A new California law allows both individuals and businesses to claim a tax credit for cash contributions made to the College Access Tax Credit Fund. In 2015 and 2016, the credit amount is 55 percent or 50 percent of the amount contributed, respectively. Scheduled to sunset in 2017, the College Access Tax Credit (CATC) is allocated and certified by the California Educational Facilities Authority (CEFA).
Total allotted credits are capped at $500 million per calendar year, and applications will be processed on a first come, first served basis. While the deadline to apply for the CATC for the 2014 tax year has passed, the application period for the 2015 tax year is July 1, 2015, through January 4, 2016. Note that unused credits may be carried over for six years—so even if you can’t use the entire credit you’re awarded, you’ll be able to apply it to a future year.
How the Credit Works
The benefit of the credit varies depending on the taxpayer’s profile, as can the effect when combined with the charitable contribution deduction taken at the federal level.
S Corporations and Their Shareholders
Although an S corporation can use a third of the credit it receives to offset its own tax liability, 100 percent of the credit will be passed through to the S corporation’s shareholders. In essence, this means the S corporation and its shareholders combined will receive 133 percent of the credit amount (nearly 80 percent of the contribution). For example, say in 2014 an S corporation applies to make a $60,000 cash contribution to the CATC Fund, and the corporation is certified as eligible by CEFA. The S corporation would then make the contribution, earning a $12,000 credit that it could apply against its franchise tax. The S corporation then passes 100 percent of the credit—$36,000—to its shareholders.
Taxpayers other than S corporations still stand to benefit significantly from the CATC. Let’s look at another example: In 2014 an individual applies to make a $50,000 cash contribution to the CATC Fund, and he or she is certified as eligible by CEFA. The taxpayer would then make the contribution, earning a 60 percent credit on it—$30,000 that could be applied against his or her California net income tax liability. The taxpayer then also takes a federal charitable contribution deduction. The value of the federal deduction may differ depending upon whether the taxpayer is subject to charitable contribution limits, the itemized deduction phaseout, or the alternative minimum tax (AMT). To simplify our example, let’s assume the taxpayer is able to deduct the entire amount of the contribution for regular federal income tax purposes.
In this case, the taxpayer is not subject to the AMT and has a marginal federal tax rate of 39.6 percent. The $50,000 contribution deduction results in $19,800 in federal income tax savings. However, the $30,000 California tax credit reduces the federal deduction the taxpayer can claim for state income tax, increasing his or her federal tax liability by $11,880. So the taxpayer takes the $50,000 charitable contribution deduction and receives a $37,920 net tax benefit (a $7,920 federal benefit plus a $30,000 California credit).
Assume the same taxpayer is subject to federal AMT at the highest rate, 28 percent. The California credit received on the contribution is still $30,000. The taxpayer’s federal tax benefit for the $50,000 contribution at the 28 percent rate is $14,000. Because state income taxes are not deductible when a taxpayer is in AMT, the state tax credit has no other federal tax impact. Thus, the taxpayer makes a $50,000 charitable contribution and receives a net federal tax benefit of $44,000 (a $14,000 federal benefit plus a $30,000 California credit).
Applying for the Credit
The application is available on CEFA’s Web site and may be faxed to CEFA at (916) 653-2179. Within 10 days of receiving the application, CEFA will issue a notice of allocation reservation to the taxpayer. The taxpayer in turn has 20 days after receiving notice to submit the agreed-upon contribution to the College Access Tax Credit Fund and the contribution submittal form to CEFA. CEFA will then issue certification to the taxpayer within 15 days after receiving the contribution. Taxpayers that claim the credit are also eligible to claim a charitable contribution deduction for the amount donated on their federal return.
Taxpayers hoping to claim a portion of the $500 million available in CATC credits for the 2015 tax year should begin planning in advance of the July application period, since the credit is awarded on a first come, first served basis. We can help model and calculate the benefits for you and guide you through the process. For more information about the CATC or to learn more about other incentives that may be available to you at the state or federal levels, contact your Moss Adams professional. Or email firstname.lastname@example.org.