As we reported earlier this summer, legislation was passed which expanded the benefits of the tax credits under The Alabama Accountability Act of 2013 (“AAA”). As a refresher, the AAA provides state income tax credits to certain donors who make contributions to a state-approved scholarship granting organization (SGO) operating within Alabama. The tax credits available under the AAA present an opportunity to help Alabama’s neediest school children at basically 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 AAA, 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). Flow through entities (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.
For federal income tax purposes, a donor may treat the contribution to the SGO as a charitable contribution. Individual taxpayers subject to the federal Alternative Minimum Tax (AMT) actually receive a greater benefit because state income taxes paid are an add-back for AMT purposes, whereas charitable contributions are not. For 2015, the pool of credits was increased to $30,000,000 and as of the writing of this Alert $13,469,000 is still remaining.
A complete list of approved SGOs is available here.
If you have any questions about how this might affect you and your business, please contact your Warren Averett Advisor.