What could be better than getting rewarded financially for doing social good?
In South Carolina, there's a tax credit for that.
The state created the Community Development Tax Credit back in 2000, along with a fixed amount of revenue that could be dedicated to the tax credit, which was $5 million. That funding has not yet been exhausted, 14 years later, because it took some time for it to catch on.
There are two ways to claim this tax credit. The first is pretty simple. People (and businesses) who donate money to a nonprofit community development corporation or community development financial institution get a 33 percent state tax credit, in addition to being able to deduct the contribution from their federal taxable income.
So, in addition to the federal tax deduction available for qualified charitable contributions, the donor gets a third of their money back as a reduction in their South Carolina income tax bill. If the credit exceeds the tax owed to the state, the difference can be carried forward for up to nine years.
That's a good way to get a bigger bang for the buck, with charitable giving. There are 21 qualified community development organizations in South Carolina, which are listed at communitydevelopmentsc.org. Charleston area organizations include the S.C. Community Loan Fund, Metanoia, and Increasing HOPE.
There's a second way to take advantage of this tax credit, which is more complicated, but intriguing, because it's a way to make stock-market-sized investment returns while helping to capitalize nonprofit community development groups.
The way it works is, a person or company who loans money to one of these organizations gets a 33 percent state tax credit, as they would if the money were a donation. But it's a loan. So the investors get a 33 percent return on their money in the form of a tax credit, plus interest payments on the loan, plus they get back the amount they invested.
For example, someone who loans $30,000 to the South Carolina Community Loan Fund, formerly the Lowcountry Housing Trust, would get $10,000 back as a credit against their state tax liability the following year. For five years (the minimum loan term), they would get interest payments on the $30,000, currently at 2 percent interest. And at the end of the 5 years they would get back the $30,000.
By my math, that's an annualized return of at least 8 percent, including the tax credit and intertest payments, which is comparable to the historic average gains of the U.S. stock market. It's actually better than that, because the investor gets a third of the money back in year one, and could then invest that in something else for the remaining four years of the loan term.
By now, you may be thinking, wow, if I invest my money in a 5-year certificate of deposit at a bank, I'll be lucky to get 2 percent interest, and here's a way to get a better than 8 percent return. What's the catch?
Well, for starters, are you wealthy? Lots of community development organizations are set up to accept contributions but not loans. The S.C. Community Loan Fund, based in North Charleston, has a robust program to accept investments, but you have to loan them at least $25,000 for a minimum of 5 years, and you have to have a high annual income (at least $200,000) or high net worth (at least $1 million).
The income/net worth requirement is tied to federal standards dealing with "accredited investors" and unregistered securities. In plain English, these investments are not insured, and are meant for people who understand the risk.
The risk, primarily, is that a nonprofit organization could default on the loan. Default is a risk inherent in every loan, which investors and lenders must evaluate.
The S.C. Community Loan Fund takes invested money, gets matching loans from the federal government, and then loans out the funds at somewhat higher interest rates to other nonprofit groups that do things such as building affordable housing.
If instead of giving investors tax credits, South Carolina simply gave the money to the nonprofit groups, those groups could create revolving loan funds. However, the tax-credit scenario allows a group such as the S.C. Community Loan Fund to turn every $1,000 in tax credits into $6,000 in money it can loan out, because investments would be triple the amount of the tax credit, and then the U.S. Treasury is matching that amount.
Every year the state makes available up to $1 million for these tax credits, out of the original $5 million approved in 2000. Like some other tax credits, donors and investors need to make sure there are still tax credits available at the time they donate or invest.
The tax credit legislation is set to expire in June 2015, so next year will be the last year to make a qualifying donation or loan, unless the program is extended, as it has been twice before.
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