Educational Improvement Tax Credit (EITC)

Overview

Tax credits to eligible businesses contributing to a Scholarship Organization, an Educational Improvement Organization, and/or a Pre-Kindergarten Scholarship Organization.

Business Application Timeline

  • May 15, 2018 – Business applicants who have fulfilled their 2-year commitment and wish to reapply in FY 18/19 to renew their 2-year commitment.
  • May 15, 2018 – Businesses who are in the middle of their 2-year commitment.
  • July 2, 2018 – All other businesses including initial applicants and those applicants wishing to submit an additional application on top of their previously submitted 2-year commitment.

EITC Guidelines
Business Application Guide

Pass-through entities, such as S-Corporations, Partnerships, LLCs, etc., can now apply the same day as C-Corporations. Applications must be submitted electronically using DCED’s Single Application for Assistance. Paper business applications will no longer be accepted. See the business application guide above.

Uses

Tax credits may be applied against the tax liability of a business for the tax year in which the contribution was made.

Funding

Tax credits equal to 75 percent of its contribution up to a maximum of $750,000 per taxable year. Can be increased to 90 percent of the contribution, if business agrees to provide same amount for two consecutive tax years. For contributions to Pre-Kindergarten Scholarship Organizations, a business may receive a tax credit equal to 100 percent of the first $10,000 contributed and up to 90 percent of the remaining amount contributed up to a maximum credit of $200,000 annually.

Eligibility

Businesses authorized to do business in Pennsylvania who are subject to one or more of the following taxes:

  • Personal Income Tax
  • Capital Stock/Foreign Franchise Tax
  • Corporate Net Income Tax
  • Bank Shares Tax
  • Title Insurance & Trust Company Shares Tax
  • Insurance Premium Tax (excluding surplus lines, unauthorized, domestic/foreign marine)
  • Mutual Thrift Tax
  • Malt Beverage Tax or Retaliatory Fees under section 212 of the Insurance Company Law of 1921

Terms

An approved company must provide proof to DCED within 90 days of the notification letter that the contribution was made within 60 days of the notification letter. Tax credits not used in the tax year the contribution was made may not be carried forward or carried back and are not refundable or transferable.

How to Apply

Pennsylvania businesses can begin applying for EITC credits through DCED’s electronic single application system. DCED will no longer require applicants to mail the signed signature page.

The business application guide explains the process of applying. Tax credit applications will be processed on a first-come, first-served basis by day submitted. All applications received on a specific day will be processed on a random basis before moving on to the next day’s applications. Applications will be approved until the amount of available tax credits is exhausted.

Once you have received your approval letter please complete the Designation Form and mail the form with your check to The Mennonite Foundation Inc. Please be aware you will also need to include a copy of your approval letter from the Department of Community and Economic Development (DCED) with this form.

Special Purpose Entities (SPE)

The Educational Improvement Tax Credit (EITC) is a state program that allows eligible businesses to receive up to a 90% tax credit on contributions to an ETIC scholarship organization. In 2014, Pennsylvania’s EITC legislation was amended to allow certain individuals (rather than only businesses) to participate in the EITC tax credit program through what is called a Special Purpose Entity (SPE). Mr. Randy Tarpey, an accountant from Tyrone, PA, is the manager of an SPE called the Children’s Jubilee Scholarship #1 LCC. This SPE has been granted a significant amount of tax credits from the state that he is looking to distribute to private schools in central PA. Lancaster Mennonite School has an opportunity to fully fund our needs-based scholarship by maximizing this EITC capacity.

This is truly an amazing opportunity and we are very excited to see how God may use this program to help meet our financial needs this year and beyond. Please consult your own tax professional to ensure that the EITC/SPE program fits your personal situation.

How it Works

  • An “accredited investor” signs a joinder agreement to participate in the SPE. In the agreement, investor will confirm status as a qualified investor, designate the amount of initial capital contribution, and designate the school to be benefited. Please list Lancaster Mennonite School as the beneficiary. You may also earmark your contribution for a specific Lancaster Mennonite campus. (To maximize the tax credit benefit, investor should make contribution so that 90% of its value is an amount as close as possible to their Pennsylvania tax burden without going over).
  • To receive the 90% tax credit, investor must commit to participating in the SPE for 2 years. If investor only intends to participate for one year, they will receive a 75% tax credit.
  • Prior to the end of the calendar year, investor must send check to the SPE in the amount they have determined. Investor will receive a tax credit for 90% of this amount (if committed to two year participation). Joinder and check should be mailed to:
    The Common Place Scholarship #1 LCC
    227 Jefferson Avenue
    Tyrone, PA 16686
    Please also email stoltzfushe@lancastermennonite.org so we can keep track of our participants.
  • In late January or early February, the SPE will distribute the contributed amount to the designated school through an EITC scholarship organization.
  • The investor will receive a federal K-1 listing the contribution. This can be an itemized deduction on Schedule A of their FEDERAL tax return as a contribution to a 501(c)(3). The amount for the federal tax benefit will vary according to one’s tax bracket.
  • The investor will also receive a state K-1 and a transfer form to transfer the tax credit from their K-1 to their personal PA tax return. The investor can claim 90% of the invested amount as a credit / payment to be used against their joint personal PA tax liability.
    • So, for example, for a $10k investment in the SPE, the investor would receive $9k off their PA tax bill (and withholdings or payments already made will be refunded – note, however, that processing of tax refund will likely be delayed until at least June).
  • In early fall of the following year, the investor will receive a notice from Mr. Tarpey prompting a second contribution for the subsequent year, repeating the above process.

Who Can Participate

In order to qualify as an “accredited investor,” an individual must meet the following requirements and agree to participate for two years.

  • A PA tax liability of at least $3500
  • Must not be employed by the government or by a non-profit charity.

Note: Business owners (S-Corporations, Partnerships, and certain LLC’s) can also participate in the SPE. Risks, Rewards, and other Details.

  • The main risk is that an investor overestimates his or her tax liability. In such a case, the excess contribution would not receive a tax benefit on PA return.
  • If the tax credit turns out to not be available for some reason, the SPE will refund your investment. There are no fees involved in this SPE as Mr. Tarpey is volunteering his services, so the entire amount would be returned.
  • The main benefit – aside from the joy of knowing you are supporting students to receive a Christ-Centered education – is that you could receive a very significant tax reduction on both your federal and state returns. See the scenario below.
  • So long as the program continues, investors should be able to continue receiving this tax credit for as long as they want to continue in the SPE. In their second year, we believe participants will be able to sign up again for another two years.

Joe Taxpayer estimated his PA tax liability for 2017 to be $10,000. He signs the joinder agreement to join the SPE and sends a check for $10k to the SPE before December 31. He will receive a $9k tax credit for his PA taxes and a $1000 reduction in his federal taxable income for 2018.

EITC-SPECIAL PURPOSE UNIT YEAR 1 YEAR 2 YEAR 3
Investment in SPE (which will be distributed to school of his choice.) $10,000 $10,000 $20,000
PA Tax Credit ($9,000) ($9,000)
Reduction in federal tax for charitable contribution. Scenario assumes taxpayer itemizes the deduction on Schedule A and is in the 24% tax bracket. ($240) ($240)
Net cash out-of-pocket for individual contributor. $760 $760 $1,520

If you would like to take advantage of this opportunity or if you have any questions, please contact Heidi Stoltzfus, director of Advancement, stoltzfushe@lancastermennonite.org, 717-740-2425.