Press Room: Tax Release

July 16, 2013

Pennsylvania Tax Law Changes Included in Fiscal 2014 State Budget

Pennsylvania Governor Tom Corbett signed House Bill (HB) 465 on July 9, 2013, which includes significant changes to the Pennsylvania tax law that will affect businesses and individuals alike. It is estimated that the bill represents a tax revenue increase of approximately $60 million for fiscal year 2013-2014. The changes are effective for tax years beginning after December 31, 2013 (unless otherwise noted) and include the following tax-related items:

Capital Stock and Franchise Tax (CSFT)

1) This modifies the phase out of the CSFT, plus extends it two additional years.    

  • 2012 – 1.89 mills ($0.00189)
  • 2013 – 0.89 mills ($0.00089)
  • 2014 – 0.67 mills ($0.00067)
  • 2015 – 0.45 mills ($0.00045)
  • 2016 – eliminated

2) The bulk of the increased revenue of $60 million is related to the CSFT extension.

Corporate Net Income

1) The bill closes the “Delaware Loophole” that allowed multistate companies to set up holding companies in Delaware as a way to avoid paying state income taxes (effective for tax years beginning after December 31, 2014).

  • Deductions are disallowed for intangible expenses or costs including the interest associated with the intangible expenses and costs paid, accrued or incurred directly or indirectly in connection with one or more transactions with an affiliated entity.
  • The adjustment is not required on transactions that are directly related to a valid business purpose and are done at arm’s length rates and terms.
  • A credit will be provided if the affiliate pays tax to Pennsylvania or another state on the income.

2) Sales Factor Sourcing – sales of services are to be sourced to where the benefit is being derived by the customer (Market Based Sourcing).

3) Net Operating Loss (NOL) Deduction – the limitation on using NOLs generated in prior years has been increased for taxable years beginning after 2013 to the greater of $4 million or 25% of Pennsylvania taxable income before the NOL deduction. For taxable years beginning after 2014 the limitation will increase to the greater of $5 million or 30%.

S Corporations, Limited Liability Companies (LLCs) and Partnerships

The Pennsylvania Department of Revenue will require information to be reported by pass-through entities to improve income tax compliance and administrative efficiencies as follows:

1) Authorizes assessment of tax at the entity level in certain instances. Partnerships and S Corporations underreporting income by more than $1 million for any tax year will be liable for the income tax, excluding interest, penalties or additions, at the tax rate applicable to the tax year, on the underreported income without regard to the tax liability of the partners or shareholders for the underreported income.

  • Partnerships and S Corporations will be assessed the tax on the underreported income at the entity level.  The partners/shareholders will NOT be assessed for the underreported income. Instead, the Partnership/S Corporation will be required to provide, within ninety days of the assessment becoming final, an amended statement to each partner/shareholder of their pro rata share of the underreported income.
  • Note: the partners/shareholders are not relieved of their tax liability on the underreported income.
  • Each partner/shareholder is allowed a credit for their share of the tax assessed against the Partnership/S Corporation that was paid by the Partnership/S Corporation. The credit is allowed on the partner's/shareholder’s return in the same taxable year that the Partnership/S Corporation underreported the income.

2) Requires estates, trusts, Pennsylvania S Corporations and Partnerships (other than publicly traded Partnerships) to maintain an accurate list of the names, current addresses and tax identification numbers of partners, members, beneficiaries or shareholders.

3) Requires estates and trusts to withhold tax on Pennsylvania-source income from non-residents.

4) Requires non-resident estates and trusts to file Pennsylvania returns if they have Pennsylvania beneficiaries or Pennsylvania-source income.

Personal Income Taxes

1) Credits are not allowed for taxes paid to foreign countries.  However, credits allowed for taxes paid to other states will remain in effect.

2) Start-up businesses are allowed to deduct $5,000 from taxable income in the year the business is established (effective for tax year 2014).

Bank Shares Tax (beginning January 1, 2014)

1) Amended to eliminate advantages to out of state banks.

2) Comprehensive changes to the tax include:

  • Removal of the use of a six year moving average valuation calculation and replaced with a one year valuation formula.
  • Elimination of the payroll and deposits factors for purposes of apportioning income, and replaced with a receipts factor only.
  • Adjustment of the rate and base of taxation from 1.25% of total equity capital to 0.89% of total bank equity capital.
  • Repeal of the current provision requiring a special appeals process and replaced with the same appeals process for other corporate taxes.

Sales and Use Tax

1) The authorization of the additional 1% Philadelphia sales and use tax scheduled to expire on June 30, 2014 has been extended.

2) The elimination of the call center tax credit (a credit against the sales tax for gross receipts taxes paid on interstate calls by call centers and telemarketers; credits may not be granted after June 30, 2013).

3) The appeal period for a business operating without a sales tax license has been shortened to 30 days.

4) The authorization of County treasurers to receive use tax due and payable from any person other than a licensee.

Inheritance Tax (applies to the estates of decedents who die on or after July 1, 2013)

1) A transfer of a qualified family owned business interest is exempt from inheritance tax if the business continues to be owned by a qualified transferee for a minimum of seven years after the decedent’s date of death.

2) The qualified family owned business interest must be reported on a timely filed inheritance tax return.

  • If the interest is no longer owned during the seven year period, it is subject to inheritance tax in the amount that would have been originally paid plus interest as of the decedent’s date of death.

3) If a transaction disqualifies the interest from the exemption, the inheritance tax due is the personal obligation of the owner of the qualified family owned business interest at the time the disqualifying transaction takes place.

4) Each owner of a qualified family owned business interest exempted from inheritance tax must certify to the department, on an annual basis, for seven years after the decedents date of death, that the qualified family owned business interest continues to be owned by a qualified transferee.

Credits

1) Innovate in Pennsylvania Tax Credit

  • This provides a new source of funding for early stage venture capital investment.
  • $100 million in tax credits may be sold to qualified taxpayers beginning October 1, 2013. Tax credits may first be applied in 2017 for taxable years that begin in 2016.
  • The total tax credits for the entire program may not exceed $20 million per year.

2) Film Tax Credit (applies to tax credits awarded after June 30, 2013)

  • This requires production companies to withhold personal income tax on payments to pass-through entities of individual talent.
  • Tax credits purchased or assigned in 2013 can be carried forward to 2014.