How does the Kansas tax credit for the low income students scholarship program work?

Plain-English summary

Kansas Notice 14-14 (May 1, 2014) describes the new Tax Credit for Low Income Students Scholarship Program.

The credit. Senate Substitute for House Bill 2506 (Sections 55-61) created a credit equal to 70% of the amount contributed to a scholarship granting organization (SGO), beginning with tax year 2015 (contributions for tax years commencing after December 31, 2014). The credit runs against:

• corporate income tax;
• the premium tax on insurance companies (K.S.A. 40-252); and
• the privilege tax on national banking associations, state banks, trust companies and savings and loan associations (article 11 of chapter 79).

How the program works. An SGO uses contributions to fund educational scholarships (up to $8,000 per eligible student per school year) so eligible students can attend a qualified nonpublic school. An "eligible student" is generally an at-risk pupil eligible for free lunch who attends (or would attend) a Title I Focus or Priority school, resides in Kansas, and meets the enrollment rules. The SGO must disburse at least 90% of contributions as scholarships within 36 months, be a 501(c)(3), be certified annually by the State Board of Education, obtain an audit, and report annually.

Caps and add-back. Total credits are limited to $10,000,000 per tax year. Any excess credit carries forward. Section 62 amends K.S.A. 79-32,138 to require an add-back on the Kansas return of any federal charitable contribution deduction claimed for a gift to an SGO to the extent it is claimed as the basis for the credit (so the taxpayer does not get both the deduction and the credit for the same dollars).

What this means for you

Corporations, banks and insurers that contribute

• You can claim a Kansas credit equal to 70% of your contribution to a certified scholarship granting organization, against corporate income, privilege or premium tax, starting in tax year 2015 -- but you must add back any federal charitable deduction claimed for the same contribution.

Scholarship granting organizations

• To generate credits, meet the program's 501(c)(3), certification, 90%-within-36-months disbursement, bonding/financial, audit and annual-reporting requirements.

Common questions

How big is the credit? 70% of the amount contributed to a scholarship granting organization.

Against which taxes? Corporate income tax, insurance premium tax, and financial-institution privilege tax.

When does it start? Tax year 2015 (contributions in tax years after December 31, 2014).

Is there a cap? Yes -- $10 million in total credits per tax year; unused amounts carry forward.

Can I also deduct the contribution federally? The federal deduction claimed as the credit's basis must be added back on the Kansas return.

Citations and references

• Sections 55-61 of Senate Substitute for 2014 House Bill 2506 -- the Tax Credit for Low Income Students Scholarship Program act.
• K.S.A. 79-32,138 -- amended (Section 62) to add back the federal charitable deduction claimed as the basis for the credit.
• K.S.A. 40-252 -- the insurance premium tax the credit may offset.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: Notice 14-14

Original ruling text

Policy & Research Phone: 785-296-3081
915 SW Harrison St FAX: 785-296-7928
Topeka KS 66612-1588 www.ksrevenue.org
Nick Jordan, Secretary Department of Revenue Sam Brownback, Governor
Richard Cram, Director

                                      NOTICE 14-14

                TAX CREDIT FOR LOW INCOME STUDENTS SCHOLARSHIP

                                      (May 1, 2014)

   During the 2014 Legislative Session, Senate Substitute for House Bill 2506 was passed

and signed into law. Sections 55 through 61 provide a tax credit for low income students
scholarship program. This program provides eligible students with scholarships to pay all or a
portion of tuition to attend a qualified school in Kansas.

    An "eligible student" is a child who qualifies as an at-risk pupil (eligible for free lunch

under the National School Lunch Act) and: 1) Attends a school that would qualify as either a
Title I Focus School or a Title I Priority School; or 2) Received an educational scholarship under
this program and has not graduated from high school or reached 21 years of age. Eligible
students will be required to reside in Kansas while receiving a scholarship and be enrolled in a
public school in the year prior to receiving the scholarship or be eligible to be enrolled in a
public school, if under the age of 6.

   A "qualified school" is any nonpublic school that provides education to elementary and

secondary students, has notified the state board of its intention to participate in the program and
complies with the requirements of the program.

   The scholarship is financed through a tax credit against corporate income and premium

(insurance companies) or privilege (financial institutions) tax liability beginning with tax year
2015 in an amount equal to 70% of the amount contributed for scholarships.

