This is a busy time of year for accountants—especially as we get closer to “Tax Day” on April 15. Since most provisions of the 2017 Tax Cut and Jobs Act (TCJA) went into effect for the 2018 tax year, this year will be particularly challenging. The Treasury Department was still issuing guidance regarding the tax reform in late December. Education reform advocates breathed a sigh of relief at one such publication, which clarified the treatment of tax credit scholarship donations.
The TCJA included limitations on state and local tax (SALT) deductions. Some states decided to create state-run charities to allow residents to “donate” their tax liability and get around the SALT limits. In response, the Treasury Department proposed a rule to disallow federal deductions for contributions that receive a state or local tax credit. Education advocates immediately recognized this would harm even long-standing tax credit scholarship programs like Pennsylvania’s Educational Improvement Tax Credit (EITC).
After receiving public comment on the proposal, the Treasury Department issued guidance clarifying that business contributions to programs like the EITC will remain deductible. School choice advocates, like the American Federation for Children, cheered the news:
We are very pleased to see the Treasury Department put forward guidance that allows businesses to continue to make charitable contributions that are fully deductible, including contributions to scholarship granting organizations that provide disadvantaged children with the opportunity to attend the school of their parents’ choice.
Every year Pennsylvania’s tax credit scholarships—both EITC and the Opportunity Scholarship Tax Credit—help thousands of children attend the school that fits them best. Scholarship organizations already face numerous challenges from arbitrary limits on tax credits and politicization of the programs. The new federal guidance prevents another roadblock from standing in their way.
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