Would you like to contribute to charity but money’s a little tight? Or maybe money’s not an issue, but you can’t pass up a good deal. Either way, the Pennsylvania Educational Improvement Tax Credit (EITC) and Opportunity Scholarship Tax Credit (OSTC) programs let you make charitable contributions to certain educational institutions at a net cost to you as little as ten cents on the dollar.
Tip: If an eligible organization (see below) is a customer of your business, the credits can be a good way to “give something back” and build goodwill with the customer – financed up to 90% by the state!
Overview
Businesses who want to participate in the program submit an online application in which they pledge to contribute an amount of money for one or two years to a certain educational institution. The business receives a letter notifying it that its application was or wasn’t approved. If approved, the business then makes the contribution and supplies proof to the Department of Community & Economic Development (DCED). The DCED then notifies the Department of Revenue that the business has earned the credits, and sends a confirming letter to the business. The amount of the credit is 75% of the charitable contribution for a one-year commitment, or 90% of the contribution for a two-year commitment.
It’s important to understand that the state sets a total amount of credits that can be approved each year. You could do everything right with your application and yet not be approved simply because the credit pool ran out before your application was processed – see the application timeline information below.
Who can apply?
The credit is available to businesses authorized to do business in Pennsylvania who are subject to one or more of the following taxes:
- Corporate Net Income Tax
- Capital Stock Franchise Tax
- Personal Income Tax of S corporation shareholders or partnership partners
- And less common taxes including Bank and Trust Company Shares Tax, Title Insurance Companies Shares Tax, Insurance Premiums Tax, Mutual Thrift Institution Tax, and tax under the Insurance Company Law of 1921.
Most small businesses are S corporations or LLCs taxed as partnerships. They can apply the credit to the business’s capital stock tax liability, then pass the remainder through to their owners to use on their Pennsylvania PA-40 individual tax returns.
Partnerships which are not LLCs generally don’t have a PA entity-level tax liability. They pass the credit through to their owners for use on their PA-40s.
Credits that are passed through to owners must be allocated to the owners in proportion to their ownership percentages. Special allocations are not allowed.
C Corporations can apply the credit to their Corporate Net Income or Capital Stock Tax liabilities (or if applicable to the miscellaneous other tax types noted above). However, they cannot pass the credit through to their owners for use against individual income tax liabilities.
Amount of the credit
The amount of the credit depends on the amount of the contribution, and whether the applicant makes a one- or two-year commitment:
- One-year commitment: 75% of the amount of the contribution
- Two-year commitment: 90% of the amount of the contribution
Note that the amount of the contribution must be specified in the application. For a two-year commitment, the contribution amounts must be the same for each of the two years.
When can the credit be used?
For entity-level taxes, the credit can only be used for the tax year in which the contribution was made.
For an S corporation or partnership passing the credit through to owners, there are two choices:
- Use the credit in the tax year in which the contribution was made, or
- Use the credit in the year immediately following the year in which the contribution was made.
The year of use is an irrevocable election which is made at the entity level and applies to all owners.
Unlike some other Pennsylvania credits, the EITC and OSTC cannot be carried forward or assigned to other taxpayers.
Tip: Be sure to do thorough tax planning before you apply for the credit to help ensure that you’ll be able to use all of the credit. If you don’t have enough tax liability to use all the credit, the remainder is lost.
Eligible donees
When you make your application, you’ll specify the educational organization to which you want to contribute. However, not all organizations are eligible. Educational institutions which want to participate in the program must apply to and be approved by the DCED.
Lists of approved organizations are available on the DCED website:
Educational Improvement Organizations
Pre-Kindergarten Scholarship Organizations
Check these lists to see if the organization you’d like to donate to is approved. If you don’t see it on the list:
- Call the organization and ask if it’s approved. Some organizations are approved, but under a legal name which is different from the “doing-business-as” name.
- If you call and they’re not approved, suggest that they apply. Send them to this page for more information!
Applications by educational organizations
This credit is a great funding tool for approved organizations. If your educational organization has not been approved, click here for the DCED Organization Guidelines and Application.
When do businesses apply?
There are strict rules regarding the time of filing the applications. As noted above, the state creates a credit pool each year. Applications received by July 1 are processed first. If there are credits left in the pool, applications received July 2 are processed. This continues until the credit pool is exhausted. This is a popular program – the credit pool can be used up on the first day. On the other hand, an application which is sent too soon may not be processed at all. The earliest application date depends on the type of application you’re making:
- May 15 –If you’re entering the second year of a two-year commitment, you can apply any time from May 15 to June 30.
- May 15 –If you have previously fulfilled a two-year commitment and wish to reapply for another two-year commitment, you can apply any time from May 15 to June 30.
- July 1 – All other applicants should apply on July 1.
How do businesses apply?
Businesses must apply online using the DCED Single Application. Paper applications are no longer accepted for the credit. Before you apply, get the DCED’s guide for online application here:
How to Apply Using DCED’s Electronic Single Application
Review the guide and assemble the required information. Apply online at:
Single Application for Assistance
What happens next?
If you’re tentatively approved, the DCED will send a letter telling you to make your promised contribution within a certain time period. You need to:
- Make the contribution,
- Obtain a written acknowledgement from the donee organization, and
- Return the requested documentation to the DCED within the specified timeframe.
The DCED will then send a letter informing you that the credit has been approved.
Applying the credit
Give the DCED’s approval letter to your tax preparer.
The credit is applied to Corporate Net Income and Capital Stock taxes by entering it on Form RCT-101, page 1, Step D, Column C – restricted credits.
A partnership or S corporation which has credits in excess of its business tax liability can pass it through to its owners by filing Form REV-1123 with the RCT-101. You must indicate whether the owners will use the credit in the year of contribution, or in the year immediately following the year of contribution.
Please leave a comment if you have any questions or contact us today!
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