    Contributions will be made to a scholarship granting organization who will in turn

disburse not less than 90% of the contributions received to eligible students in the form of
educational scholarships within 36 months of receipt. The scholarship may not exceed $8,000
per eligible student for each school year and shall cover all or a portion of the costs of tuition,
fees, and expenses of a qualified school and if applicable, the costs of transportation to a
qualified school if provided by the qualified school.

    A "scholarship granting organization" is defined as an organization that complies with

the requirements of this program and provides educational scholarships to students attending
qualified schools of their parents' choice.

    The credit will be claimed and deducted from the taxpayer's tax liability during the tax

year in which the contribution was made.

   Total amount of credits allowed in each tax year is limited to $10 million.

   Specifically sections 55 through 61 provide:

  New Sec. 55. The provisions of sections 55 through 61, and amendments thereto, shall be

known and may be cited as the tax credit for low income students scholarship program act.

    New Sec. 56. As used in the tax credit for low income students scholarship program act:
    (a) "Contributions" means monetary gifts or donations and in-kind contributions, gifts or

donations that have an established market value.
(b) "Department" means the Kansas department of revenue.
(c) "Educational scholarship" means an amount not to exceed $8,000 provided to eligible
students to cover all or a portion of the costs of tuition, fees and expenses of a qualified school
and, if applicable, the costs of transportation to a qualified school if provided by such qualified
school.
(d) "Eligible student" means a child who:
(1) (A) Qualifies as an at-risk pupil as defined in K.S.A. 72-6407, and amendments
thereto, and who is attending a school that would qualify as either a title I focus school or a title I
priority school as described by the state board under the elementary and secondary education act
flexibility waiver as amended in January 2013; or (B) has received an educational scholarship
under this program and has not graduated from high school or reached 21 years of age;
(2) resides in Kansas while receiving an educational scholarship; and
(3) (A) was enrolled in any public school in the previous school year in which an
educational scholarship is first sought for the child; or (B) is eligible to be enrolled in any public
school in the school year in which an educational scholarship is first sought for the child and the
child is under the age of six years.
(e) "Parent" includes a guardian, custodian or other person with authority to act on behalf
of the child.
(f) "Program" means the tax credit for low income students scholarship program
established in sections 55 through 61, and amendments thereto.
(g) "Public school" means a school that would qualify as either a title I focus school or a
title I priority school as described by the state board under the elementary and secondary
education act flexibility waiver as amended in January 2013 and is operated by a school district.
(h) "Qualified school" means any nonpublic school that provides education to elementary
and secondary students, has notified the state board of its intention to participate in the program
and complies with the requirements of the program.
(i) "Scholarship granting organization" means an organization that complies with the
requirements of this program and provides educational scholarships to students attending
qualified schools of their parents' choice.
(j) "School district" or "district" means any unified school district organized and
operating under the laws of this state.
(k) "School year" shall have the meaning ascribed thereto in K.S.A. 72-6408, and
amendments thereto.
(l) "Secretary" means the secretary of revenue.
(m) "State board" means the state board of education.

    New Sec. 57. (a) There is hereby established the tax credit for low income students

scholarship program. The program shall provide eligible students with an opportunity to attend
schools of their parents' choice.
(b) Each scholarship granting organization shall issue a receipt, in a form prescribed by
the secretary, to each contributing taxpayer indicating the value of the contribution received.
Each taxpayer shall provide a copy of such receipt when claiming the tax credit established in
section 61, and amendments thereto.
(c) Prior to awarding an educational scholarship to an eligible student, unless such
student is under the age of six years, the scholarship granting organization shall receive written
verification from the state board that such student is an eligible student under this program,
provided the state board and the board of education of the school district in which the eligible
student was enrolled the previous school year have received written consent from such eligible
student's parent authorizing the release of such information.
(d) Upon receipt of information in accordance with subsection (a)(2) of section 58, and
amendments thereto, the state board shall inform the scholarship granting organization if such
student has already been designated to receive an educational scholarship by another scholarship
granting organization.
(e) In each school year, each eligible student under this program shall not receive more
than one educational scholarship under this program.
(f) An eligible student's participation in this program by receiving an educational
scholarship constitutes a waiver to special education services provided by any school district,
unless such school district agrees to provide such services to the qualified school.

