Year-End Tax Planning with Tax Credit-Funded Scholarships

Bradley Arant Boult Cummings LLP
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Bradley Arant Boult Cummings LLP

The Alabama Accountability Act provides state income tax credits to certain donors who make contributions to a state-approved scholarship granting organization (SGO). Alabama’s neediest school children can be helped at little or no cost to the donor—a tax planning idea that individuals, C corporations, and certain pass-through entities such as S corporations and LLCs (and their owners), should consider before year-end.

Our client, the Alabama Opportunity Scholarship Fund (AOSF), is one of the state-approved SGOs and the largest in terms of funds raised and scholarships issued. C corporations, individuals, and most pass-through entities can donate to the AOSF 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 half of their Alabama income tax liability in a given year. Individual taxpayers, including owners of most pass-through entities, may use the credits to offset up to half 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 LLCs can make donations and pass through the credit to their owners. In any case, unused credits may be carried over for up to three years.

While a donor who claims an Alabama income tax credit for a donation to an SGO can’t also take a state charitable contribution deduction, the donation may be eligible for a federal charitable contribution deduction because each SGO must be a section 501(c)(3) organization. As many CPAs will advise you, individual taxpayers subject to the federal Alternative Minimum Tax (AMT) stand to receive the greatest tax benefit from donating to an SGO. As of November 16, only approximately $20 million of the $30 million tax credit allocation is still available so donors need to act quickly. But beware of any SGO that says you can earmark your donation for a particular school or student(s). That may void the tax credit. A helpful set of FAQs about the donor tax credit aspects of the Act that we prepared for AOSF is available on the AOSF website.

AOSF is the state’s largest SGO, having granted over 2,100 scholarships this year to students in 38 Alabama counties attending 150 different public and private schools. According to Executive Director Lesley Searcy, 83 percent of the scholarships were awarded to minority students and all recipients must be members of low-income families. The names of donors are kept strictly confidential. Only the Alabama Department of Revenue and the donee SGO know their identities. The demand for educational choice from parents and the associated scholarships far exceeds the funds that have been donated so far, so please consider a donation and consult your tax adviser soon, before year-end.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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