Philadelphia Updates Business Tax Guidance on Coronavirus Stimulus
February 09, 2021
By Julia Bennetsen and Vincent Occhino
On February 1, 2021, the city of Philadelphia Department of Revenue released new tax guidance regarding Philadelphia’s treatment of certain business tax provisions as a result of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and the Consolidated Appropriations Act of 2021. The guidance addresses the Payment Protection Program (“PPP”), Federal Employee Retention Credit (“ERC”), Section 163(j) Business Interest Expense Limitation, and Qualified Improvement Property (“QIP”) bonus deprecation under Sec. 168. Pennsylvania also released revised guidance addressing PPP treatment for personal income tax purposes.
Payment Protection Program (PPP)
Under the CARES Act, any portion of a PPP loan that is forgiven is excluded from gross taxable income. To be eligible for forgiveness of debt, proceeds must have been used to cover costs of payroll, mortgage interest, rent and/or utility obligations. Additionally, the Consolidated Appropriations Act clarified that those qualified expenses will be tax deductible regardless of whether the loan proceeds were excluded from taxable income.
For Pennsylvania personal income tax (“PIT”) purposes, Pennsylvania conforms to the federal provisions by excluding qualified PPP loan forgiveness from gross income and allowing eligible deductions reimbursed by forgiven PPP loans. The Economic Impact Payments (stimulus checks) received by individuals from the federal government are also excluded from gross income.
For business income and receipts tax (“BIRT”) and for net profits tax, Philadelphia also conforms to the federal provisions by excluding qualified PPP loan forgiveness from gross income and allowing eligible deductions reimbursed by forgiven PPP loans. This guidance only applies to PPP under the recent federal legislation and does not change Philadelphia’s general rule that loan forgiveness creates taxable receipts.
The ERC is a refundable payroll tax credit available to employers who have had to fully or partially suspend operations due to government orders or had a greater than 50% reduction in quarterly receipts relative to the prior year. Under the CARES Act, the credit was equal to 50% of up to $10,000 of qualified wages and health benefits for a maximum amount of $5,000 per employee. The Consolidated Appropriations Act extended and expanded the credit to 70% of up to $10,000 of qualified wages and health benefits for each of the first two quarters of 2021, for a maximum amount of $14,000 per employee.
For BIRT, an employer’s tax deduction for wages and benefits must be reduced by the employee retention credit. Additionally, the credit will not be treated as gross income to the employer.
Sec. 163(j) Limitation on Business Interest Expense
The CARES Act increased the maximum business interest expense deduction for taxpayers (except partnerships, discussed separately) from 30% of adjusted taxable income to 50% for years 2019 and 2020. In addition, to benefit taxpayers who have had reduced income in 2020, an election may be made to use 2019 adjusted taxable income for computing the limitation. For partnerships, the 50% threshold only applies to tax years beginning in 2020. With regard to 2019, 50% of excess business interest expense—exceeding 30% of adjusted taxable income—would be treated as a 2020 expense and fully deductible by the partner with no Sec. 163(j) limitation. The remaining 50% would be subject to the existing rules.
Philadelphia conforms to Sec. 163(j) for tax years beginning in 2019 and 2020 for determining a taxpayer’s interest expense deduction for BIRT purposes. Taxpayers are also obligated to use the federal interest expense deduction on a separate company basis.
A 100% Bonus Depreciation on Qualified Improvement Property (QIP)
The CARES Act allows 100% bonus depreciation on QIP placed in service after December 31, 2017, and before January 1, 2023. Philadelphia decouples from federal bonus depreciation.