    New Sec. 58. (a) To be eligible to participate in the program, a scholarship granting

organization shall comply with the following:
(1) The scholarship granting organization shall notify the secretary and the state board of
the scholarship granting organization's intent to provide educational scholarships to students
attending qualified schools;
(2) upon granting an educational scholarship to an eligible student, the scholarship
granting organization shall report such information to the state board;
(3) the scholarship granting organization shall provide verification to the secretary that
the scholarship granting organization is exempt from federal income taxation pursuant to section
501(c)(3) of the federal internal revenue code of 1986;
(4) upon receipt of contributions in an aggregate amount or value in excess of $50,000
during a school year, a scholarship granting organization shall file with the state board either:
(A) A surety bond payable to the state in an amount equal to the aggregate amount of
contributions expected to be received during the school year; or
(B) financial information demonstrating the scholarship granting organization's ability to
pay an aggregate amount equal to the amount of the contributions expected to be received during
the school year, which must be reviewed and approved of in writing by the state board;
(5) scholarship granting organizations that provide other nonprofit services in addition to
providing educational scholarships shall not commingle contributions made under the program
with other contributions made to such organization. A scholarship granting organization under
this subsection shall also file with the state board, prior to the commencement of each school
year, either:

    (A) A surety bond payable to the state in an amount equal to the aggregate amount of

contributions expected to be received during the school year; or
(B) financial information demonstrating the nonprofit organization's ability to pay an
aggregate amount equal to the amount of the contributions expected to be received during the
school year, which must be reviewed and approved of in writing by the state board;
(6) the scholarship granting organization shall ensure that each qualified school receiving
educational scholarships from the scholarship granting organization is in compliance with the
requirements of the program;
(7) at the end of the calendar year, the scholarship granting organization shall have its
accounts examined and audited by a certified public accountant. Such audit shall include, but not
be limited to, information verifying that the educational scholarships awarded by the scholarship
granting organization were distributed to the eligible students determined by the state board
under subsection (c) of section 57, and amendments thereto, and information specified in this
section. Prior to filing a copy of the audit with the state board, such audit shall be duly verified
and certified by a certified public accountant; and
(8) if a scholarship granting organization decides to limit the number or type of qualified
schools who will receive educational scholarships, the scholarship granting organization shall
provide, in writing, the name or names of those qualified schools to any contributor and the state
board.
(b) No scholarship granting organization shall provide an educational scholarship for any
eligible student to attend any qualified school with paid staff or paid board members, or relatives
thereof, in common with the scholarship granting organization.
(c) The scholarship granting organization shall disburse not less than 90% of
contributions received pursuant to the program to eligible students in the form of educational
scholarships within 36 months of receipt of such contributions. If such contributions have not
been disbursed within the applicable 36-month time period, then the scholarship granting
organization shall not accept new contributions until 90% of the received contributions have
been disbursed in the form of educational scholarships. Any income earned from contributions
must be disbursed in the form of educational scholarships.
(d) A scholarship granting organization may continue to provide an educational
scholarship to an eligible student who received an educational scholarship under this program in
the year immediately preceding the current school year.
(e) A scholarship granting organization shall direct payments of an educational
scholarship to the qualified school on behalf of the eligible student. Payment shall be made by
check made payable to both the parent and the qualified school. If an eligible student transfers to
a new qualified school during a school year, the scholarship granting organization shall direct
payment in a prorated amount to the original qualified school and the new qualified school based
on the eligible student's attendance. If the eligible student transfers to a public school and enrolls
in such public school after September 20 of the current school year, the scholarship granting
organization shall direct payment in a prorated amount to the original qualified school and the
public school based on the eligible student's attendance. The prorated amount to the public
school shall be considered a donation and shall be paid to the school district of such public
school in accordance with K.S.A. 72-8210, and amendments thereto, to provide for the education
of such eligible student.
(f) By June 1 of each year, a scholarship granting organization shall submit a report to the
state board for the educational scholarships provided in the immediately preceding 12 months.

