United States: Year-End Tax Planning And Expanded Scholarship Tax Credits

Last Updated: November 18 2015
Article by Bruce P. Ely and J. Sims Rhyne, III

The Alabama Accountability Act of 2013 (the "Act") provides state income tax credits to certain donors who make contributions to a state-approved scholarship granting organization (SGO) operating within Alabama. The Act was amended earlier this year to, among other changes, expand the tax credit provisions related to contributions made to SGOs. With the changes, the tax credits available under the Act present an opportunity to help Alabama's neediest school children at little or no cost to the donor—a tax planning idea that individuals, C corporations, and now certain pass-through entities, should keep in mind.

Under the Act, as amended, C corporations, individuals, and certain pass-through entities can donate to an SGO and receive an Alabama income tax credit equal to 100 percent of their contribution. Different limitations on the use of the credits apply to each type of donor. C corporations may use the credits to offset up to 50 percent of their Alabama corporate income tax liability in a given year. Individual taxpayers may use the credits to offset up to 50 percent of their individual income tax liability, subject to a cap of $50,000 (under prior law, the individual cap was $7,500). S corporations, partnerships and limited liability companies can now make donations to SGOs and receive state income tax credits, which may be passed through to the entity's owners with the applicable limitation applying at the owner level. In any case, unused credits may be carried over for up to three years.

While a donor who claims an income tax credit for a donation to an SGO may not also take a state charitable contribution deduction for the donation, donations may also be eligible for a federal charitable contribution deduction because each SGO must be a section 501(c)(3) organization. Individual taxpayers subject to the federal Alternative Minimum Tax (AMT) stand to receive the greatest tax benefit from donating to an SGO because state income taxes paid are an add-back for AMT purposes, whereas charitable contributions are not. Presently, the credit is limited to the Alabama income tax. For 2015, $30,000,000 of tax credits are available, which is a $5,000,000 increase over the credit pool from previous years. A helpful set of FAQs about the donor tax credit aspects of the Act that we drafted for our client, the Alabama Opportunity Scholarship Fund (AOSF), are available on the AOSF website.

AOSF is the state's largest SGO, having raised over $29,352,000 in donations and having granted approximately 5,800 scholarships to students in 45 Alabama counties since its scholarship program began in Fall 2013. And the demand for educational choice from parents and the associated scholarships far exceeds the funds that are available. Since AOSF's program began, AOSF reports having received over 15,000 applications for scholarships. For the 2015-2016 academic year, AOSF awarded 2,208 scholarships to children from low-income families, all of whom qualified for the federal free and reduced price lunch program.

According to AOSF guidelines, donated funds are used to empower low-income parents to choose a different school for their children. Preference is given to children if their assigned public school is considered a "failing school" by the Alabama Department of Education. By state law, 95 percent of all donated funds must be used for scholarships—only 5 percent or less may be retained by an SGO for administrative costs. All qualified SGOs must undergo a full audit by a CPA firm each year and are also subject to audit by the Alabama Department of Revenue (ADOR), which must pre-approve each SGO. In addition, SGOs are now  required to file annual and quarterly reports with the ADOR, and each filed report is available on the ADOR's website. However, the names of donors are kept strictly confidential. Only the ADOR and the donee-SGO know their identities. 

There are several potential benefits to participating in this program—both tangible and intangible. If you have an interest or any questions, please contact Ms. Lesley Searcy, the Executive Director of AOSF, at alabamascholarshipfund.org. Since AOSF is a client of our firm, we recommend that you make any decisions regarding an investment in this program only after conducting your own due diligence and seeking the advice of your tax advisers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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