Pennsylvania Bulletin on Restricted Tax Credits

State and Local Tax

By Matthew Dodge

The Pennsylvania Department of Revenue issued Corporation Tax Bulletin 2011-03 on November 15, 2011. The updated bulletin replaces Corporation Tax Bulletin 2008-02 and provides guidelines on the application and sale of restricted credits.

The tax credits addressed by the bulletin include: the Research and Development Tax Credit (“R&D”), the Film Production Tax Credit (“Film”), the Neighborhood Assistance Program Tax Credit (“NAP’), the Resource Enhancement and Protection Tax Credit (“REAP”), the Keystone Innovation Zone Tax Credit (“KIZ”), the Alternative Energy Production Tax Credit (“AEP”), and the Keystone Special Development Zone Tax Credit (“KSDZ”).

Restricted tax credits are applied to unpaid tax liabilities for the same tax period in which they were approved before they can be sold, transferred or applied to other tax periods. The Department applies restricted credits before cash payments and utilizes a FIFO basis in applying prior-year credits until outstanding tax liability obligations are fulfilled. Restricted credits may be used by taxpayers to satisfy estimated payments and quarterly liabilities.

The R&D, Film, NAP, REAP and AEP tax credits may be passed through to shareholders, member or partners of Pennsylvania S Corporations, Limited Liability Companies and Partnerships. The entity’s tax credit is applied to its tax liability for the tax year for which the credit is approved prior to any transfer. In order to complete the pass through, the Department requires a written request on the entity’s letterhead. The request must include the names of the shareholders, members or partners and the amount of credit assigned to each individual. The request must be signed by an authorized representative and sent to the Department of Revenue. The Department of Community and Economic Development has a separate sale application for the KIZ credit.

Tax credits cannot be sold until they are first applied to the seller’s tax liability in the year the credit is approved. In order to sell a restricted tax credit, the seller is required to have filed all outstanding tax reports and taxes due. The NAP, REAP and AEP tax credits must be held for one year by the seller before being sold or assigned. Restricted tax credit can only be applied up to a maximum percentage of tax liability. The percentage of tax liability that can be offset by tax credits ranges from 50% to 100%.

The bulletin contains a section with answers to a number of frequently asked questions regarding restricted tax credits. The Department’s bulletin also includes a reference table that summarizes, by restricted tax credit, application deadlines, purchaser’s offset limits and waiting periods for each of the restricted credits.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person any tax-related matter.

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