As seen in The Legal Intelligencer
'Tis the season, not only for holiday celebrations, but also year-end tax planning for individuals. At this time of year, taxpayers look at their investment portfolios to decide whether to take losses to offset gains recognized earlier in the year, make decisions on paying or prepaying certain deductible expenses before the end of the year, or to look at their charitable commitments and decide whether to fund them by Dec. 31. What many should also consider is that the budget battle in Harrisburg has added an unknown to many Pennsylvania residents who have been planning on taking part in the two Pennsylvania scholarship tax credit programs. This unknown has affected many schools and other private education institutions as well.
Pennsylvania has made available to eligible taxpayers the Educational Improvement Tax Credit (EITC) and the Opportunity Scholarship Tax Credit (OSTC) programs. Under the EITC program, individuals and corporations receive tax credits for donating to organizations that provide low- and middle-income families private school and prekindergarten scholarships, as well as organizations that support innovative public school programs; the OSTC program provides tax credits to individuals and corporations that donate to organizations that provide students, residing within the boundaries of a low-achieving school, scholarships to attend a participating public or nonpublic school. If the taxpayer made a two-year commitment, he then received a tax credit equal to 90 percent of his donation; and if it was a one-year commitment, then the credit was equal to 75 percent of his donation. The effect of this credit was to allow taxpayers to reduce their Pennsylvania tax almost dollar for dollar by their donation. Over the past few years it has been commonplace for donors to apply for credits that could be as much as $750,000.
Originally the programs were limited to reducing Pennsylvania corporate tax but they have been expanded so that owners of entities like LLCs and S corporations that are required to file Pennsylvania corporate tax returns could elect to have the credit offset their personal income tax. In 2015, the rules were liberalized even further to allow taxpayers who do not have to file a corporate tax return to take advantage of the credit as well. This has become very popular and in fact has created situations where the amount applied for exceeds the available dollars. The funding for the OSTC for fiscal year 2014-15 was $50 million and for the EITC was $100 million. The applications are processed on a first-come basis so not everyone who applies is approved.
The way the system works is that applicants who apply by July 1 declare which program they want to participate in and the dollar amount of their commitment. Typically by September, applicants are notified whether they have been accepted and if they are, then they must make a qualified contribution to the organization within 60 days and show proof to the state it was made, after which the state notifies the taxpayers of their credit.
This year, because of the budget battle in Harrisburg, there is a lot of uncertainty. The EITC and OSTC programs are not officially in place and therefore no letter of eligibility has gone out. Most people who contributed because of the tax credit have not made their donation. This has an effect on the institutions that rely on this funding and leaves taxpayers not knowing if they are going to have the benefit of sheltering their 2015 state tax liability. There are many Pennsylvania private schools that have had drastic cuts in their funding as a result of this impasse.
Even if the budget is passed soon, the question will be whether there is enough time for approval letters to be distributed, and for taxpayers to make qualified donations before year-end. Those individuals who have made applications and are counting on the programs will need to keep an eye on the budget battle between now and the end of the year, and be prepared to cover their state taxes another way. Taxpayers who were relying on the credit may not have paid estimates during the year in anticipation of the credit, and may now be subject to penalties. As a result, Pennsylvania taxpayers who are assuming they will have the credit will need to monitor the budget situation and may have to make an estimated payment in the next several weeks. Just one more thing to keep an eye on during this hectic holiday season.
Reprinted with permission from the November 30, 2015 issue of The Legal Intelligencer. © 2015 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.