Federal

Educational Choice for Children Act

Source: Congress.gov · 4,484 words in original text

What This Bill Does

This bill creates tax credits for individuals and corporations who donate money to organizations that provide scholarships for elementary and secondary school students. The scholarships cover education expenses for students from households earning no more than 300 percent of the area median income. Students who receive these scholarships do not have to pay taxes on the scholarship money. ##

Who It Affects

- Individual taxpayers who donate to scholarship organizations - Corporations that donate to scholarship organizations - Nonprofit organizations that give out scholarships (called "scholarship granting organizations") - Elementary and secondary school students from lower and middle-income households - Parents of scholarship recipients - Private and religious schools that students may attend with scholarships - State and federal tax authorities ##

Key Provisions

- Individuals can claim a tax credit equal to the amount they donate to scholarship organizations, with the credit capped at whichever is higher: 10 percent of their adjusted gross income or $5,000 per year (Sec. 2(a)) - Corporations can claim a tax credit equal to 5 percent of their taxable income for donations to scholarship organizations (Sec. 2(b)) - Scholarship organizations must give scholarships to at least two students at different schools, cannot earmark money for specific students, must verify that recipients are from households earning no more than 300 percent of area median income, and must have annual financial audits by independent accountants (Sec. 2(a), subsection (d)) - Scholarship organizations must distribute 85 to 100 percent of donations received each year, with up to 10 percent allowed for administrative costs and up to 15 percent allowed to carry over to the next year (Sec. 2(c)) - Scholarship money received by students is exempt from federal income tax (Sec. 4) - Government entities cannot control scholarship organizations or private schools, cannot exclude private or religious schools from the program, and cannot discriminate against schools based on religious character (Sec. 5) ##

What Changes

The federal tax code will be amended to add two new tax credits: one for individuals donating to scholarship organizations (Internal Revenue Code Section 25F) and one for corporations making such donations (Section 45AA). A new federal penalty system is created for scholarship organizations that fail to distribute their donations properly (Section 4969). Students receiving scholarships will no longer have that money counted as taxable income. A real-time system will track donations to ensure they do not exceed annual caps set at $10,000,000,000 nationwide, with $20,000,000 allocated per state initially. ##

Important Definitions

- **Eligible student:** A student whose household income does not exceed 300 percent of the area median gross income and who is eligible to enroll in a public elementary or secondary school - **Qualified contribution:** A charitable donation made to a scholarship organization in cash or marketable securities (stocks, bonds, etc.) intended to fund scholarships - **Qualified elementary or secondary education expense:** Education costs for elementary or secondary schools, including tuition, fees, and tutoring expenses for students with academic needs or learning loss - **Scholarship granting organization:** A nonprofit organization exempt from federal income tax that provides scholarships to two or more students at different schools and has no officers or board members convicted of felonies - **Disqualified person:** A person who cannot receive a scholarship due to a conflict of interest, determined by rules similar to federal law governing private foundations ##

Effective Date

These tax credits apply to tax years beginning after December 31, 2023 (Sec. 6).

