Following is an update to our previous Insight dated July 2, 2013, "Pennyslvania's Budget Update," which summarized the tax reform provisions that were being negotiated by Pennsylvania lawmakers. House Bill 465 was signed into law by Governor Tom Corbett on July 9, 2013 and incorporates the following changes into Pennsylvania's Tax Reform Code of 1971.
Corporate Net Income Tax
- Effective for taxable years beginning after December 31, 2014, no deduction will be allowed for intangible or interest expense, paid or accrued, in connection with transactions with an affiliated entity. In lieu of a deduction against income, the taxpayer shall receive a credit against its Pennsylvania tax liability, calculated as follows:
- The taxpayer's Pennsylvania apportionment factor multiplied by
- The tax liability (before credits) of the affiliated entity with respect to the intangible/interest expense of the taxpayer
- However, the above deduction will be allowed if the principle purpose of the underlying transaction was not tax avoidance and the transaction was done at arm's-length rates and terms.
- Effective January 1, 2014, sales of services are allocated to Pennsylvania if the service is delivered to a location within the Commonwealth. This methodology is commonly referred to as market-based sourcing.
- For taxable years beginning after December 31, 2013, the allowable net operating loss deduction (NOL) is increased to the greater of 25% of taxable income or $4 million. The thresholds increase to 30% and $5 million for taxable years beginning after December 31, 2014.
- Taxpayers required to file an annual report shall be subject to a penalty for not filing or for making a false report, the minimum of which is $500.
Capital Stock/Foreign Franchise tax
- For taxable years beginning January 1, 2014 through December 31, 2014, the tax rate will decrease to 0.67 mills. The rate will then decrease to 0.45 mills for taxable years beginning January 1, 2015 through December 31, 2015. The tax is set to expire for taxable years beginning after December 31, 2015.
Personal Income Tax
- Taxpayers who incur intangible drilling and development costs may elect to recover the costs by expensing up to one-third of the costs in the taxable year in which the costs are incurred and expensing the remaining costs ratably over a ten-year period beginning in the taxable year in which the costs are incurred. In the alternative, taxpayers may elect to recover the costs over a ten-year period beginning in the taxable year in which the costs are incurred, with no upfront expensing.
- Taxpayers may no longer use taxes paid to foreign countries in calculating their resident credit for taxes paid.
If you have questions about the enacted Pennsylvania legislation and its potential impact on your business and/or personal income taxes, please contact a member of Schneider Downs’ SALT group.
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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.