Overview

Governor Ivey recently signed Senate Bill 261 into law, which increases the tax credit for contributions made to Scholarship Granting Organizations (“SGO”).  Effective in 2022, an Alabama taxpayer may claim up to 100% of the individual’s Alabama tax liability for contributions made to an SGO, not to exceed $100,000 per year. Prior to the 2022 amendment, the credit was limited to 50% of the taxpayer’s Alabama tax liability with a cap of $50,000.  For C corporations, the credit was also increased from 50% to 100% of the Corporation’s Alabama tax liability and is not subject to the $100,000 per year cap.

Why is this beneficial?

Beginning in 2018, the Tax Cuts and Jobs Act placed a $10,000 cap on the state and local tax (“SALT”) deduction for individuals who itemize deductions. In the years since 2018, many taxpayers have exceeded the cap and have paid large amounts of state income taxes that weren’t deductible for Federal purposes.   Instead of paying non-deductible SALT payments, many taxpayers would prefer to make a donation that will be used to improve educational opportunities for disadvantaged youth.  IRS regulations limit the ability for an individual to claim these SGO donations as itemized deductions, however, many of our clients still prefer to make a donation to a charity in lieu of state tax payments.

Pass-through entities (“PTE”) may make a donation to an SGO that passes through to its owners, and, in some circumstances, the PTE may also deduct the donation as an ordinary and necessary business expense.  These circumstances result in a major win for PTE owners who are subject to the $10,000 SALT cap.  The PTE owner receives a dollar-for-dollar state tax credit and the PTE deducts the payment as an ordinary deduction on the PTE’s tax return.

Other Considerations

Pass-through entities should also consider the Alabama Pass-through Entity Election provided under HB588.  Click Here for more information about the Alabama PTE Election.   Under HB588, a PTE pays Alabama tax on behalf of its owners and passes through a credit for taxes paid by the PTE, while also deducting the tax payment on the PTEs Federal income tax return.  The result of a PTE making an SGO contribution versus making the PTE Election under HB588 can be very similar.  We encourage all PTE owners to consider both programs.

The annual statewide limit for tax credit contributions to SGOs remains at $30 million.  As of mid-July, approximately $26.7 million of tax credits remain for 2022.  We expect the amount available will decline as year end approaches and may be entirely depleted.

Donations to SGOs must be reported in advance on My Alabama Taxes in order to secure the Alabama tax credit.

As always, please contact your Dent Moses advisor if you have any questions.