It is always interesting to see what - if any - new or modified tax changes are enacted during Pennsylvania's annual process to pass a balanced budget. In these days of rising costs and falling revenue, tax increases are almost a certainty. Unfortunately, Pennsylvania is not immune to these demands and has enacted tax law changes as part of its 2013/2014 budget that may feel like tax increases for some businesses.
A highlight of recent changes to Pennsylvania taxes is as follows:
Capital Stock and Franchise Tax
The long anticipated phase out of the capital stock and franchise tax has been extended. The tax was originally scheduled to sunset at the end of 2013. Under the new legislation, the tax is scheduled to sunset at the end of 2015 (tax years beginning on or after 2016). The rate for 2013 stands at the current rate of 0.89 mills. The rate for 2014 is reduced to 0.67 mills and further reduced to 0.45 mills in 2015.
Related Party Intangible and Interest Expenses
A provision for the add back of related party intangible and interest expenses has been added to the corporate net income tax. The benefit companies derive from deducting expenses paid to affiliated or related parties has been under attack for some time in the Commonwealth. Although businesses are now required to make this adjustment on their returns, all is not lost. The law provides for some exceptions to the add back and should be explored to determine if the adjustment is necessary. The one exemption that is most applicable to businesses would be related party transactions that are at arm's length and not for tax avoidance purposes.
Corporate Net Income Tax Rate
The corporate net income tax rate remains the same, at 9.99 percent.
Net Operating Loss
The net operating loss for purposes of the corporate net income tax has been modified for tax years beginning in 2014. This will allow businesses to deduct the greater of 25 percent of taxable income or $4 million. The limitation is increased to the greater of 30 percent or $5million for tax years beginning on or after December 31, 2014.
Sourcing Rules for Sales of Services
The sourcing rules for sales of services for both the corporate net income tax and the capital stock/franchise tax will now be based on where the service is delivered. Services delivered to a location in Pennsylvania will be considered Pennsylvania sales. Services delivered to a location inside and outside of Pennsylvania will be sourced to Pennsylvania based upon a percentage of the total value of the service delivered to a location within the state.
Sourcing Rules for Real Property
Receipts from the sale, lease, or rental of real property are sourced to Pennsylvania if the property is located in the state.
Sourcing Rules for Tangible Personal Property
Receipts from the lease, licensing, or rental of tangible personal property are sourced to Pennsylvania if the property is first delivered to a location within the state. Property that is moved outside the state will require an allocation of the original cost attributable to the property while in the state.
Sourcing Rules for Intangibles
Receipts from intangibles continue to be sourced to Pennsylvania based on the current income producing activity and cost of performance rules.
Late Filing Penalty for Corporations
The late filing penalty for corporations has been increased to $500 plus 1 percent of any liability over $25,000 for tax years beginning after December 31, 2013.
Additional Philadelphia Sales Tax
The additional Philadelphia sales tax will continue to be 2 percent. The additional 1 percent was previously scheduled to sunset on June 30, 2014.
The loans tax was repealed for tax years beginning after December 31, 2013.
S Corporation and Partnership Changes
There have been a number of changes to the provisions governing S corporations and partnerships, including:
- The ability to assess tax at the entity level if income is underreported by more than $1 million.
- Information reporting to corporate shareholders and partners of Pennsylvania apportioned income or loss.
- Classification of S corporation and partnership income and credits will be made at the entity level.
Personal Income Tax Changes
Personal income tax changes include:
- Businesses will be allowed a start-up business deduction if it qualifies for the federal deduction for tax years starting after December 31, 2013.
- Expensing of up to one-third of intangible drilling and development costs, with the remainder being recovered over 10 years if a federal election to expense such costs has been made. Otherwise, the costs are capitalized.
- A resident credit will no longer be allowed for taxes paid to foreign countries.
- Estates and trusts with non-resident beneficiaries will be required to withhold taxes for tax years beginning in 2014.
Real Estate Transfers
Real estate companies must now consider legally binding commitments options to transfer an interest in the entity at a future date executed during the three year measurement period towards the 90 percent transfer of ownership test when determining if a real estate company has become acquired. Entities holding a direct or indirect interest in a real estate company are now considered to be real estate companies if 90 percent or more of the FMV of its assets are the direct or indirect interest in the real estate company.
Family Business Transfer Exemption
A family business exemption has been enacted for inheritance tax purposes. The transfer of a qualified family business will not be subject to tax if it is transferred to a qualified transferee. Qualified businesses are those businesses that have been in existence for 5 or more years, have fewer than 50 full time employees, have a net book value of less than $5 million, and are owned as a proprietorship or an entity owned by the decedent or the decedent and qualified transferees. Qualified transferees are the decedent's spouse, lineal descendants, siblings, and the sibling's lineal descendants. The qualified transferees must own the business for seven years for the exemption to be valid.
Several new credits have been added to the tax code:
- Keystone Special Development Zone Credit
- Neighborhood Improvement Zone Credit
- Innovate PA Credits
- Mobile Telecommunications Broadband Investment Credit
- City Revitalization and Improvement Zone Credit
Please feel free to contact Thomas Frascella at 215.734.0092 or Email or any other member of Kreischer Miller's state and local tax consulting practice for more information or questions regarding the Pennsylvania tax law changes discussed above.
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