II 118TH CONGRESS 1ST SESSION S. 120 To amend the Internal Revenue Code of 1986 to allow a credit against tax for charitable donations to nonprofit organizations providing edu- cation scholarships to qualified elementary and secondary students. IN THE SENATE OF THE UNITED STATES JANUARY 26, 2023 Mr. CASSIDY (for himself, Mr. CORNYN, Mr. DAINES, Mr. TUBERVILLE, Mr. WICKER, Mr. BARRASSO, Mr. SCOTT of South Carolina, Mrs. BLACK- BURN, Mr. BRAUN, Mr. SCOTT of Florida, Mr. YOUNG, Mr. BOOZMAN, Mr. HAWLEY, Mr. TILLIS, and Mrs. BRITT) introduced the following bill; which was read twice and referred to the Committee on Finance A BILL To amend the Internal Revenue Code of 1986 to allow a credit against tax for charitable donations to nonprofit organizations providing education scholarships to quali- fied elementary and secondary students. Be it enacted by the Senate and House of Representa- 1 tives of the United States of America in Congress assembled, 2 SECTION 1. SHORT TITLE. 3 This Act may be cited as the ‘‘Educational Choice 4 for Children Act’’. 5 VerDate Sep 11 2014 22:17 Feb 03, 2023 Jkt 039200 PO 00000 Frm 00001 Fmt 6652 Sfmt 6201 E:\BILLS\S120.IS S120 kjohnson on DSK79L0C42PROD with BILLS 2 •S 120 IS SEC. 2. TAX CREDIT FOR CONTRIBUTIONS TO SCHOLAR- 1 SHIP GRANTING ORGANIZATIONS. 2 (a) CREDIT FOR INDIVIDUALS.— 3 (1) IN GENERAL.—Subpart A of part IV of sub- 4 chapter A of chapter 1 of the Internal Revenue Code 5 of 1986 is amended by inserting after section 25E 6 the following new section: 7 ‘‘SEC. 25F. QUALIFIED ELEMENTARY AND SECONDARY EDU- 8 CATION SCHOLARSHIPS. 9 ‘‘(a) ALLOWANCE OF CREDIT.—In the case of an in- 10 dividual who is a citizen or resident of the United States 11 (as defined in section 7701(a)(9)), there shall be allowed 12 as a credit against the tax imposed by this chapter for 13 the taxable year an amount equal to the amount of quali- 14 fied contributions made by the taxpayer during the taxable 15 year. 16 ‘‘(b) AMOUNT OF CREDIT.—The credit allowed under 17 subsection (a) in any taxable year shall not exceed an 18 amount equal to the greater of— 19 ‘‘(1) 10 percent of the adjusted gross income of 20 the taxpayer for the taxable year, or 21 ‘‘(2) $5,000. 22 ‘‘(c) DEFINITIONS.—For purposes of this section— 23 ‘‘(1) ELIGIBLE STUDENT.—The term ‘eligible 24 student’ means an individual who— 25 VerDate Sep 11 2014 22:17 Feb 03, 2023 Jkt 039200 PO 00000 Frm 00002 Fmt 6652 Sfmt 6201 E:\BILLS\S120.IS S120 kjohnson on DSK79L0C42PROD with BILLS 3 •S 120 IS ‘‘(A) is a member of a household with an 1 income which is not greater than 300 percent 2 of the area median gross income (as such term 3 is used in section 42), and 4 ‘‘(B) is eligible to enroll in a public ele- 5 mentary or secondary school. 6 ‘‘(2) QUALIFIED CONTRIBUTION.—The term 7 ‘qualified contribution’ means a charitable contribu- 8 tion (as defined by section 170(c)) to a scholarship 9 granting organization in the form of cash or market- 10 able securities for the purpose of providing scholar- 11 ships for qualified elementary or secondary edu- 12 cation expenses of eligible students. 13 ‘‘(3) QUALIFIED ELEMENTARY OR SECONDARY 14 EDUCATION EXPENSE.—The term ‘qualified elemen- 15 tary or secondary education expense’ has the same 16 meaning given the term ‘qualified higher education 17 expenses’ under paragraph (3) of section 529(e), ex- 18 cept that— 19 ‘‘(A) such paragraph shall be applied— 20 ‘‘(i) by substituting ‘elementary school 21 or secondary school (as such terms are de- 22 fined in section 8101 of the Elementary 23 and Secondary Education Act of 1965 (20 24 VerDate Sep 11 2014 22:17 Feb 03, 2023 Jkt 039200 PO 00000 Frm 00003 Fmt 6652 Sfmt 6201 E:\BILLS\S120.IS S120 kjohnson on DSK79L0C42PROD with BILLS 4 •S 120 IS U.S.C. 7801))’ for ‘eligible educational in- 1 stitution’ each place it appears, and 2 ‘‘(ii) in subparagraph (B) thereof, by 3 substituting ‘such school’ for ‘such institu- 4 tion’ each place it appears, and 5 ‘‘(B) such term shall include tutoring ex- 6 penses for student academic needs, including 7 for learning loss. 8 ‘‘(4) SCHOLARSHIP GRANTING ORGANIZA- 9 TION.