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). 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 is using 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 an 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. (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).
- Prior to the end of the calendar year, investor must send a check to the SPE in the amount they have determined. Investor will receive a tax credit for 90% of this amount. Joinder and check should be mailed to the address listed on the joinder or to Attn: Luis Torres, Lancaster Mennonite School, 2176 Lincoln Hwy E., Lancaster, PA 17602.
- Please also email firstname.lastname@example.org so we can keep track of our participants.
- Early in the following calendar year, the SPE will distribute the contributed amount to the designated school through an EITC scholarship organization. These funds will be used to provide need based financial aid to Lancaster Mennonite students.
- 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).
- Most SPEs require a two year commitment to receive the full 90% tax credit (75% tax credit is the minimum for any one year commitment). Please verify with the particular SPE whether a one year commitment provides the full 90% tax credit.
- Note: Multiple SPE options are available for supporting Lancaster Mennonite students. If you have been put on a waitlist or told that an SPE does not have any more funds available for this year, please communicate this information to Luis Torres who will connect you to another SPE option (717-740-2426 or email@example.com).
WHO CAN PARTICIPATE
Requirements vary by the individual SPE. Lancaster Mennonite has relationships with multiple SPEs. The minimum requirements for participation are:
- A PA tax liability of at least $500
- For an individual taxpayer or married filing jointly tax payers who work for nonprofits, a simple additional step of purchasing a Pennsylvania stock is required to qualify. In this case, please contact Luis Torres at 717-740-2426 or firstname.lastname@example.org.
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.
- 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. Each SPE that we partner with gives priority to investors from the previous year.
Joe Taxpayer estimated his PA tax liability for 2022 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 $1,000 reduction in his federal taxable income for 2022.
|EITC-SPECIAL PURPOSE UNIT||YEAR 1||YEAR 2||TOTAL|
|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|