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PA Educational Improvement Tax Credit Users - You Have a Voice!

PA Educational Improvement Tax Credit Users – You Have a Voice!

Proposed IRS rules could create problems for participants in the PA EITC program
As indicated in our URGENT blog posts on Monday August 27th, based on IRS proposed regulations issued on August 23, 2018, payments to charities in exchange for state income tax credits would result in reduced federal income tax deductions if paid to the charity after Monday, August 27, 2018.

Specifically, the amount of the federal charitable contribution deduction would be reduced by the amount of the applicable state credit. For example, for a $10,000 contribution after August 27th to an Educational Improvement Organization under the PA EITC program, the federal income tax deduction amount would be reduced to $1,000 (the $10,000 contribution paid less the $9,000 PA tax credit – assuming a 2-year commitment and 90% credit). This is significantly different treatment than for payments prior to August 28th which would result in a full $10,000 deduction in this example.

Dilemma for participants in the PA EITC program
This proposed regulation effective date is particularly problematic for applicants for the PA EITC program. This is because as of Monday, August 27, 2018, the Pennsylvania Department of Community and Economic Development (PA DCED) had not yet notified the applicants if their applications had been approved and the amount, if any, of the credit that had been awarded. Therefore, even if they wanted to make the applicable payment by Monday, August 27th, they could not because the amount was not known. Based on information obtained from the PA DCED, the PA EITC notification letters will not be sent until September or early October.

Potential solution – commenting on the proposed regulations
At Herbein + Company, Inc., we addressed this timing dilemma with an attorney at the US Treasury Department who assisted in preparing the proposed regulations. We explained the PA EITC timing dilemma and the inability of PA EITC applicants to make their payments by August 27th and inquired if the actual effective date of the proposed regulations could be changed. The attorney understood the issue and advised that it may be possible to effectuate change by submitting written comments requesting a disregarding of the proposed regulations. She cautioned that she could not say for certain whether the written comments would result in a change but that it very well could work. She then provided instructions regarding how to post written comments regarding these proposed regulations.

You Have a Voice!
Help your cause by submitting written comments.  Based on the information provided by the US Treasury Department attorney, we recommend that any stakeholder in the PA EITC program – either PA EITC program applicant or an Educational Organization administrator – should consider posting a comment regarding these proposed regulations to request a postponement of the effective date until December 31, 2018.

So, if you are a PA EITC stakeholder, now is your chance to have your voice heard and hopefully help initiate an important tax rule change. We hope you will follow the instructions below to post your own comment and support the effort to sustain full tax deductions for 2018 payments to applicable PA EITC organizations.

Post Your Comments
The process is easy:

  • Search for the following regulation: REG-112176-18
  • Then click the Comment Now! box to post comments
  • The more comments the better. Apparently, the IRS has a tracking system that will tally comments with the same topics

Here is a DRAFT suggestion of comments to post:
I am requesting that the effective date of the proposed regulations be postponed until December 31, 2018. I am making this request as an applicant for the Pennsylvania Educational Improvement Tax Credit (“PA EITC”) program who was unable to make applicable payments as of August 27, 2018 since my PA EITC credit application for 2018 had not yet been reviewed and approved as of August 27th.

As a participant in the PA EITC program, I applied for the PA tax credits on May 15th for a renewal or on July 2nd for an initial application. Like most applicants, the decision to apply for the PA EITC program was part of my annual budgetary and tax planning process with the anticipation that, if approved, I will be awarded tax credits to satisfy PA tax obligations and obtain a full federal income tax deduction for the amount of the contribution to the applicable educational improvement organization. For 2018, these planning considerations and application deadlines occurred either on or before May 15th, prior to the issuance of IRS Notice 2018-54, Guidance on Certain Payments Made in Exchange for State and Local Tax Credits, or on or before July 2nd, prior to issuance of these proposed regulations.

I realize that if these proposed regulations become final, in the future, considering current tax situations at that time, I, along with other PA EITC applicants, may decide not to participate in the program if there is no net economic tax difference, as illustrated in Example 1 in the proposed regulations, between contributing to the PA EITC program or paying my state and local income taxes directly. However, in 2018  I have already made an economic and moral commitment to participate in the PA EITC program based upon both my donative intent and the federal income tax economic benefits in effect at the time I made that commitment. Furthermore, based on my prior participation in the PA EITC program or my current intent to participate in the program that was conveyed to the applicable PA educational improvement organization, there is an expectation by that organization that it will receive a 2018 contribution from me. Therefore, it would be a financial hardship to that organization and others like it if, as a result of the mid-year change in tax policy established with these proposed regulations, I and other PA EITC program applicants choose to not follow through on our commitments due to the unexpected and unplanned disruption of the net economic tax benefits.

Finally, as an applicant for the PA EITC program who is fully committed to the 2018 program I cannot make my contribution payment to the applicable educational improvement organization until my application has been approved and the amount of the credit has been awarded. Unfortunately, based on information obtained from the PA DCED, the organization that administers the EITC program, the credit approval and award letters will not be issued until late September or October 2018. Therefore, due to these circumstances that are beyond my control, it was not possible for me to know by August 27, 2018 if I was approved for an EITC payment and the amount of the approved payment. Due to these facts and circumstances, I respectfully request that the effective date of these proposed regulations be postponed until December 31, 2018.

CONCLUSION
Until now, participation the PA EITC program has been extremely lucrative for PA taxpayers with donative intent. By making contributions to their designated educational improvement organization, a PA business could benefit the charity with a payment that was nearly totally funded by tax benefits.

As a result of the IRS rebuttal to efforts by several states to provide for charitable donations in exchange for state and local tax credits we believe that in the future the benefits of participation in the PA EITC program will be somewhat diminished due to the proposed rules to reduce the amount of the federal charitable contribution deduction by the amount of the applicable credit.

However, for 2018, we see an opportunity to possibly preserve the full benefit for this year if the IRS postpones the effective date of the regulations until the end of the year. Hopefully, you will help seize this opportunity by posting your comment using the process described above.

If you have questions regarding this article or the process we described please contact Barry D. Groebel, CPA at bdgroebel@herbein.com or 484-525-4648.