On August 31, 2017, the Illinois Invest in Kids Act (“Act”) was signed into law. The Act provides an Illinois state tax credit of 75% of the amount of donations made to pay for tuition at private elementary and secondary schools in Illinois. The Act requires that these donations be directed to these schools through what will be known as scholarship granting organizations (“SGOs”). The leaders and administrators of private schools, and of religious organizations who sponsor private schools, must now consider the pros and cons of either establishing an SGO or having donations to their schools be routed through SGOs that their school is not affiliated with.
SGOs will be subject to the requirements of the Act and further regulations imposed by the Illinois Department of Revenue (“IDOR”). On November 13, 2017, the IDOR enacted Emergency Rules regarding SGOs that will remain in effect until April 12, 2018. On December 4, 2017, the IDOR began accepting applications from organizations that wish to act as SGOs. Any organization that wants to distribute scholarship funds for the 2018-2019 school year will need to submit its application to the IDOR by January 15, 2018. A prospective donor will need to receive a certificate from the IDOR awarding a tax credit before a donation to an SGO can be made. It is anticipated that donors will be able to reserve tax credits beginning on January 2, 2018. The future modification of the Emergency Rules means that the leaders of private schools, their students and those students’ families, and interested donors should remain alert to changes to the law governing SGOs.
Donations to SGOs
A taxpayer who donates a large enough sum to an SGO could eliminate their entire state income tax obligation. Depending on a taxpayer’s state and federal income tax obligations this credit could provide that taxpayer with a significantly greater benefit than if they received the federal tax deduction that would correspond with a donation of the same amount.
Donations cannot be designated to benefit a specific student or group of students. Private donors can designate their donation to benefit a specific school or group of schools. Corporate donors cannot do so.
Any taxpayer who wants to donate to an SGO will need an IDOR MyTax Illinois account. Anyone who does not already have such an account will need to obtain a “Letter ID” from the IDOR to set up an account. Instructions for obtaining a Letter ID can be found under the “INDIVIDUALS” tab at the MyTax Illinois website https://mytax.illinois.gov//. Because it normally takes seven to ten business days for a Letter ID to arrive prospective donors should request these as soon as possible if they wish to apply for a tax credit on January 2. It is anticipated that the available tax credits will be claimed quickly on January 2.
Applying to Operate an SGO
The Act and the IDOR’s Emergency Rules establish requirements that apply to organizations acting as SGOs. An organization applying to be an SGO must meet requirements that include being a 501(c)(3) nonprofit, certifying that it will use 95% of the money received from donations made pursuant to the Act to fund scholarships, and certifying that it will hold all such donations in an account separate from any other funds.
An existing 501(c)(3) corporation can apply to act as an SGO. Alternatively, a new nonprofit could be incorporated with the intention that it would carry out this function.
Additionally, there are restrictions on who can run an SGO. No board member or paid staff member of a private school that is eligible to receive SGO funds, or the immediate family member of such a person, can serve as an officer, executive director, or employee with managerial authority of an SGO.
The Benefits of Affiliating with an SGO
Private schools and religious organizations that sponsor private schools will benefit in a number of ways from SGOs. These benefits are reason for the leaders of these institutions to consider whether to pursue efforts to establish an SGO that would be affiliated with their school or group of schools.
The current restrictions on who can run an SGO are not an insurmountable barrier to a school supporting the establishment of an SGO. A school could support the efforts of a leadership group made up of alumni of the school, donors to the school, family members of current students, and/or former board members and employees of the school to establish and run an SGO. A group of schools or a religious organization sponsoring multiple schools could also support such an effort.
Any organization that supported the establishment of such an SGO could be confident that the SGO would be run fairly, doing away with the likelihood of any favoritism being shown towards other schools A school with a strong connection to such an SGO could then serve the interests of its students, those students’ families, and the school’s financial supporters by strongly encouraging donors to contribute to that SGO and students and their families to apply to that SGO for scholarships.
Limitations on the Benefits of Affiliating with an SGO
On the other hand, any school or group of schools that is considering supporting the formation of an affiliated SGO should be aware of why it might not be necessary or beneficial to do so.
The main reason is the lack of discretion SGOs will have in allocating scholarship funds to eligible students. An SGO has to allow all students who receive funds from it to attend “any qualified school of the student’s choosing.” Additionally, students with the greatest financial need and those who submit their applications for scholarships the soonest will be given priority in allocating scholarship funds. So it would be very difficult for an SGO to favor or discriminate against students from any school or group of schools.
Additionally, there is the demanding requirement that 95% of donations made to an SGO pursuant to the Act must be allocated to scholarships. This means SGOs will have to be very efficiently run and/or draw on funds other than these donations to pay operating expenses.
Lastly, anyone who wants to establish an SGO will have to face the uncertainty left by the Act and the IDOR’s regulations regarding the application process for establishing an SGO, the handling of taxpayers’ donations and students’ applications for scholarships by SGOs, and the annual review the IDOR will conduct of all SGOs. This uncertainty is heightened because SGOs are a brand new invention and no one has any experience in running one.
Despite the uncertainty surrounding SGOs the Act provides an exciting opportunity for Illinois students, taxpayers, and private schools. Every private school and religious organization sponsoring one or more private schools needs to decide for itself if it should seek to support an affiliated SGO.