Such report shall be in a form and manner as prescribed by the state board, approved and signed
by a certified public accountant, and shall contain the following information:
(1) The name and address of the scholarship granting organization;
(2) the name and address of each eligible student receiving an educational scholarship by
the scholarship granting organization;
(3) the total number and total dollar amount of contributions received during the 12-
month reporting period; and
(4) the total number and total dollar amount of educational scholarships awarded during
the 12-month reporting period and the total number and total dollar amount of educational
scholarships awarded during the 12-month reporting period to eligible students who qualified
under subsection (d) of section 56, and amendments thereto.
(g) No scholarship granting organization shall:
(1) Provide an eligible student with an educational scholarship established by funding
from any contributions made by any relative of such eligible student; or
(2) accept a contribution from any source with the express or implied condition that such
contribution be directed toward an educational scholarship for a particular eligible student.

    New Sec. 59. On or before the first day of the legislative session in 2015, and each year

thereafter, the state board shall prepare and submit a report to the legislature on the program.
Annual reports shall include information reported to the state board under subsection (f) of
section 58, and amendments thereto, and a summary of such information.

    New Sec. 60. (a) (1) To qualify for the tax credit allowed by this act, the scholarship

granting organization shall apply each tax year to the state board for a certification that the
scholarship granting organization is in substantial compliance with the program based on
information received in the annual audit and yearly report filed by the scholarship granting
organization with the state board.
(2) The state board shall prescribe the form of the application, which shall include, but
not be limited to, the information set forth in subsection (a)(1).
(b) If the state board determines that the requirements under this section were met by the
scholarship granting organization, the state board shall issue a certificate of compliance to the
director of taxation.
(c) The state board shall adopt rules and regulations to implement the provisions of this
section.

     New Sec. 61. (a) There shall be allowed a credit against the corporate income tax liability

imposed upon a taxpayer pursuant to the Kansas income tax act, the privilege tax liability
imposed upon a taxpayer pursuant to the privilege tax imposed upon any national banking
association, state bank, trust company or savings and loan association pursuant to article 11 of
chapter 79 of the Kansas Statutes Annotated, and amendments thereto, and the premium tax
liability imposed upon a taxpayer pursuant to the premiums tax and privilege fees imposed upon
an insurance company pursuant to K.S.A. 40-252, and amendments thereto, for tax years
commencing after December 31, 2014, an amount equal to 70% of the amount contributed to a
scholarship granting organization authorized pursuant to section 55 et seq., and amendments
thereto.

    (b) The credit shall be claimed and deducted from the taxpayer's tax liability during the

tax year in which the contribution was made to any such scholarship granting organization.
(c) For each tax year, in no event shall the total amount of credits allowed under this
section exceed $10,000,000 for any one tax year. Except as otherwise provided, the allocation of
such tax credits for each scholarship granting organization shall be determined by the scholarship
granting organization in consultation with the secretary, and such determination shall be
completed prior to the issuance of any tax credits pursuant to this section.
(d) If the amount of any such tax credit claimed by a taxpayer exceeds the taxpayer's
income, privilege or premium tax liability, such excess amount may be carried over for
deduction from the taxpayer's income, privilege or premium tax liability in the next succeeding
year or years until the total amount of the credit has been deducted from tax liability.
(e) The secretary shall adopt rules and regulations regarding filing of documents that
support the amount of credit claimed pursuant to this section.

   Section 62 of Senate Substitute for House Bill 2506 amends K.S.A. 79-32,138 to provide

an add back modification to federal adjusted gross income for the amount of the charitable
contribution that is made to a scholarship granting organization to the extent that contribution is
claimed as the basis for the credit under Section 61. Specifically Section 62 provides:

    (b) There shall be added to federal taxable income:
    (v) The amount of any charitable contribution deduction claimed for any contribution or

gift made to a scholarship granting organization to the extent the same is claimed as the basis
for the credit allowed pursuant to section 61, and amendments thereto.

                                  Taxpayer Assistance

Additional copies of this notice, forms or publications are available from our web site,
www.ksrevenue.org. If you have questions about this Notice, please contact:

                              Taxpayer Assistance Center
                             Kansas Department of Revenue
                             915 SW Harrison St., 1st Floor
                               Topeka, KS 66612-1588
                                 Phone: 785-368-8222
                                  Fax: 785-291-3614