2019 K-1s are going out to all our SPE members in February 2020 by mail. Many donors have asked about the federal deduction which has previously been a 100% deduction with a 90% in Pennsylvania state tax credit. 2019 K-1s will have a 10% IRS deduction as required by the final 2019 IRS regulations and a 90% Pa tax credit and a statement saying determination of the federal deduction is determined by the taxpayer at the individual tax level based on their personal tax situation.
This article attempts in non accountant language explain options for correctly filing and deducting the Pennsylvania tax credit education donation differently than in past years but with the same overall outcome. For tax accountants the IRS regulations and announcements are provided so your accountant can make their own determination about your tax situation. There are 5 different types of donor tax filing situations discussed below because of all the new IRS guidance.
Individual Donor who Itemize and have over $10,000 in State and Local Taxes
The new IRS regulations are final with a new tax law limiting state and local taxes to $10,000 annually. It is unwise for a donor with more than $10,000 in state and local tax deductions to take a full 100% donation deduction on donations after 8-28-18 due to the regulations and how the regulations highlight circumventing the $10,000 state and local tax deduction limit as being a problem. Taxpayers in this situation should follow their K-1 reporting to account for the IRS guidance provided. The 2020 1099-G will reflect refunds of Pennsylvania taxes as automatically taxable if you only take a 10% donation deduction you need to declare any Pennsylvania refund as non taxable in the 2020 tax year because of your decision to reduce your 2019 donation deduction by adding an explanation schedule to your 2020 return declaring your Pennsylvania refund as nontaxable. Final result is a 90% Pa tax credit and a 10% IRS donation deduction with no state refund being taxable for your EITC donation.
Individual Donor who Don’t Itemize and Use Standard Deduction
Many donors will not be impacted by their federal K-1 as the new standard deduction is much higher. You still must enter your Pa K-1 to claim the 2019 Pa 90% tax credit and any 2020 1099-G Pa refund notice can be ignored as nontaxable since you did not deduct the donation or the state taxes on your 2019 return. Final result 90% Pa tax credit for your EITC donation.
Individual Donor who Itemize and have under $10,000 in State and Local Taxes
Taxpayers in this situation should follow their K-1 reporting to account for the IRS guidance provided. A 10% IRS donation deduction is the proper way under the final regulations to account for this donation. In additional up to a 90% state and local tax payment can be claimed up to the $10,000 limit. The 2020 1099-G will reflect refunds of Pennsylvania taxes as automatically taxable if you only take a partial state tax deduction you need to declare any Pennsylvania refund as non taxable in the 2020 tax year because you did not deduct the taxes in excess of $10,000 by adding an explanation schedule to your 2020 return declaring your Pennsylvania refund as fully or partially nontaxable. Final result is a 90% Pa tax credit and a 10% IRS donation deduction and an additional IRS deduction of state taxes for your EITC donation.
Individual Donor who Can’t or Don't use their 90% Pa tax credit
Taxpayers in this situation should follow their K-1 reporting to account for the IRS guidance provided. A 10% IRS donation deduction is the proper way under the final regulations to account for this donation. In additional up to a 90% IRS donation deductionfor portion of credit that is not used as a Pa tax credit can be claimed as an additional IRS donation deduction. Final result is some portion of a 90% Pa tax credit and remainder of donation as an IRS donation deduction.
Business Donors
Our SPE’s accept business donation checks for individual donations. Taxpayers in this situation should not follow their K-1 reporting to account for the IRS guidance provided. A 0% IRS donation deduction is the proper way under the final regulations to account for this donation. The 2020 1099-G will reflect refunds of Pennsylvania taxes as automatically taxable if your state and local taxes exceed $10,000. You can declare any Pennsylvania refund as non taxable in the 2020 tax year because you did not deduct the 2019 taxes in excess of $10,000 by adding an explanation schedule to your 2020 return declaring your Pennsylvania refund as fully nontaxable. Your business check can be deducted for IRS purposes as an ordinary business expense as long as you can justify a business purpose for your expenditure. New IRS clarification on education tax credits encourage donation by business check to Pennsylvania SPEs with proper tax planning. New 2019 temporary regulations and consistent with other IRS communication donations to SPE by business check can be considered a business deduction. Here is an section of the regulations from page 29 and 30 of the new regulations.
§1.162-15 Contributions, dues, etc.
