The Educational Improvement Tax Credit (“EITC”) is a longstanding, but underutilized program under which businesses can utilize a tax credit to reduce tax obligations to the Commonwealth by making contributions to eligible educational support organizations. By participating, a business, in essence, can redirect a portion of its tax dollars from the Commonwealth to local educational organizations in the community.
The EITC program is run by the Department of Community and Economic Development (DCED). To participate, both businesses that want to claim the tax credit and educational organizations that want to receive donations must register with DCED.
Businesses can apply if they are subject to certain taxes, including Personal Income Tax, Capital Stock/Foreign Franchise Tax, Corporate Net Income Tax, Bank Shares Tax, Title Insurance & Trust Company Shares Tax, Insurance Premiums Tax (excluding unauthorized, domestic/ foreign marine), Mutual Thrift Tax, Malt Beverage Tax or Surplus Lines Tax. Both regular businesses and special pass- through entities are eligible.
Educational organizations can participate if they are classified as Scholarship Organizations, Educational Improvement Organizations, or Pre-Kindergarten Scholarship Organizations. Typically, most local school districts, charter schools and private schools qualify as approved organizations.
The general rule is that a business may claim a tax credit equal to 75 percent of its contribution to an eligible educational organization, up to $750,000 per taxable year. However, if the business commits to making the same contribution for two years when applying, then the tax credit available increases from 75 percent of the contribution to 90 percent of the contribution.
For example, if a business owes $10,000 in corporate net income tax to the Commonwealth and is approved for a 90-percent tax credit by committing to donate for two years, it could donate $10,000 to an eligible local educational organization. In return, the business would be entitled to a $9,000 EITC credit against its tax liability, meaning it only needs to pay $1,000 in corporate net income tax to the Commonwealth for that year while having donated $10,000 to the organization.
In the noted example, the business participating in the EITC ends up paying $1,000 in taxes and donating $10,000 to a local organization. While the business is out-of-pocket $1,000 more overall than if it just paid the Commonwealth its $10,000 tax bill, many businesses view this as not a “cost” but an “investment” as a good corporate citizen. By participating in the EITC in the above example, the business was able to contribute meaningfully to a local education organization, keeping its money local and building goodwill in the community.
Before participating a business should consult its tax advisers to structure participation to the business’ best advantage. Often, however, participating in the EITC makes sense as a business decision from the perspective of corporate citizenship.
For more information, contact MacDonald Illig Attorneys at 814/870-7600 or info@mijb.com.
Brian Cressman is a partner at MacDonald Illig Attorneys and a member of the firm’s Business Transactions, Trusts & Estates, Real Estate, and Education Law Practice Groups.
