Notice 2015-01 explains requirements to participate in Special Purpose Entities (SPE's) allowing donors to receive PA EITC tax credits as authorized by Act 194 of 2014. SPE's allow a new group of individual donors to participate and receive EITC tax credits along with an alternative way for business owners to receive individual EITC tax credits. These EITC tax credits can offset an individual's joint or single PA tax liability allowing the individual to redirect their personal PA taxes to the school of their choice as tuition scholarships.
Many private schools and scholarship organizations will be tempted to set up SPE's to access donors funds. Some schools and scholarship organizations have already set up and are operating SPE partnerships. SPE's are wonderful for donors and their accountants and tax preparers but there are a number of compliance and administrative burdens that schools and scholarship organizations should be aware before adding their own SPE. The other disincentive to operating an SPE alone is the long delay between setup of the SPE and when PA EITC tax credits are awarded to a new SPE.
SPE's require a team with certain skill sets to operate properly. An SPE is a business entity in which an individual makes an "investment " that is then donated to a charity. Because the SPE is a business entity it requires an operating agreement and a managing member assuming its operates as an LLC. If ten or more individuals invest in the SPE security laws need to be followed which may require federal and state registration and careful adherence to the compliance requirements of these registrations. If fees are involved licensed investment advisors may need to participate in the SPE investment process. Not every individual can participate in the SPE either because of Notice 2015-01 limitations or limitations imposed by security laws requiring investors to be accredited investors. The year end tax return for the SPE needs filed early so the investors can get their K-1s to take the PA EITC tax credit on their personal tax return. The application for EITC tax credits on July 1 and May 15 and the process of certifying the tax credit and physically transferring the tax credit to each individual needs to be handled properly. The SPE team should include a lawyer, a tax preparer, a managing member, an EITC expert and possibly a registered investment advisor. This team can get expensive or disfunctional if not coordinated and handled properly. Our charity Central Pennsylvania Scholarship Fund has an entire volunteer team that can be utilized to complete the SPE team for your SPE.
SPE's require application for Pennsylvania EITC tax credit so investors have a benefit for their investment and subsequent donation. New EITC tax credits are difficult to obtain because they can only be applied for as a new organization on July 1. Existing EITC donors get preference by getting to apply early between May 15 and June 30 so new SPEs are only applying for tax credits not used up by existing donors. Due to the popularity of the Pennsylvania EITC program in recent years July 1 applications were not always successful as tax credits had already been fully utilized by existing donors or applications on 7-1 exceeded the supply of EITC tax credits available. A new SPE could have to wait thru several 7-1 application cycles to be awarded tax credits. The tax credit awarded has to be claimed and donations made in a 60 day window in the fall. Any excess tax credit award would be returned to DCED on day 61. A successful tax credit award and donor campaign still would be limited to future donors as it may be 2 years until additional credits for new donors can be obtained. Our charity Central Pennsylvania Scholarship Fund has an entire network of SPEs that can collaborate with your school or scholarship organization to obtain 2017 PA EITC or OSTC tax credits for your school and to fully utilize your existing or a new SPE.
Our volunteer group is actively looking for existing SPEs or new SPE's to help. Our only request is to be your SPE's managing member or co managing member and to be able to utilize any excess PA EITC or OSTC tax credits in your existing SPE or new SPE for our other schools and donors. Your SPE will receive volunteer assistance in the areas where you may lack so your SPE will be as compliant as possible. Your donors will receive access to our SPE network of available PA EITC tax credits. All SPEs in our network allow the donor to pick the school to benefit from their donation and 100% of the donors funds go to their school as scholarship funds.
SPE's are a great additional EITC fund raising tool for your school. If you are currently operating an SPE don't go it alone! Our volunteers would be happy to discuss your SPE questions and situation further. Please feel free to contact Randy Tarpey CPA at 814-684-4640 or RandyTarpey@gmail.com.