tax reduction) and partners are $2,500 AHEAD by making the contribution
* The tax credits may be applied against the PA tax liability of a business (or shareholders of pass-through organizations) for the tax year in which the contribution is made.
* Tax credits that are not used in the tax year in which the contribution is made cannot be carried back to a prior year, nor carried forward to a subsequent year.
* The credits are neither refundable nor transferable.
For more information or assistance with the application process, please call Cindi McCall at (412) 466-1919 or email email@example.com
Roughly 85% of our students are eligible for some level of support through this program. On their behalf, I thank you for helping them be part of our winning team!
Mrs. Cindi McCall, Executive Director