Pennsylvania education tax credits can still be claimed by business firms if contributions are listed as a business expense on the taxpayer’s federal return. The guidance concerns the treatment of contributions made to claim the Educational Improvement Tax Credit and Opportunity Scholarship Tax Credit. The state’s guidance applies to tax years after December 31, 2017 and before January 1, 2026. The guidance may change pending final approval of federal regulations.
What did the TCJA Change?
Following the enactment of the Tax Cuts and Jobs Act (TCJA) the federal government proposed regulations regarding charitable deductions. The new regulations allow business taxpayers to deduct payments that they receive state tax credits for as business expenses. Before enactment of the TCJA, a taxpayer could receive a state or local tax credit for amounts contributed to a scholarship organization or educational improvement organization and claim a federal charitable deduction for the same amounts. The new regulations seek to end this practice.
Can Contributions be Claimed as Federal Business Expenses?
The Pennsylvania educational tax credit law does not allow credits for activities that are a part of a business firm’s normal course of business. The state clarifies that the law does not prohibit a taxpayer from claiming a contribution as a business expense on the taxpayer’s federal return. Taxpayers can claim the state credit for payments made to scholarship organizations or educational improvement organizations even if the taxpayer has claimed the payments as a deduction for federal income.
How do Pass-Through Entities Treat Contributions?
Pass-through entities are required to make an adjustment to Pennsylvania taxable income. The entities must add-back educational tax credit amounts that it deducted as a business expense from federal income. Pennsylvania considers pass-through entity donations to a scholarship organization or educational improvement organization to be charitable. A pass-through entity cannot deduct any amounts for which it received a tax credit under the educational tax credit law.
Restricted Tax Credit Bulletin 2018-02, Pennsylvania Department of Revenue, December 12, 2018, ¶204-678