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Pennsylvania EITC/OSTC Changes and New Opportunities

Pennsylvania Education Improvement Tax Credit (EITC)/Opportunity Scholarship Tax Credit (OSTC)

Act 194 of 2014  was signed into law on October 31, 2014 for PA fiscal year 2014/2015

Impact:

  • Special purpose entities, or a subsidiary of an existing firm, may be established to apply for and utilize the EITC/OSTC credits to offset PA personal income tax liability. See additional information below.
  • Separate PA-40 filings no longer required for married couples claiming the credit- beginning with tax year 2015, married couples may file jointly and claim the credit
  • Easier transfer between the EITC/OSTC programs based on available funding – “Check the box” option available to default to the other program if your selected program’s funding is depleted (can apply for EITC and check the  box to be eligible for OSTC program in the event EITC funding not available).
  • Name change to “Education Tax Credits”

Special Purpose Entity (SPE)

  • Who can form?
    • Our interested clients!     Shareholders, partners, members or employees of one or more other business firms (that may have other owners that do not wish to participate in the program, or to participate in a different amount than their ownership percentage)
      • Shareholders, partners or members of a business firm can form several difference SPEs with different ownership percentages.
    • Who is not eligible?
      • Sole proprietorships
      • Entities not subject to tax
    • The sole purpose of the SPE can be to receive capital from its members, apply for the credit and disburse funds to EITC/OSTC organizations.
    • SPE to be formed like other entities-  operating agreement, register with PA, obtain EIN
    • Example:
      • Mary is a member of a large LLC that operates in 10 states.  The LLC does not participate in the Education Tax Credit program because the credit would be allocated to all of the members, most of whom could not use the credit.
      • Mary and 2 coworkers form SPE LLC.
      • Mary estimates her PA tax liability to be $10,000.  She makes a contribution of $11,111 to SPE LLC.  Her coworkers make contributions based on their desired credit amount as well.
      • SPE LLC applies for Education Tax Credits
      • Upon approval by the DCED, SPE LLC sends the qualified contributions made by Mary and her coworkers to the Education Tax Credit qualified organization.  SPE LLC timely provides the DCED with all necessary paperwork to substantiate the contribution.
      • On Mary’s tax return, she reports her Federal charitable contribution and claims the $10,000 credit on her PA tax return.

The expanded definition of “business firm” to include Special Purpose Entities creates new opportunity for our clients interested in participating in the program.

For additional information:

Link to Informational Notice Miscellaneous Tax 2015-01, issued March 17, 2015

Click here to download

August 27, 2015