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After the IRS cracked down on a tax shelter that allowed donors to private school programs to break even or make money off donations by claiming it was a charitable donation, Oklahoma’s largest fund began giving out new advice: report your donations as a “federal business expense.”
A new report by the Institute on Taxation and Business Policy says state legislatures should eliminate these tax shelters. Wealthy families are overwhelmingly the ones using tax credits to avoid paying taxes into public coffers, data from three states shows.
It works like this: Businesses donate to a fund and claim up to $100,000 per year for a state tax credit. Single filers can claim $1,000 and married couples are allowed $2,000. By stacking the credit, which provides a dollar for dollar reduction in tax liability, with state and federal deductions, taxpayers can receive all or most of their investment back.
In marketing material to potential donors, Oklahoma’s Opportunity Scholarship Fund explains how a business owner can turn a $20,000 donation into a $400 profit.
They describe it as a “win-win situation.”
“When you donate, children across Oklahoma win big — but so does your business. Through state income tax credits and charitable contribution deductions, businesses have the chance to earn back almost all of the total donation. Plus, if your business is a ‘pass-through’ business, those tax credits and deductions flow through to your personal tax returns,” the brochure reads.
Sarah Guardiola, chief executive officer of Opportunity Scholarship Fund, said such materials are meant to alert donors to a possible tax option. “Each person’s tax liability is unique to them. However, we do bring visibility to the tax code as it relates to tax credit scholarship programs,” she said in a written statement Wednesday.
Oklahoma is one of a few states whose programs allow donations of corporate stock or securities. The Institute on Taxation and Business Policy says this type of tax shelter allows wealthy families to offload stock and get paid all or most of its value with state tax credits.
To end what the institute calls an “abuse of tax credit shelters,” they recommend states pass legislation making pass-through business owners ineligible for the credit if they deduct their contribution on a state or federal tax return. They also says states should only allow monetary contributions — no stocks or property.
Oklahoma’s Equal Opportunity Scholarship program was enacted by the Legislature in 2011. It’s different from the tax credit plan currently being considered. That plan (via House Bill 1935) would give tax credits to parents who spend on private school tuition or homeschool expenses.
The Equal Opportunity program uses tax credits to incentivize donations, which are then given out as private school vouchers. In 2021, $4.7 million in tax credits were awarded, according to the Oklahoma Tax Commission.
State leaders that year expanded the program by raising the cap from $1.5 million to $25 million for private school donations and added $25 million in tax credits for donations to public schools — so $50 million in total.
Totals from 2022 aren’t yet available, so the budgetary impact of the expansion has not yet been realized.
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— Jennifer Palmer
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