2024 Update – Alabama Tax Credits for Contributions to Scholarship Granting Organizations
The Alabama Accountability Act was effective in 2013 and established a dollar-for-dollar income tax credit for contributions paid to Scholarship Granting Organizations (“SGO”). SGOs are 501(c)(3) charities that provide scholarships to children from lower-income families to attend private K-12 schools. Individual and corporate taxpayers in Alabama can still benefit from this program in 2024.
For tax years beginning in 2022, an Alabama taxpayer may claim a credit for up to 100% of the individual’s Alabama tax liability for contributions made to an SGO, not to exceed $100,000 per year. If the SGO tax credit is more than the amount of Alabama tax, then the SGO credit carries forward for a maximum of 3 years. For C corporations, the credit is 100% of the Corporation’s Alabama tax liability but is not subject to the $100,000 per year cap. As discussed below, pass-through entities (“PTE”) may also make donations to SGOs and pass-through the tax credit to the PTE owners.
For all taxpayers who wish to make a tax credit donation to an SGO, the tax credit must be reserved via My Alabama Taxes prior to making the donation. The reservation process is to ensure the total credits claimed do not exceed a $40 million state-wide limit.
Click here for the ADOR approved list of SGO charities as of December 2023.
Please contact your Dent Moses advisor if you would like to discuss making a tax credit donation to an SGO.
Additional Information for Pass-Through Entities
Pass-through entities 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 owners receive a dollar-for-dollar state tax credit and the PTE deducts the payment as an ordinary deduction on the PTE’s tax return.
In addition to the tax credit for donations paid to an SGO, we recommend PTEs consider making a PTE election. If a PTE makes a PTE election and a donation to an SGO, both amounts pass through from the PTE to the individual owners. The SGO credit will be used first up to the amount of Alabama tax, and the PTE credit counts as a payment which can be refunded or applied. The combination of SGO and PTE works best when the PTE owner has significant amounts of income in addition to the passthrough income covered by the PTE payments.
If you are interested in discussing the SGO tax credit donations and PTE election in greater detail, please contact your Dent Moses advisor.