Does your nonprofit support schools, scholarships, or serve an educational purpose? Let businesses & individuals know their donations qualify for PA tax credits

What do Pennsylvania nonprofit historical societies, public libraries, symphony associations, theater companies, and similar organizations have in common?

Answer: As “educational improvement organizations,’’ they can receive donations through the state’s Educational Improvement Tax Credit (EITC) program, run through the Department of Community & Economic Development.

For anyone running a qualifying nonprofit, this means you have the opportunity to seek donations from businesses and individuals who can get a good feeling from supporting their community while earning Pennsylvania tax credits.

Many private primary and secondary school scholarships tout the EITC program when they look for donors. But other nonprofits with qualifying educational missions can also use the program to help raise money for their activities.

Keep reading to find out how you can get your nonprofit EITC-qualified and how your donors can benefit.

EITC program – business donors

EITC business donors to most scholarship programs or educational improvement organizations receive tax credits equaling 75 percent of up to a $750,000 contribution in a single year or up to 90 percent if the business commits to the same amount in two consecutive years.

• More credits for pre-Kindergarten: Businesses contributing to a Pre-Kindergarten Scholarship Organization receive 100 percent credit for the first $10,000 and up to 90 percent of the remaining amount up to a maximum credit of $200,000 annually.

Under the program, a company must provide the DCED proof of their contribution within 90 days of getting EITC approval. Tax credits are only usable in the same year of the assistance and are not refundable or transferable.

Businesses can apply the credits 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
• Retaliatory Fees under section 212 of the Insurance Company Law of 1921

What is available for individual donors?

In 2014, the state changed the tax regulations to allow individuals to receive credits toward their joint or single state tax liability by contributing to a special-purpose entity. The SPE, in turn, donates the money to an EITC-approved scholarship or educational improvement organization.

As your nonprofit approaches would-be donors, it is also worth pointing out to businesses that their employees can directly contribute to an SPE to receive state income tax credits.

Individuals or couples filing jointly must owe at least $3,500 in state income tax to qualify. As with businesses, individuals get a 75 percent tax credit for participating for one year and a 90 percent tax credit if they agree to donate for two years. Additionally, an SPE donor (or at least one of the jointly filing couple) must either work for or own a Pennsylvania business.

The tricky part for individuals/couples is the need to estimate an amount that will not exceed their current tax year liability (as with businesses, the credits are only usable in the same year of the donation).

SPEs and your nonprofit

Your nonprofit can either use an existing SPE or create one. Many SPEs exist in Pennsylvania to support schools, scholarships, and other EITC-qualifying entities.

Setting up an SPE entails various compliance responsibilities. Many are limited liability corporations (LLCs). You will want to talk with your financial advisor to see what makes sense for your organization.

How do nonprofits qualify for the EITC program?

More details about the EITC program are available by visiting https://dced.pa.gov/programs/educational-improvement-tax-credit-program-eitc/.

To get an idea of whether your nonprofit may qualify for the EITC program, you can look at other approved organizations:

• Educational Improvement Organizations (which includes museums, historical societies, etc.): https://dced.pa.gov/educational-improvement-organizations/
• Scholarship Organizations: https://dced.pa.gov/scholarship-organizations/
• Pre-Kindergarten Scholarship Organizations: https://dced.pa.gov/pre-kindergarten-scholarship-organizations/

Final thoughts

As the fundraising landscape becomes increasingly difficult, pitching business and individual donations through Pennsylvania’s EITC program can give your nonprofit another way to raise money for your mission.

Some additional points to keep in mind:

• While the EITC-qualifying aspect of your nonprofit does not have to be its primary mission, 80 percent of the money received through the program must go toward the EITC-related state purpose.
• Tax credits are on a first-come, first-served basis. Pennsylvania’s 2022-23 budget gave the program $340 million in tax credits, a $125 million increase.
• Businesses apply through the state Department of Community and Economic Development (DCED) and must submit their paperwork online. For application information, visit: https://dced.pa.gov/programs/educational-improvement-tax-credit-program-eitc/.

The EITC program allows businesses and individuals to support local educational institutions and strengthen our communities while benefiting from state tax credits. If you have any questions about EITC or any tax matters, the expert team at Boyer & Ritter is ready to help.