Q&A with the Pennsylvania Department of Revenue

An irrevocable trust receives a PARK-1 from a pass-through entity that has both income and credits. How do the credits get reported?

Jul 14, 2015
Q:

An irrevocable trust receives a PARK-1 from a pass-through entity that has both income and credits (EITC, etc). The trust would then fully distribute its income to its beneficiary. Therefore, the trust does not pay any Pennsylvania State income tax, and all of the income is taxed on the beneficiary’s individual income tax return. 

How do the credits get reported / recognized in this scenario? 

A:

The Restricted tax credits earned or awarded to an estate or trust cannot be passed through to the beneficiaries of the estate or trust. Credits not used by the trust are lost. All of the restricted credits contain language prohibiting the "double pass-through" of credits. For example, in the EITC statute "A tax credit not used by the applicant in the taxable year the contribution was made or in the year designated by the shareholder, member or partner to whom the credit was transferred under section 1705-F(e) may not be carried forward or carried back and is not refundable or transferable.” 72 P.S. § 8706-F(d). In the film tax credit statute "A shareholder, member or partner of a pass-through entity to whom credit is transferred under subsection (a) shall immediately claim the credit in the taxable year in which the transfer is made. The shareholder, member or partner may not carry forward, carry back, obtain a refund of or sell or assign the credit.” 72 P.S. 8709-D(c).
 

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These documents provide a summary of the answers provided by the Department of Revenue to the PICPA Committee on State Taxation at its annual question and answer session. These documents are classified as revenue information issued for informational purposes only for the convenience of PICPA members. Pursuant to 61 Pa. Code Section 3.4, these documents should not be relied upon for any purpose or used in tax appeals. Taxpayers requiring a binding opinion on their specific fact situation may request a written letter ruling under 61 Pa. Code Section 3.3.