Accredited Investor
Special Purpose Entities (SPE) are used in Pennsylvania to aggregate charitable donations from individuals interested in the Education Improvement Tax Credit (EITC) program. The individuals get a PA K-1 form annually with a 90% tax credit (90% X donation amount) and a federal K-1 with a charitable contribution for the amount of their individual contribution annually. Donors can redirect their PA taxes to scholarships for the school of their choice.
SPEs were authorized for EITC by a 194 in October 2014 and explained by Notice 2015-01
Individuals are authorized to utilize SPEs but can only use EITC tax credits provided they:
1. Work for business (W-2).
2. Own a business (K-1 or LLC)
The PA EITC tax credit must be used in the tax year acquiring so if it exceeds the donors PA joint tax liability the extra EITC tax credit is lost. The credit is use it or lose it. The eligibility of owning a business or working for a business can be one paycheck or a small but active LLC and once eligible the EITC tax credit can be used against all joint Pa tax liability for the current tax year.
Central Pennsylvania Scholarship Fund (CPSF) requires a donation of at least $3,500 as mentioned on the SPE joinder. The LLC manager felt this was the appropriate minimum. Other SPEs in Pennsylvania have higher minimums. Central Pennsylvania Scholarship Fund SPEs do not require donors to be accredited investors as a recent letter ruling exempts CPSF SPEs from the accredited investor requirements. Donors can select any K-12 school in Pennsylvania that charge tuition to receive EITC scholarships from CPSF. 100% of the donation amount will be disbursed as scholarships once the schools submit proper scholarship paperwork.
When the SPE law was passed in 2014 LLC partnerships and limited partnerships were used to accept "investments " which were then "donated" to eligible EITC scholarships. SPE investments were limited to Accredited Investors as required by PA Dept of Banking Form D requirements. SPE managers took on significant liability and SPEs that did not follow these rules could be exposed to significant difficulties from regulators and investors. SPEs under PA Dept of Banking law had to register with the Pennsylvania Department of Banking as they were issuing securities. Central Pennsylvania SPE LLC was registered with the SEC in 2016 under and register with the Pennsylvania Department of Banking.
Central Pa AMT Partners was exempt from security rules and accredited investor rules as a partnership with less than 10 partners. In 2017 all CPSF SPEs were exempted from registration by letter ruling from the Pennsylvania Department of Banking and the exemption eliminated the requirement in 2017 to limit investments to accredited investors. In 2017 CPSF SPE participants became donors under the explanation of the letter ruling and adherence to its requirements. In 2018 all operating agreements will be updated to eliminate accredited investor language and in 2017 the SPE manager will waive completion of accredited investor certification. Donations for 2017 have to be received by December 31, 2017. PA EITC tax credits were requested May 15, 2017 and July 1, 2017. Some award letters have been received and tax credits are still available for new donors until December 31, 2017.
SPEs that require accredited investors obtain certification that SPE investors either have $1 million in net worth or income for two years of $300,000 for a couple or $200,000 for an individual.
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