(a) Payments and transfers to entities described in section 170(c)—(1) In
general. A payment or transfer to or for the use of an entity described in section 170(c) that bears a direct relationship to the taxpayer’s trade or business and that is made with a reasonable expectation of financial return commensurate with the amount of the payment or transfer may constitute an allowable deduction as a trade or business expense rather than a charitable contribution deduction under section 170.
No Pa deduction is allowed on your business tax return for this expenditure. Final result is a 90% Pa tax credit and a 100% IRS donation deduction and a non taxable IRS income on state tax refund received for your EITC donation.
TurboTax
For taxpayers who don’t use an accountant and use TurboTax a federal K-1 is required to be created. Once a federal K-1 is created and SPE name and EIN number added go to Pa data entry and create a Pa K-1 in TurboTax and add your
90% PA tax credit. Review your PA return to make sure on PA 40 line 23 other credits your 90% credit is reflected so your requesting a refund.
For accountants and other computer tax packages this same concept of checking line 23 PA 40 to verify a tax credit was entered on the return is important. If you don’t claim the credit you won’t receive the benefit. Additionally please make certain on K-1 input the taxpayer (T) or Spouse (S) is the same as the K-1. We transfer the PA tax credit via form 1123 to the social security number on the K-1. If you claim the tax credit under the other persons social security number on a joint return Pa will send you a notice saying they can’t find the tax credit you claimed. Pa allows you to use the credit against all joint income on the Pa return but they have to be able to find the credit you claim.
For our few rare SPE business donors if you issue a K-1 from your business you also must do a second 1123 form to transfer the Pa credit from your EIN to the owners Social Security number or Pennsylvania will send you a notice saying no tax credit exists at the individual level.
The 90% Pennsylvania tax credit remains unchanged and is a great reason to redirect your state taxes to scholarships locally to support local families.
If your tax accountant or you wish to do further independent research into the current temporary regulations or other recent IRS pronouncements here are links to the most current guidance as of the date of this post:
2010 IRS chief counsel memorandum
IRS Notice 2018-54
2018 temporary regulations
2018 Business Donation Clarifications
2019 Revenue Procedure 2019-12
2019 Final regulations
2019 new temporary regulations
(See page 29 and 30 for business check SPE guidance)
Each SPE member is strongly advised to consult their tax advisor for the advice applicable to their specific circumstances. This article does not constitute tax advice.
This article attempts in non accountant language explain options for correctly filing and deducting the Pennsylvania tax credit education donation differently than in past years but with the same overall outcome. For tax accountants the IRS regulations and announcements are provided so your accountant can make their own determination about your tax situation. There are 5 different types of donor tax filing situations discussed below because of all the new IRS guidance.
Individual Donor who Itemize and have over $10,000 in State and Local Taxes
The new IRS regulations are final with a new tax law limiting state and local taxes to $10,000 annually. It is unwise for a donor with more than $10,000 in state and local tax deductions to take a full 100% donation deduction on donations after 8-28-18 due to the regulations and how the regulations highlight circumventing the $10,000 state and local tax deduction limit as being a problem. Taxpayers in this situation should follow their K-1 reporting to account for the IRS guidance provided. The 2020 1099-G will reflect refunds of Pennsylvania taxes as automatically taxable if you only take a 10% donation deduction you need to declare any Pennsylvania refund as non taxable in the 2020 tax year because of your decision to reduce your 2019 donation deduction by adding an explanation schedule to your 2020 return declaring your Pennsylvania refund as nontaxable. Final result is a 90% Pa tax credit and a 10% IRS donation deduction with no state refund being taxable for your EITC donation.
Individual Donor who Don’t Itemize and Use Standard Deduction
Many donors will not be impacted by their federal K-1 as the new standard deduction is much higher. You still must enter your Pa K-1 to claim the 2019 Pa 90% tax credit and any 2020 1099-G Pa refund notice can be ignored as nontaxable since you did not deduct the donation or the state taxes on your 2019 return. Final result 90% Pa tax credit for your EITC donation.
