Pennsylvania’s Educational Improvement Tax Credit (“EITC”) program allows businesses to make contributions to certain 501(c)(3) organizations that offer enrichment programming to youths.
Friends of Education LLC works closely with select 501(c)(3) organizations throughout Pennsylvania. These organizations collect donor dollars and provide meaningful recognition to participants. Funds raised in this program provide enrichment programming for students. In turn, participants receive recognition including featuring the contributors in widely disseminated newsletters, identifying contributors at events, listing the businesses on materials distributed, or other significant public recognition.
In the past two years, our recipient 501(c)(3) organizations included the Carnegie Museum, the Franklin Institute, the Kimmel Center, the Pittsburgh Cultural Trust, the Pittsburgh Symphony, the Please Touch Museum, WHYY and WQED.
Businesses who participate in this program join a special purpose entity consisting only of other business members. A special purpose entity is a limited liability company that collects the funds and distributes them to the charities.
Businesses work with us to select the approved charity which will receive the funds on their behalf. Because a business qualifies for both a federal deduction and a state income tax credit, donations will be cash flow positive in most circumstances. Below is an example of how the program works for a taxpayer who has a marginal federal rate of 37%.
| Costs | Benefits | |
| Payment to Educational Opportunities, a special purpose entity, which distributes funds to selected 501(c)(3)s | ($100,000) | |
| Deduction of $40,000 under I.R.C. § 162 (funds given to accredited 501(c)(3) organizations) | $37,000 | |
| Non-refundable PA state tax credit | $90,000 | |
| Total | ($100,000) | $127,000 |
| Net tax benefit | $27,000 | |
Key Facts:
- Participants will receive a benefit if they are operating in Pennsylvania with owners who are Pennsylvania residents. Opportunities for businesses with out-of-state owners are limited.
- Partnerships, subchapter S corporations, and C corporations are eligible to participate. Individuals may not participate. C corporations do not receive the same benefits.
- Individuals may not participate unless they operate a Schedule C business.
- Participants work with Friends of Education to find approved organizations to accept donor funds.
- Business deductions are only available if there is a “reasonable expectation of a financial return commensurate with the amount of the payment” to the 501(c)(3) organization. Friends of Education will assist the donors in structuring a recognition package from the donee that is compliant under federal and state law.
- Not all 501(c)(3) organizations are eligible to receive EIO funding, and not every EIO provides sufficient recognition to justify a deduction in the tax code.
- Availability is limited.
IRS guidance on the availability of a deduction under I.R.C. § 162 in this scenario is available on our Resources webpage.
Prospective participants are strongly encouraged to review these materials with their tax advisor before participating.