As Governor Corbett signed Pennsylvania’s fiscal year 2013-14 budget into law, there were some notable absences, namely the tax reform provisions. Although they did not make it into the final budget, the tax reform provisions are being negotiated in House Bill 465. The Bill contains some not-so-unexpected proposals which have made their way into the discussion. Leading the charge in this department are the measures related to the “Delaware Loophole” and capital stock/foreign franchise tax. Both of these major initiatives have been introduced in one form or another in past sessions, so there is no guarantee that both proposals will make it into the final Bill.
Following is a brief summary of the usual suspects, as well as a few additional noteworthy proposals:
Corporate Net Income Tax
- Closes the so-called “Delaware Loophole” by requiring taxpayers to add-back certain payments made to affiliated companies. If passed, this change would be effective for taxable years beginning in 2015.
- Adopts a market-based sourcing approach for sourcing sales of services.
- Increases the annual maximum net operating loss deduction to $4 million or 25% of Pennsylvania taxable income, and $5 million or 30% of Pennsylvania taxable income, for tax years 2014 and 2015, respectively.
- Implements a new $500 minimum non-filer penalty.
Capital Stock/Foreign Franchise tax
- Delays the capital stock/foreign franchise tax phase-out for an additional two years. As it stands, the tax rate is set to decrease to zero for tax years beginning January 1, 2014. However, this latest proposal looks to set the tax year 2014 and 2015 rates at .67 mills and .45 mills, respectively, with the tax expiring for tax years 2016 and thereafter.
Personal Income Tax
- Permits a taxpayer to recover Intangible Drilling Costs by using either a ten-year amortization period, or an election to expense up to one-third of the allowable costs under Internal Revenue Code §263(c).
- Conforms to the Federal rule that allows taxpayers to expense up to $5,000 in start-up costs.
- Eliminates the personal income tax credit for taxes paid to foreign countries.
We will continue to closely monitor these developments and provide updates as they become available. Please check our website or sign up for our SALT Insights to receive updates directly via email.
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