As we transition to warmer weather, there is another seasonal process that should garner your attention. On May 15, 2014, qualified businesses will be allowed to file early applications for the Educational Improvement Tax Credit (EITC). All businesses, including those eligible to file early, will be able to submit an application for the EITC on July 1, 2014.
Because of the popularity of the EITC program, businesses that are eligible to file early should take all necessary steps to do so. Funding caps make it imperative to file your application as close to May 15 as possible, as funds are generally exhausted within the first few days of filing. If you wait until the July 1 open filing date, your application will be considered with all of the others filed on that date.
If you are not eligible to file an application on May 15,take all of the necessary steps to file your application on July 1. Initial filers will generally increase their chances of receiving an EITC by submitting their application on this date. Applications filed after July 1 are not likely to receive EITC. Instead, consider applying for the Opportunity Scholarship Tax Credit (OSTC) or Pre-K programs. The tax benefits under these programs are the same as the EITC and generally involve less competition for available funds.
In the world of state and local tax incentives, no other programs are as generous as the Pennsylvania EITC and related programs. Each has been funded through provisions contained in the Pennsylvania tax budget, which allocates money to qualified donors who are willing to contribute to qualified educational institutions that provide services to children in need.
Participation in the EITC and related programs can allow businesses the unique opportunity of selecting the beneficiary of “tax” dollars through donor-directed contributions to qualified educational institutions and programs, and should be considered part of your state tax planning in 2014.
Because of the way the tax credit is structured with these programs, a donor can make a two year commitment and receive 90 percent of the contribution back in the form of a tax credit for state tax purposes. The donation also qualifies as a charitable contribution for federal income tax purposes, which provides a federal tax benefit. Because of the interplay between the federal and state tax benefits, it is possible for a donor to realize a federal and state tax benefit equal to almost the entire amount of the contribution. And in certain circumstances, it is possible for a donor to realize a benefit slightly greater than the contribution amount.
The credit has also been designed to be as flexible as possible in how and who utilizes it. For example, pass through entities can elect to transfer some or all of their credits to shareholders, partners, or members. Or, it can elect to hold on to some of the credit to apply against its own tax liability, such as the capital stock tax, and transfer the remaining portion to shareholders to satisfy their personal income tax liabilities. In order to effectively transfer the credit, the election must be made in writing and made no later than the due date of the entity’s return.
May 15, 2014 Filers
If you are in the second year of a two year commitment or have just completed a two year commitment and are interested in signing up for another two years, you can submit your application on May 15, 2014. Previously, pass through businesses were required to wait to submit their applications. However, this penalty was removed last year and now all applicants are eligible to submit their applications on the same date.
July 1, 2014 Filers
If you have not previously contributed to qualified educational institutions, you may find you are unable to participate in the EITC program. However, consider submitting a single application for participation in the OSTC and Pre-K programs, as funds for both are still available and the benefits are identical to those under the EITC program. If you are submitting your application for the first time, you must wait until July 1, 2014.
Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.