—The term ‘scholarship granting organization’ 10 means any organization— 11 ‘‘(A) which— 12 ‘‘(i) is described in section 501(c)(3) 13 and exempt from tax under section 501(a), 14 and 15 ‘‘(ii) is not a private foundation, 16 ‘‘(B) whose substantial purpose is to pro- 17 vide scholarships for qualified elementary or 18 secondary education expenses of eligible stu- 19 dents, 20 ‘‘(C)(i) which meets the requirements of 21 subsection (d), or 22 ‘‘(ii) which, pursuant to State law, was 23 able, as of the date of the enactment of the 24 Educational Choice for Children Act, to receive 25 VerDate Sep 11 2014 22:17 Feb 03, 2023 Jkt 039200 PO 00000 Frm 00004 Fmt 6652 Sfmt 6201 E:\BILLS\S120.IS S120 kjohnson on DSK79L0C42PROD with BILLS 5 •S 120 IS contributions that are eligible for a State tax 1 credit if such contributions are used by the or- 2 ganization to provide scholarships to individual 3 elementary and secondary students, including 4 scholarships for attending private schools, and 5 ‘‘(D) which, separate from any other funds 6 or contributions received by such organization, 7 maintains and accounts for any contributions 8 made by any person for the purpose of pro- 9 viding scholarships for qualified elementary or 10 secondary education expenses of eligible stu- 11 dents. 12 ‘‘(d) REQUIREMENTS FOR SCHOLARSHIP GRANTING 13 ORGANIZATIONS.— 14 ‘‘(1) IN GENERAL.—An organization meets the 15 requirements of this subsection if— 16 ‘‘(A) such organization provides scholar- 17 ships to 2 or more students, provided that not 18 all such students attend the same school, 19 ‘‘(B) such organization does not provide 20 scholarships for any expenses other than quali- 21 fied elementary or secondary education ex- 22 penses, 23 ‘‘(C) such organization provides a scholar- 24 ship to eligible students with a priority for— 25 VerDate Sep 11 2014 22:17 Feb 03, 2023 Jkt 039200 PO 00000 Frm 00005 Fmt 6652 Sfmt 6201 E:\BILLS\S120.IS S120 kjohnson on DSK79L0C42PROD with BILLS 6 •S 120 IS ‘‘(i) students awarded a scholarship 1 the previous school year, and 2 ‘‘(ii) after application of clause (i), 3 any such students who have a sibling who 4 was awarded a scholarship from such orga- 5 nization, 6 ‘‘(D) such organization does not earmark 7 or set aside contributions for scholarships on 8 behalf of any particular student, 9 ‘‘(E) such organization takes appropriate 10 steps to verify the annual household income and 11 family size of eligible students to whom it 12 awards scholarships, and limits them to a mem- 13 ber of a household for which the income does 14 not exceed the amount established under sub- 15 section (c)(1)(A), 16 ‘‘(F) such organization— 17 ‘‘(i) obtains from an independent cer- 18 tified public accountant annual financial 19 and compliance audits, and 20 ‘‘(ii) certifies to the Secretary (at such 21 time, and in such form and manner, as the 22 Secretary may prescribe) that the audit de- 23 scribed in clause (i) has been completed, 24 and 25 VerDate Sep 11 2014 22:17 Feb 03, 2023 Jkt 039200 PO 00000 Frm 00006 Fmt 6652 Sfmt 6201 E:\BILLS\S120.IS S120 kjohnson on DSK79L0C42PROD with BILLS 7 •S 120 IS ‘‘(G) no officer or board member of such 1 organization has been convicted of a felony. 2 ‘‘(2) INDEPENDENT CERTIFIED PUBLIC AC- 3 COUNTANT.