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PA EITC program stakeholders UPDATE! Breaking federal tax news

Breaking federal tax news (good!)

For PA EITC program stakeholders – applicable payments by businesses should be fully deductible!

This just in – the IRS clarifies that it will allow businesses to fully deduct business related contributions to charities or government entities for which they receive state and local tax credits.

On September 5, 2018, U.S. Treasury Secretary Steven T. Mnuchin announced this clarification with the following statement:

“The IRS clarification makes clear that the longstanding rule allowing businesses to deduct payments to charities as business expenses remains unchanged under the Tax Cuts and Jobs Act. The recent proposed rule concerning the cap on state and local tax deductions has no impact on federal tax benefits for business-related donations to school choice programs.”

Good news for business payments to PA EITC entities
Since this statement specifically refers to “business-related donations to school choice programs” it appears that this clarification applies directly to business payments to charities as part of the PA Educational Improvement Tax Credit program. Therefore, unless the IRS later retracts or alters this clarification, for now it seems safe to assume that businesses that make contributions as part of the PA EITC program can fully deduct those payments as ordinary and necessary business expenses of the business.

Note that this IRS clarification affects federal tax treatment only. It is possible that the PA Department of Revenue (DOR) may not follow this federal policy and therefore the PA EITC payments may not be fully deductible for PA income tax purposes. Stay tuned to see if the PA DOR issues its own statement.

Comments on IRS proposed regulations are still encouraged
The IRS clarification was made after our most recent tax blog on this subject which suggested that PA EITC stakeholders submit written comments regarding the IRS proposed regulations to request that the applicability date be postponed until December 31, 2018 – click here to access that blog article https://www.herbein.com/blog/pa-educational-improvement-tax-credit-users-you-have-a-voice.

We still recommend submitting written comments requesting the postponement of the applicability date. Since the IRS has been all over the place with respect to these rules it seems possible that a specific policy or position could change again. In addition, even though the IRS clarification specifically refers to business contributions to school choice programs, some PA EITC stakeholders participate through recently available “special purpose entities” and it is not certain that contributions from those entities will qualify as fully deductible under this IRS clarification.

If you have questions regarding this article or the ongoing saga of the federal tax treatment of payments to charities in exchange for state and local tax credits please contact Barry Groebel at bdgroebel@herbein.com or 484-525-4648.