New Pennsylvania Tax Legislation
Pennsylvania Governor Tom Corbett signed new tax legislation (H.B. 465) on July 9, making numerous changes to Pennsylvania tax law. Below are some of the highlights of the newly enacted law:
Intangible Expense Add-Back– Pennsylvania will now require an add-back to Corporate Net Income Tax of intangible expenses that are paid, accrued, or incurred directly or indirectly in connection with transactions with affiliated entities. The add-back includes expense related royalties, licenses and fees paid as well as interest expense to the extent that the deduction is directly related to an intangible expense. There are exceptions to the add-back provision that include situations where the affiliate receiving the payment is subject to taxation, there is a demonstrated business purpose, or the payment to an affiliate is ultimately paid to non-affiliated third parties. This provision will be effective for tax years beginning after December 31, 2014.
Expansion of the Net Operating Loss Deduction Cap – The cap on the use of net operating loss deductions is currently limited to $3 million or 20% of losses per year. This cap will increase to $4 million or 25% of losses in 2014 and will increase again to $5 million or 30% of losses in 2015 and going forward.
Phase-Out of the Capital Stock Foreign Franchise Tax Extended – The phase-out of the Capital Stock/Foreign Franchise Tax is extended for two additional years. For tax years beginning after December 31, 2013 the tax rate is reduced to 0.67 mills. For tax years beginning after December 31, 2014 the tax rate is reduced to 0.45 mills. For tax years beginning after December 31, 2015 the tax rate drops to 0.00 mills.
Sales Factor Move to Market-Based Sourcing – Effective for tax years after December 31, 2013, Pennsylvania will employ “market-based” sourcing for sales factor apportionment purposes for certain sales unrelated to the sale of tangible personal property and primarily related to the sale of services. The current law employs a “greater cost of performance” standard and this sourcing model will still be employed for sourcing purposes of those sales not specifically enumerated within the new law. The Department of Revenue, in conjunction with Chief Counsel, will be providing additional guidance for compliance with this new law later this year.
Philadelphia Sales and Use Tax – The sunset provision of the temporary additional 1% local Philadelphia sales and use tax (scheduled to expire June 30, 2014) is eliminated and the rate will remain in place until further legislation is passed to change the rate.
Personal Income Tax – Effective for tax years beginning after December 31, 2013, the Pennsylvania Personal Income Tax will allow for start-up business deductions in the year a business is started to align with federal law and eliminate the Personal Income Tax Credit for taxes paid to foreign countries. The credit for taxes paid to domestic taxing jurisdictions remains unchanged.
Inheritance Tax – The new law eliminates the inheritance tax on real estate and other assets of small family-owned businesses that are transferred to members of the same family, provided that the business remains under family control for at least seven years after the owner’s death.
Tax Credits – The new law establishes two new credits, the “Innovate in PA Tax Credit” and the “Mobile Telecommunication Broadband Investment Credit.” The Innovate in PA Tax Credit creates $100 million of new funding sources for venture capital investment in new businesses. The new law also provides for economic development and job creation in Commonwealth third class cities in the “City Revitalization and Improvement Zones (CRIZ)” program. Guidelines for the program are expected to be published by October 31, 2013.
Board of Finance and Revenue – Effective April 1, 2014, the Board of Finance and Revenue will be reconstituted as a three-member board comprised of three full-time members, two nominated by the governor and approved by the senate and the third member being the state treasurer or designee. This is a change from the current structure with six board members. The new law also allows the Department of Revenue representation before the Board and will not allow substantive communication with the Board without representation of the Department and Petitioner. The Board may now order compromise settlements.
Realty Transfer Tax – Effective for tax years beginning after January 31, 2013, the definition of a “real estate company” now includes a corporation or associates that own 90% or more of the fair market value of its assets in a direct or indirect interest in a “real estate company.” The prior law, and still applicable first level definition of a “real estate company,” is an entity primarily engaged in the business of holding, selling, or leasing real estate with 90% of its ownership interest held by 35 or fewer persons and which derived 60% or more of its annual gross receipts from ownership or disposition of real property; or holds real estate, the value of which comprises 90% or more of the value of its entire tangible asset holdings. The new law also modifies the criteria for determining when 90% or more of the total ownership interest in a real estate company has been deemed to be transferred. The Department of Revenue, in conjunction with Chief Counsel, will be providing additional guidance for compliance with this new law later this year.
The new law also makes changes to the Bank Shares Tax.
For full text of H.B. 465 please click here.