—For purposes of paragraph (1)(F), the 4 term ‘independent certified public accountant’ 5 means, with respect to an organization, a certified 6 public accountant who is not a person described in 7 section 465(b)(3)(A) with respect to such organiza- 8 tion or any employee of such organization. 9 ‘‘(3) PROHIBITION ON SELF-DEALING.— 10 ‘‘(A) IN GENERAL.—A scholarship grant- 11 ing organization may not award a scholarship 12 to any disqualified person. 13 ‘‘(B) DISQUALIFIED PERSON.—For pur- 14 poses of this paragraph, a disqualified person 15 shall be determined pursuant to rules similar to 16 the rules of section 4946. 17 ‘‘(e) DENIAL OF DOUBLE BENEFIT.—Any qualified 18 contribution for which a credit is allowed under this sec- 19 tion shall not be taken into account as a charitable con- 20 tribution for purposes of section 170. 21 ‘‘(f) CARRYFORWARD OF UNUSED CREDIT.— 22 ‘‘(1) IN GENERAL.—If the credit allowable 23 under subsection (a) for any taxable year exceeds 24 the limitation imposed by section 26(a) for such tax- 25 VerDate Sep 11 2014 22:17 Feb 03, 2023 Jkt 039200 PO 00000 Frm 00007 Fmt 6652 Sfmt 6201 E:\BILLS\S120.IS S120 kjohnson on DSK79L0C42PROD with BILLS 8 •S 120 IS able year reduced by the sum of the credits allowable 1 under this subpart (other than this section, section 2 23, and section 25D), such excess shall be carried to 3 the succeeding taxable year and added to the credit 4 allowable under subsection (a) for such taxable year. 5 ‘‘(2) LIMITATION.—No credit may be carried 6 forward under this subsection to any taxable year 7 following the fifth taxable year after the taxable year 8 in which the credit arose. For purposes of the pre- 9 ceding sentence, credits shall be treated as used on 10 a first-in first-out basis. 11 ‘‘(g) APPLICATION OF VOLUME CAP.—A qualified 12 contribution shall be taken into account under this section 13 only if such contribution is not in excess of the volume 14 cap established under section 3 of the Educational Choice 15 for Children Act.’’. 16 (2) CLERICAL AMENDMENT.—The table of sec- 17 tions for subpart A of part IV of subchapter A of 18 chapter 1 of such Code is amended by inserting 19 after the item relating to section 25E the following 20 new item: 21 ‘‘Sec. 25F. Qualified elementary and secondary education scholarships.’’. (b) CREDIT FOR CORPORATIONS.— 22 (1) IN GENERAL.—Subpart D of part IV of 23 subchapter A of chapter 1 of the Internal Revenue 24 VerDate Sep 11 2014 22:17 Feb 03, 2023 Jkt 039200 PO 00000 Frm 00008 Fmt 6652 Sfmt 6201 E:\BILLS\S120.IS S120 kjohnson on DSK79L0C42PROD with BILLS 9 •S 120 IS Code of 1986 is amended by adding after section 1 45Z the following: 2 ‘‘SEC. 45AA. CONTRIBUTIONS TO SCHOLARSHIP GRANTING 3 ORGANIZATIONS. 4 ‘‘(a) GENERAL RULE.—For purposes of section 38, 5 in the case of a corporation, the education scholarship 6 credit determined under this section for the taxable year 7 is the aggregate amount of qualified contributions for the 8 taxable year. 9 ‘‘(b) AMOUNT OF CREDIT.—The credit allowed under 10 subsection (a) for any taxable year shall not exceed 5 per- 11 cent of the taxable income (as defined in section 12 170(b)(2)(D)) of the corporation for such taxable year. 13 ‘‘(c) QUALIFIED CONTRIBUTIONS.—For purposes of 14 this section, the term ‘qualified contribution’ has the 15 meaning given such term under section 25F. 16 ‘‘(d) DENIAL OF DOUBLE BENEFIT.—No deduction 17 shall be allowed under any provision of this chapter for 18 any expense for which a credit is allowed under this sec- 19 tion. 20 ‘‘(e) APPLICATION OF VOLUME CAP.—A qualified 21 contribution shall be taken into account under this section 22 only if such contribution is not in excess of the volume 23 cap established under section 3 of the Educational Choice 24 for Children Act.’’