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Deemed Sale of Capital Asset Election

2002 Tax Rates and Information Bulletin

Educational Improvement Tax Credit

Proposed Regulations on Required Minimum Distributions From Retirement Plans

Installment Sales Method Available Again for Accrual Basis Taxpayer

Educational Improvement Tax Credit

Act 4 of 2001 amends the Pennsylvania Public School Code to provide for the establishment of the Educational Improvement Tax Credit.  The program is administered by the Department of Community and Economic Development (“DCED”). 

Who may receive the Credit

 Any business authorized to do business in Pennsylvania that is subject to the Pennsylvania corporate net income, capital stock, franchise, bank shares, title insurance and trust company shares, insurance premiums, or mutual thrift institution taxes. To receive the tax credit, the business must make contributions to eligible scholarship organizations or educational improvement organizations. 

Scholarship Organization and Educational Improvement Organization

An eligible scholarship organization provides tuition to students attending public and nonpublic kindergarten, elementary, or high schools in Pennsylvania.  An educational improvement organization is a nonprofit entity that contributes funds to a public school to support innovative educational programs.  There are numerous requirements set forth in the Act and the scholarship organization or educational improvement organization must be approved by the DCED as an eligible organization.  A list of the qualifying organizations is to be published at the website www.inventpa.com.  The initial list of qualifying organizations is to be posted on or about September 1, 2001. 

Amount of Credit

A business may receive a tax credit equal to 75% of its contribution to a scholarship organization or to an educational improvement organization.  The credit may not exceed the lesser of $100,000 or the taxpayer’s total tax liability for the year.  The credit may be increased to 90% of the contribution made if the business agrees to provide the same contribution to the organization for two consecutive years.

The credit if nontransferable and nonrefundable.  The credit is limited to the taxable year in which the qualified contribution was made.

How to Claim the Credit

A business must file an application with, and receive approval from, the DCED.  A taxpayer must then make a contribution to an eligible scholarship or educational improvement organization within 60 days after any tax credit is approved.  The DCED awards the credits on a first-come, first-served basis, up to a total amount of $30 million dollars per fiscal year, with $20 million in credits allocated for contributions to scholarship organizations and $10 million in credits allocated for contributions to educational improvement organizations.

Proposed Regulations on Required Minimum Distributions From Retirement Plans

On January 12, 2001 the IRS issued proposed regulations which supercede the proposed regulations issued in 1987 dealing with how individuals calculate minimum required distributions from retirement plans, IRAs, tax-sheltered annuities, and 457 plans. 

 Here is a summary of the key provisions:

1.            Effective Dates - The regulations have an effective date of January 1, 2002, however, a plan or IRA owner can elect to apply the new rules to 2001 distributions, regardless of prior distribution elections.  A qualified plan wishing to do so needs to adopt an IRS model amendment, but need not submit the amendment for approval.  An IRA sponsor does not need to adopt the model amendment in order to use the new rules and, in fact, the IRS has advised IRA sponsors to not amend their IRAs until the regulations are final

2.            Required Distributions after 70½ - In the past these amounts were calculated based on the participant’s age, the beneficiary’s age, and whether an election was made at age 70½ to recalculate one or both life expectancies.  Beneficiary changes after 70½ also affected the calculation. The new rules are much simpler and usually produce a smaller minimum required distribution.  They generally look only at the participant’s age to make the calculation for pre-death distributions and apply the recalculated joint life expectancy of the participant and a beneficiary 10 years younger, regardless of the actual age of the beneficiary.  No recalculation decision is involved.   A table showing the factor to use each year to do the computation for account balance benefits, such as IRAs and 401(k)s is reproduced below.  Simply divide the beginning of the year account balance by the factor for the participant’s age on his birthday during the year.  A participant with a spouse more than ten years younger who is also the sole beneficiary of his account can use the old joint life expectancy tables that produce an even smaller required payout.

 3.            Required Distributions after Death - These rules also have been simplified and improved for the taxpayer.  In general, a designated beneficiary will be able to withdraw the account over the beneficiary’s remaining life expectancy.  The beneficiary as of the end of the calendar year following the year of the participant’s death is the beneficiary whose life expectancy is used for this calculation.  The old single life expectancy tables are used for this computation to set the fixed period over which the distributions will be made.  Each year the distribution period is reduced by one year. 

Installment Sales Method Available Again for Accrual Basis Taxpayer

At the end of 2000, the Installment  Tax Correction Act of 2000 was signed into law.  The Act repealed the 1999 legislation that prevented accrual basis taxpayers from utilizing the installment sale method of accounting for dispositions of property after December 16, 1999.  An accrual basis taxpayers may want to file an amended return if a disposition of property qualifying for installment sale treatment occurred after December 16, 1999 and the entire gain was reported and tax on the entire gain was paid.