PASS-THRU TAX CREDIT ISSUE GAINS FAVORABLE RESOLUTION
FROM DEPARTMENT OF REVENUE
As you know, in July REACH was successful in getting pass-thru entities added to the EITC program so that for the first time, nearly every business in Pennsylvania is now able to participate in this wonderful program. In late September REACH became aware of an issue regarding the interpretation and implementation of the new provisions by the Department of Revenue that made it very difficult and unattractive for pass-thru entities to donate under the EITC program.
In response to these implementation issues, REACH retained a tax attorney and in early November met with the appropriate representatives from the Department of Revenue to discuss our concerns surrounding their interpretation and implementation of the new pass-thru entities of the EITC program. Department of Revenue listened to our concerns, but was not willing to concede that our proposed interpretation was more valid than their's at that point. They asked for REACH to submit our concerns and supporting points to them for review by their general counsel's office.
REACH is very pleased to report that late yesterday evening, we received word from Department of Revenue that our concerns had been heeded and that a more benign interpretation of the new pass-thru provisions was being adopted by the Department. While they are still in the process of developing their internal written guidance procedures and election forms, REACH wanted to share the following preliminary explanation of how the new pass-thru provisions will be handled going forward.
The Department of Revenue has decided that there will be three options for S-corps and LLC’s to participate in the EITC:
1.) The S-corp can elect to apply the entire tax credit to the shareholders/members’ Personal Income Tax in the year of contribution. DOR is working on a form for this option. In the meantime, please submit a letter explaining that this is the option that the S-corp chooses. The letter should:
a) be on company letterhead,
b) indicate that the S-corp’s choice is to transfer the entire credit to the entity’s shareholders/members,
c) specify the amount of the credit to be transferred to each shareholder/member – based on the income interest of each shareholder/member, and
d) be signed by each shareholder/member.
2.) The S-corp can also elect to utilize part of the credit through the entity (ex: Capital Stock and Franchise Tax) and to transfer the remaining credit to the members/shareholders to their Personal Income Tax for the year of contribution. DOR is working on a form for this option, as well. In the meantime, please submit a letter explaining that this is the option that a particular S-corp chooses. The letter should:
a) be on company letterhead,
b) indicate the option,
c) specify the amount of the credit that will be applied at the entity level,
d) specify the amount of the credit to be transferred to each shareholder/member, and
e) be signed by each shareholder/member.
3.) In absence of indicating either option, credit will be applied to the taxes of the entity (ex: Capital Stock and Franchise Tax) for the tax year in which the contribution is made. Any credit not utilized at the entity level may then be transferred to the S Corp shareholders or LLC members, to be applied to their PIT for the year following the year of contribution. The Department will be publishing instructions concerning the form of notice to be submitted in order to transfer credit not used at the entity level.
Address all election letters to:
Commonwealth of Pennsylvania
Department of Revenue
Bureau of Corporation Taxes
Dept. 280701
Harrisburg, PA 17128-0701
Attn: Thomas Bordner
For those of you that have been concerned about lost contributions due to these implementation issues, REACH thanks you for your patience as we worked through this process. With several weeks still remaining in this current tax year and SO tax credits still available, please encourage any businesses that would like to take advantage of the new EITC pass-thru provisions to apply as soon as possible. It is not too late for them to claim the credits for 2008 – as long as they are approved by DCED and make their contributions before December 31st.
