The Pennsylvania Education Improvement Tax Credit (EITC) potentially allows business firms to significantly reduce the firm's state tax liability (e.g., Corporate Net Income tax, Capital Stock Franchise Tax, Bank and Trust Company Shares Tax, Alternative Bank and Trust Company Shares Tax, Title Insurance Companies Shares Tax, Alternative Title Insurance Companies Shares Tax, Insurance Premiums Tax, and Mutual Thrift Institution Tax) by donating to a nonprofit educational improvement or nonprofit scholarship organization.

The EITC program is to be administered by the Department of Community and Economic Development (DCED) on a first-come-first-serve basis. The total tax credits approved shall not exceed $30 million in a fiscal year (with no less than $20 million for contributions to scholarship organizations, and no less than $10 million for contributions to educational improvement organizations).

A tax credit shall be granted to a business firm providing proof of a contribution to a scholarship organization or educational improvement organization equal to 75% of the total amount contributed during the taxable year. The tax credit must be applied in the taxable year the contribution is made. Any unused portion of the tax credit may not be carried forward or back, nor is it refundable or transferable. Additionally, a tax credit shall be granted equal to 90% of the total amount contributed, if the business firm provides a written commitment to contribute the same amount for two consecutive tax years. A tax credit shall not exceed the tax liability of a business firm for any given taxable year, nor shall the credit exceed $100,000 annually.

A scholarship organization is a nonprofit entity (exempt from federal taxation) that contributes at least 80% of its annual receipts to a scholarship program providing tuition to eligible students to attend a school located in the Commonwealth of Pennsylvania. An educational improvement organization is a nonprofit entity (exempt from federal taxation) that contributes at least 80% of its annual receipts as grants to public schools for innovative educational programs (a program that is not part of a regular public school academic program, but enhances the curriculum or academic program of the public school).

The following example compares and contrasts a hypothetical corporation with $220,000 in net taxable income before contribution and CNI tax. The example shows that a corporation making a one year $10,000 donation to an educational improvement or scholarship organization costs the corporation only $915. A 75% EITC imparts an overall 91% effective tax credit to the business entity.

However, if the company agrees to make a two-year commitment to an educational improvement or scholarship organization, the $10,000 donation costs the company $0. The two-year commitment creates a 90% EITC that imparts an overall effective tax credit to the business of 100%.

Three scenarios are contrasted - 1) a corporation making no contribution, 2) a one-year only contribution to an educational improvement or scholarship organization, and 3) a corporation making at least a two-year commitment for a contribution to the same educational improvement or scholarship organization. The amount of the contribution is $10,000.

Initially, a Pennsylvania company saves $999. Because the IRS allows deductions for donations to charities (limited to about 10% of income), the company that contributes immediately sees its taxable federal income fall by $10,000. PA CNI tax is then computed on that income. A company that makes ANY charitable donation has at this point saved $999 in PA taxes where the corporation is conducting all business in Pennsylvania.

Furthermore, a Pennsylvania company saves an additional $7,500 because of the 75% Educational Improvement Tax Credit. A corporation's federal income is adjusted after PA CNI tax, because the corporation is allowed a deduction at the federal level for income taxes paid. Making a contribution to ANY charity lowers the federal income after PA CNI tax to $196,521 as contrasted to $198,022 for a company with no contribution.

Compare the Pennsylvania business making a two-year commitment that instead allows for an additional $9,000 in savings, because of the 90% Educational Improvement Tax Credit. Now making a contribution to ANY charity lowers the federal income after PA CNI tax to $198,021.

The federal taxes are then calculated for the companies. The company that makes no contribution pays federal tax of $60,479; the company that makes a one-year only $10,000 contribution pays $59,893 in taxes; and the company that makes a $10,000 contribution with a two-year commitment pays $60,478 in taxes.

At this point, the company contributing to the educational improvement or scholarship organization for only one-year has saved $8,499 in PA taxes ($7,500 in credit and $999 in lowered PA CNI liability) and $586 in federal taxes. The company has contributed $10,000 and has received $9,085 in tax relief. Effectively it has cost the company only $915 to make a $10,000 donation to an educational improvement or scholarship organization.

The result is that a 75% EITC on a $10,000 contribution, provides a greater than 75% tax credit to the company providing the donation. In the example, the 75% EITC provides about an overall 91% total effective tax credit to the company.

However, the company contributing to an educational improvement or scholarship organization with a two-year commitment has saved $9,999 in PA taxes ($9,000 in credit and $999 in lowered PA CNI liability) and $1 in federal taxes. The company has contributed $10,000 and has received $9,999 in tax relief. Effectively it has cost the company with a two-year commitment only $1 to make a $10,000 donation to an educational improvement or scholarship organization.

The result is that a 90% EITC on a $10,000 contribution, provides a 100% credit to the company providing the donation with a two-year commitment. In the example, the 90% EITC provides a 100% total effective tax credit to the company - a 9% increase in the overall effective tax relief relative to a company contributing to the educational improvement or scholarship organization WITHOUT a two-year commitment.

                                                       No
                                                   Contribution        75% EITC        90% EITC



Net income Before Contribution & PA CNI Tax        $220,000            $220,000        $220,000
EITC Contribution                                  None                $10,000         $10,000
Federal Taxable Income Before PA CNI Tax           $220,000            $210,000        $210,000
PA CNI Tax @ 9.99%                                 $21,978             $20,979         $20,979
Federal Income after PA CNI Tax                    $198,022            $189,021        $189,021






PA CNI Tax Savings
(After Deduction for Contribution)                 None                $999            $999
EITC (PA CNI Tax Savings)                          None                $7,500          $9,000
PA Tax Savings - Total                             None                $8,499          $9,999






Federal Taxable Income                             $198,022            $196,521        $198,021
Federal Tax                                        $60,479             $59,893         $60,478
Federal Tax Savings                                None                $586            $1






PA Tax Savings - Total                             None                $8,499          $9,999
Federal Tax Savings                                None                $586            $1
Total Tax Savings                                  None                $9,085          $10,000






Annual Cash Required to Contribute $10,000         -NA-                $915            $0






Percentage Effective Total Tax Savings
When Contributing $10,000 with an EITC             -NA-                90.85%          100%