Individual Donor who Itemize and have under $10,000 in State and Local Taxes
Taxpayers in this situation should follow their K-1 reporting to account for the IRS guidance provided. A 10% IRS donation deduction is the proper way under the final regulations to account for this donation. In additional up to a 90% state and local tax payment can be claimed up to the $10,000 limit. The 2020 1099-G will reflect refunds of Pennsylvania taxes as automatically taxable if you only take a partial state tax deduction you need to declare any Pennsylvania refund as non taxable in the 2020 tax year because you did not deduct the taxes in excess of $10,000 by adding an explanation schedule to your 2020 return declaring your Pennsylvania refund as fully or partially nontaxable. Final result is a 90% Pa tax credit and a 10% IRS donation deduction and an additional IRS deduction of state taxes for your EITC donation.
Individual Donor who Can’t or Don't use their 90% Pa tax credit
Taxpayers in this situation should follow their K-1 reporting to account for the IRS guidance provided. A 10% IRS donation deduction is the proper way under the final regulations to account for this donation. In additional up to a 90% IRS donation deductionfor portion of credit that is not used as a Pa tax credit can be claimed as an additional IRS donation deduction. Final result is some portion of a 90% Pa tax credit and remainder of donation as an IRS donation deduction.
Business Donors
Our SPE’s accept business donation checks for individual donations. Taxpayers in this situation should not follow their K-1 reporting to account for the IRS guidance provided. A 0% IRS donation deduction is the proper way under the final regulations to account for this donation. The 2020 1099-G will reflect refunds of Pennsylvania taxes as automatically taxable if your state and local taxes exceed $10,000. You can declare any Pennsylvania refund as non taxable in the 2020 tax year because you did not deduct the 2019 taxes in excess of $10,000 by adding an explanation schedule to your 2020 return declaring your Pennsylvania refund as fully nontaxable. Your business check can be deducted for IRS purposes as an ordinary business expense as long as you can justify a business purpose for your expenditure. New IRS clarification on education tax credits encourage donation by business check to Pennsylvania SPEs with proper tax planning. New 2019 temporary regulations and consistent with other IRS communication donations to SPE by business check can be considered a business deduction. Here is an section of the regulations from page 29 and 30 of the new regulations.
§1.162-15 Contributions, dues, etc.
(a) Payments and transfers to entities described in section 170(c)—(1) In
general. A payment or transfer to or for the use of an entity described in section 170(c) that bears a direct relationship to the taxpayer’s trade or business and that is made with a reasonable expectation of financial return commensurate with the amount of the payment or transfer may constitute an allowable deduction as a trade or business expense rather than a charitable contribution deduction under section 170.
No Pa deduction is allowed on your business tax return for this expenditure. Final result is a 90% Pa tax credit and a 100% IRS donation deduction and a non taxable IRS income on state tax refund received for your EITC donation.
TurboTax
For taxpayers who don’t use an accountant and use TurboTax a federal K-1 is required to be created. Once a federal K-1 is created and SPE name and EIN number added go to Pa data entry and create a Pa K-1 in TurboTax and add your
90% PA tax credit. Review your PA return to make sure on PA 40 line 23 other credits your 90% credit is reflected so your requesting a refund.
For accountants and other computer tax packages this same concept of checking line 23 PA 40 to verify a tax credit was entered on the return is important. If you don’t claim the credit you won’t receive the benefit. Additionally please make certain on K-1 input the taxpayer (T) or Spouse (S) is the same as the K-1. We transfer the PA tax credit via form 1123 to the social security number on the K-1. If you claim the tax credit under the other persons social security number on a joint return Pa will send you a notice saying they can’t find the tax credit you claimed. Pa allows you to use the credit against all joint income on the Pa return but they have to be able to find the credit you claim.
For our few rare SPE business donors if you issue a K-1 from your business you also must do a second 1123 form to transfer the Pa credit from your EIN to the owners Social Security number or Pennsylvania will send you a notice saying no tax credit exists at the individual level.
The 90% Pennsylvania tax credit remains unchanged and is a great reason to redirect your state taxes to scholarships locally to support local families.
If your tax accountant or you wish to do further independent research into the current temporary regulations or other recent IRS pronouncements here are links to the most current guidance as of the date of this post:
2010 IRS chief counsel memorandum
IRS Notice 2018-54
2018 temporary regulations
2018 Business Donation Clarifications
2019 Revenue Procedure 2019-12
2019 Final regulations
2019 new temporary regulations
(See page 29 and 30 for business check SPE guidance)
Each SPE member is strongly advised to consult their tax advisor for the advice applicable to their specific circumstances. This article does not constitute tax advice.
