Department of Revenue Issues Favorable Ruling for Tax Credit Scholarship Donors

The Alabama Department of Revenue has cleared up confusion over the tax treatment of donations to scholarship funds for underprivileged children attending failing public schools by ruling this month how those donations interact with estimated-tax penalty rules, according to Business Council of Alabama member Bradley Arant Boult Cummings LLC.

Many donors and their tax advisers had interpreted the ADOR’s position to mean that they could only donate money to a qualified scholarship granting organization (SGO) in the fourth quarter of the year if they wanted to avoid the risk of estimated tax penalties – in effect, leaving SGOs unable to make long-term scholarship commitments.

Revenue Commissioner Vernon Barnett issued Revenue Procedure 2017-01 on Aug. 3 at the request of the Alabama Opportunity Scholarship Fund, one of the state’s largest scholarship granting organizations. The revenue procedure was followed by an email clarification to all SGOs from Deputy Commissioner Curtis Stewart on Aug. 14.

Scholarships are authorized under the Alabama Accountability Act of 2013, which created tax credits for families with students in chronically failing schools to attend private or non-failing public schools of their choice.

“The Alabama Opportunity Scholarship Fund is a worthy cause and goal of providing financial help for parents who want the best education for their children in the best environment but who otherwise couldn’t afford it,” BCA President and CEO William J. Canary said. “At our summer conference, we heard from a young man who is attending Mobile Christian School on a scholarship and now has college in his future where before, as he testified, education was secondary because he feared for his life in his zoned school.”

Mobile Christian School senior Calvin Coleman said the school he was zoned for was worrisome because he feared violence and being killed. Because of a scholarship to attend Mobile Christian School, Calvin said, he can focus on his grades and college, which never before was an option to him. Now it’s a possibility.

“The Business Education Alliance of Alabama urges scholarship donations in Alabama now that the Alabama Department of Revenue has clarified the procedures for contributions,” said BEA Chairman and President Joe Morton, Ph.D. “A scholarship today will pay dividends tomorrow for the student, his or her family, and Alabama.”

The law also allows for flexibility contracts between the State Board of Education and local school districts and creates tax credits for individual and business taxpayers who donate to a nonprofit “scholarship granting organization” that provides scholarships for students to attend a nonpublic school or non-failing public school.

The BCA is a partner in the AOSF, whose newest board member, Page Stalcup, a senior partner at Wilkins Miller CPAs in Mobile, assisted in the clarification effort along with his tax partner, Frank Brown. “Hopefully, it will result in more donations and credits that will help a child get a better education,” Stalcup said.

The Revenue Procedure provides a safe harbor that allows donors to minimize the risk of quarterly estimated tax penalties, Bradley attorneys said.

The Revenue Procedure confirms that no penalty will be assessed if the amount of estimated tax payments made to the ADOR by the quarterly due date, plus the amount of creditable donations made to SGOs during that quarter, exceed the total amount of estimated tax payments otherwise required to be made for that quarter. (Bradley advises consulting with a CPA for assistance.)

For 2017 and beyond, qualified donors may in some cases choose to direct their entire third- and fourth-quarter Alabama estimated tax payments to an SGO without penalty, Bradley said. Not only do donations to qualified SGOs provide a dollar-for-dollar Alabama tax credit of up to 50 percent of the donor’s annual income tax liability, but donors also should be eligible for a charitable contribution deduction on their federal income tax return.

Also, individuals who are subject to the federal Alternative Minimum Tax (AMT) could actually receive a net cash benefit when they donate to an SGO. The procedure for making these donations and donor qualifications are available on the AOSF website and on the ADOR’s helpful website.

AOSF Executive Director Lesley Searcy thanked the department.

“Our students just want the opportunity to learn, be safe, and succeed. So many are in desperate situations and the scholarship provides the opportunity they need to get on track academically and to feel safe at school,” she said. “AOSF needs $5 million to commit to our students who are re-enrolling this school year, and an additional $4 million to move students off the waiting list. We hope corporate and individual taxpayers will take advantage of this new opportunity to support low income students through their 3rd and 4th quarter estimated tax payments.”

At the BCA’s summer conference in Point Clear earlier this month, Searcy previewed an excellent video of the organization’s efforts to promote quality education for children through tax credits that support Alabama schools.

The Bradley law firm was involved in seeking the revenue procedure and clarifying email on behalf of AOSF and one of firm’s corporate clients.