Accounting for Pennsylvania Corporate Income Tax Rate Change

It’s hard to believe it’s been five years since the Tax Cuts and Jobs Act of 2017 was enacted. Nearly everyone in the U.S. was impacted in one way or another by this reform. For corporations, the change to a flat U.S. income tax rate of 21% required nearly all companies to remeasure their deferred tax assets and liabilities against the new rate.

And while changing tax rates can seem straightforward, aligning tax law with U.S. GAAP reporting requirements in accordance with ASC 740 is never as easy as it seems. Now, five years later, companies with a significant presence in Pennsylvania are being tasked once again with accounting for a recently enacted decrease in the state’s corporate income tax rate.

On July 8 of this year, Pennsylvania Governor Tom Wolf signed PA House Bill 1342 into law. The bill includes a gradual reduction in the corporate net income tax rate over the next nine years, from its current 9.99% to 4.99%. For tax years beginning on or after January 1, 2023, the rate is decreased to 8.99%, then reduced by 0.5% annually through tax year 2031 to end at the 4.99% rate.

Under ASC 740-20-45-8, companies are required to adjust their deferred tax assets and liabilities from changes in enacted tax laws or rates and record this impact in income tax expense/benefit in the period of enactment. The gradual rate change in Pennsylvania creates an additional step when calculating this adjustment. The company will be required to record its deferred tax assets and liabilities at the tax rate(s) in which they’re expected to reverse. Therefore, a rollout of the ending deferred tax assets and liabilities will be required each year to estimate the state tax rate that should be applied. Keeping in mind that the timing of these reversals is estimated, the impact of this rate change will continue to be adjusted for each period until 2031 when the state rate will stay at 4.99% under current law. 

There’s one other item companies should consider when adjusting their deferred tax balances. ASC 740 requires that any adjustments to deferred balances that relate to other comprehensive income (OCI) are required to be adjusted through income from continuing operations rather than adjusting OCI leaving a “stranded tax effect.” In 2018, the Financial Accounting Standards Board issued Accounting Standards Update No. 2018-02, reclassification of certain tax effects from accumulated other comprehensive income, to allow for a one-time adjustment to remove the “stranded tax effect” from U.S. tax reform and permit an adjustment between OCI and retained earnings. At this time, we note that the impact of the Pennsylvania rate change will be required to be adjusted through income from continuing operations even if related to OCI. 

Proper consideration should be given to remeasuring your company’s deferred tax assets and liabilities due to the recent Pennsylvania corporate income tax rate change. Contact your Schneider Downs representative if you’d like to discuss further the impact to your company’s financial statements.

About Schneider Downs Tax Services

Schneider Downs’ tax advisors have experience and expertise in a wide range of industries, including Automotive, Construction, Real Estate, Manufacturing, Energy & Resources, Higher Education, Not-for-profits, Transportation and others. Our industry knowledge and focus ensure the delivery of technical tax strategies that can be implemented as practical business initiatives.  

To learn more, visit our dedicated Tax Services page.