“What are income and corporate tax credits?”
Income and corporate tax credits are complicated. So in effort to better understand the controversy surrounding recent legislative bills, here is a synopsis of what they are and how they work.
- Income tax credits are funds contributed to private and/or public schools.
- Contribution maximums are dependent upon how taxes are filed. For example:
o Private school tax credit:
- Maximum for individual: $500
- Maximum for joint/married or family: $1000
o Public school tax credit:
- Maximum for individual: $200
- Maximum for joint/married or family: $400
- Regardless of whether tax credits are given to private or public schools, income tax credit reduces a contributor’s tax liability to zero. Any balance may be carried over by the state for up to five (5) years.
o If an individual or couple owes money at the end of the year, the state deducts their tax liability from their credit.
o If an individual or couple does not owe money, the balance may be carried over by the state for up to five (5) years.
- Note: These funds are not refunds! They are “credits.” The funds have never made their way IN to the state, but they are coming back as a credit OUT of the state’s general fund.
- At private schools, tax credits are generally directed towards a specific child’s tuition, but can be put towards a general scholarship fund. These funds are collected and processed by School Tuition Organizations or STOs (see below).
- At public schools, tax credits stay at the site school where the credit is submitted and are typically used to fund programs such as art, P.E., and music courses that would otherwise be cut due to budget shortfalls.
Corporate Tax Credits:
Click for a copy of the Corporate Tax Statute
- Corporate tax credits are funds corporations contribute for the purpose of providing scholarships to middle-low and lower income children.
- Corporations notify a school tuition organization (STO) of the amount of their tax credit contribution.
- The STO submits an application to the Arizona Department of Revenue identifying:
o the contributing corporation
o the amount the corporation will contribute as a tax credit
- Corporate tax credits are available for private schools only.
- Unlike income tax credits, corporate tax credits cannot be directed to a specific student and/or private school.
- Like with income tax credits, corporate tax credits can reduce a corporation’s tax liabilities to zero.
o Note: These are “credits.” The money never made its way IN to the state, but the funds are coming OUT of the state’s general fund.
- Corporations can elect to leave their credit and/or balance on the state’s books for up to five (5) years.
- A combined maximum corporate tax credit ceiling (meaning a maximum corporate tax credit dollar amount allowed for the entire state and those corporations that participate)
is $14.4 million dollars for FY 2009, and increases 20% in FY 2010, to $17.28 million dollars.
- Unlike credits given to private schools, corporate tax credits cannot be directed towards a specific school and/or child.
- The corporate tax credit program in the state of Arizona was established in 2006 as a means to answer the demand for vouchers, which have been ruled unconstitutional.
- HB 2288 allows for corporate tax credits will continue to increase 20% per year into perpetuity with no option and/or provision for public school participation.
- By state law, all corporate tax credits must be processed through a School Tuition Organization (STO).
“What are School Tuition Organizations (STOs)?”
- School Tuition Organizations or STOs are identified by the IRS as 501(c)(3) nonprofit organizations that allocates 90% of its revenue towards scholarships or grants to students at more than one school.
- STOs are not certified by the Arizona Department of Revenue.
- As of 2008, the Arizona Department of Revenue reported 55 STOs operating in the state.
“How do they work?”
- STOs collect tax credits or funds from either individuals and/or corporations to be used for the purpose of scholarships or grants for private tuition costs.
- STOs process said credits by depositing funds into a bank account, issue a receipt to the contributor for tax purposes, and later allocates funds in the form of scholarship awards or tuition payments for students who attend private schools.
- Some STOs have board members who evaluate applications and award according to need.
- Some STOs are operated by large churches, such as Catholic Diocese. Other STOs are run by CPAs, and some by attorneys.
- STOs are allowed to keep 10% of tax credit contributions meant for grant allocations/donations for organizational expenses.
For information on Income Tax Credits and STOs as provided by the Arizona Department of Revenue, visit: http://www.azdor.gov/brochure/707.pdf