. 25 VerDate Sep 11 2014 22:17 Feb 03, 2023 Jkt 039200 PO 00000 Frm 00009 Fmt 6652 Sfmt 6201 E:\BILLS\S120.IS S120 kjohnson on DSK79L0C42PROD with BILLS 10 •S 120 IS (2) CONFORMING AMENDMENTS.—Section 1 38(b) of such Code is amended by striking ‘‘plus’’ at 2 the end of paragraph (39), by striking the period 3 and inserting ‘‘, plus’’ at the end of paragraph (40), 4 and by adding at the end the following new para- 5 graph: 6 ‘‘(41) the education scholarship credit deter- 7 mined under section 45AA(a).’’. 8 (3) CLERICAL AMENDMENT.—The table of sec- 9 tions for subpart D of part IV of subchapter A of 10 chapter 1 of such Code is amended by adding at the 11 end the following new item: 12 ‘‘Sec. 45AA. Contributions to scholarship granting organizations.’’. (c) FAILURE OF SCHOLARSHIP GRANTING ORGANI- 13 ZATIONS TO MAKE DISTRIBUTIONS.— 14 (1) IN GENERAL.—Chapter 42 of the Internal 15 Revenue Code of 1986 is amended by adding at the 16 end the following new subchapter: 17 ‘‘Subchapter I—Scholarship Granting 18 Organizations 19 ‘‘Sec. 4969. Failure to distribute receipts. ‘‘SEC. 4969. FAILURE TO DISTRIBUTE RECEIPTS. 20 ‘‘(a) IN GENERAL.—In the case of any scholarship 21 granting organization (as defined in section 25F) which 22 has been determined by the Secretary to have failed to 23 satisfy the requirement under subsection (b) for any tax- 24 VerDate Sep 11 2014 22:17 Feb 03, 2023 Jkt 039200 PO 00000 Frm 00010 Fmt 6652 Sfmt 6201 E:\BILLS\S120.IS S120 kjohnson on DSK79L0C42PROD with BILLS 11 •S 120 IS able year, any contribution made to such organization dur- 1 ing the first taxable year beginning after the date of such 2 determination shall not be treated as a qualified contribu- 3 tion (as defined in section 25F(c)(2)) for purposes of sec- 4 tions 25F and 45AA. 5 ‘‘(b) REQUIREMENT.—The requirement described in 6 this subsection is that the amount of receipts of the schol- 7 arship granting organization for the taxable year which 8 are distributed before the distribution deadline with re- 9 spect to such receipts shall not be less than the required 10 distribution amount with respect to such taxable year. 11 ‘‘(c) DEFINITIONS.—For purposes of this section— 12 ‘‘(1) REQUIRED DISTRIBUTION AMOUNT.— 13 ‘‘(A) IN GENERAL.—The required distribu- 14 tion amount with respect to a taxable year is 15 the amount equal to 100 percent of the total re- 16 ceipts of the scholarship granting organization 17 for such taxable year— 18 ‘‘(i) reduced by the sum of such re- 19 ceipts that are retained for reasonable ad- 20 ministrative expenses for the taxable year 21 or are carried to the succeeding taxable 22 year under subparagraph (C), and 23 VerDate Sep 11 2014 22:17 Feb 03, 2023 Jkt 039200 PO 00000 Frm 00011 Fmt 6652 Sfmt 6201 E:\BILLS\S120.IS S120 kjohnson on DSK79L0C42PROD with BILLS 12 •S 120 IS ‘‘(ii) increased by the amount of the 1 carryover under subparagraph (C) from 2 the preceding taxable year. 3 ‘‘(B) SAFE HARBOR FOR REASONABLE AD- 4 MINISTRATIVE EXPENSES.—For purposes of 5 subparagraph (A)(i), if the percentage of total 6 receipts of a scholarship granting organization 7 for a taxable year which are used for adminis- 8 trative purposes related to activities for pro- 9 viding scholarships for qualified elementary or 10 secondary education expenses of eligible stu- 11 dents (as such terms are defined in section 12 25F(c)) is equal to or less than 10 percent, 13 such expenses shall be deemed to be reasonable 14 for purposes of such subparagraph. 15 ‘‘(C) CARRYOVER.—With respect to the [Text truncated for display. Full text available on Congress.gov.]

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