Tax Impacts of PA Budget

This report is a summation of an analysis conducted by your Chamber’s auditors, RKL. The State and Local Tax Team at RKL closely monitor budget negotiations and legislation and regularly offer their review of these activities. This report is for information and illustration purposes only and Chamber members should seek specific financial and tax advice.
 
This year’s state budget crossed the finish line, that would be the Governor’s desk, a few days late and surprisingly it was a tad more than the Governor requested. The headline news for most Chamber members is that the state budget, our Commonwealth’s primary source of tax law, included much talked about changes to the Corporate Net Income Tax (CNIT). There were even some changes to the Personal Income Tax (PIT) tucked into the final budget.
 
PA Corporate Net Income Tax
Tax rate: It has been a theme for years that Pennsylvania needs to do something about its CNIT rate. At a flat rate of 9.99 percent on C Corporation taxable income, Pennsylvania had the highest rate in the country except for New Jersey, which imposes an 11.5 percent rate on income over $1 million. In 2023, the corporate tax rate will drop to 8.99 percent and then will drop another half a percent per year until it bottoms out at 4.99 percent in 2031. Once fully phased down to 4.99 percent, Pennsylvania’s rate will have dropped from the second highest in the country to the ninth lowest among states that impose a CNIT (given current rates in other states, which are subject to change).
 
Taxing income from intangibles: As a separate filing state, Pennsylvania has long been susceptible to losing tax revenue from tax planning strategies of a C Corporation setting up an intangible holding company or IHC in another state (primarily Delaware), with the operating company then paying substantial royalties to the IHC, siphoning taxable income out of Pennsylvania to a state where it was non-taxable. Expense addback provisions have lessened the effectiveness of this tax planning strategy, but there were still exceptions to these provisions and some outdated laws that kept this strategy alive…until now.
While the full leap to combined reporting, instead of separate filing did not occur, two other changes make the use of IHCs virtually obsolete for Pennsylvania-based C Corporations:

1. Pennsylvania codified an economic nexus rule that says a C Corporation is subject to tax if it has over $500,000 of sales sourced to the state.
2. The sourcing for receipts derived from intangibles was changed from cost-of-performance or where the intangible was managed to market-based such as where the intangible is used.

The combination of these changes means Pennsylvania can now directly tax IHCs that previously escaped tax altogether in the state or were, at best, maybe taxed indirectly through the expense addback provisions.

PA Personal Income Tax (PIT)
A last-minute set of amendments to the tax code as part of the budget process provides opportunities for individuals, including owners of pass-through entities, to save on their PIT when acquiring assets, starting in tax year 2023.

1. The amount that can be expensed under Internal Revenue Code 179 for Pennsylvania PIT purposes has been increased from $25,000 per year to match the federal amount ($1,080,000 for 2022 and adjusted annually for inflation).
2. Pennsylvania will now allow tax-deferred like-kind exchanges as allowed under Internal Revenue Code 1031 for real estate.