Tax incentives can be quite rewarding – especially if you can receive more than a dollar back from the government for each dollar you spend. The Commonwealth of Pennsylvania has a tax credit for contributions to educational institutions that has exactly that effect, and legislation enacted last month has now expanded the scope of the credit.

The Educational Improvement Tax Credit

Pennsylvania enacted an education tax credit for Pennsylvania corporate taxpayers in May 2001. The Educational Improvement Tax Credit is a tax credit granted to a taxpayer that donates to a qualifying scholarship organization or educational improvement organization, in an amount equal to 75 percent of the amount of such a donation. The amount of the tax credit is also increased to 90 percent of the donated amount if the taxpayer provides a written commitment to donate the same amount for two consecutive years. In either case, the combined effect of the Pennsylvania tax credit and the Federal income tax benefit resulting from the charitable contribution deduction for the same donation can quite easily exceed 100 percent of the donation amount.

The amounts of credits are subject to individual annual limitations, as well as a statewide cap on the total amount of credits that may be awarded. To receive tax credits, taxpayers must be approved to make contributions to scholarship organizations, educational improvement organizations or pre-K scholarship organizations that are on the list published by the Pennsylvania Department of Community and Economic Development. The current list of approved organizations and the necessary application form for applying for credit approval can be found on the Department’s web site at www.newPA.com/EITC.

Recent Changes Expand the Educational Improvement Tax Credit

Gov. Edward G. Rendell signed into law a new act extending the Educational Improvement Tax Credit on July 9, 2008, making the tax credit available not just to corporate taxpayers, but also to pass-through entities such as partnerships, limited liability companies and S corporations. The act also provides that a pass-through entity that does not use all approved tax credits may elect, in writing, to transfer all or a portion of the credit to the entity’s owners in proportion to their ownership percentages.

In addition, the new act increases the annual credit limits per taxpayer from $200,000 to $300,000 for donations to scholarship and education improvement organizations, and from $100,000 to $150,000 for donations to pre-kindergarten scholarship organizations. Moreover, for contributions to pre-kindergarten scholarship organizations a taxpayer may now 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 total credit of $150,000 per year.