Pennsylvania’s Budget from a Tax Perspective

Pennsylvania had an opportunity that they have not had the pleasure of dealing with for some time. Pennsylvania had significant funds available to them from higher-than-expected tax revenues collected as well as remaining federal funds.  In short, Pennsylvania entered the recent budget negotiations with a General Fund surplus of approximately $5.6 billion.  Pennsylvania passed a budget in excess of $45.2 billion when factoring in the $2.4 billion in federal funds.

Having such a significant surplus, many legislators had ideas of how to spend or in some cases not to spend these funds.  Additional funding to various programs, tax cuts or replenishing the “rainy day” fund were several thoughts with regards to how the money should be used.  The biggest change from a taxpayer’s perspective was the passing of a reduction to Pennsylvania’s corporate net income tax rate.  Historically, Pennsylvania was not viewed favorably in the business community due to the fact the state had such a high corporate net income tax rate, a flat 9.99%.  The recently passed budget addressed this concern by providing for a reduction in the rate to 8.99% in 2023 and an additional 0.5% rate reduction annually until the rate reached 4.99% in 2031. 

Significant Tax Changes

In addition to the reduction of Pennsylvania’s corporate net income tax rate, the following are other significant changes associated with Pennsylvania’s tax environment:

  • As states have based nexus (minimum connection with a state in which that state can impose their tax) on physical nexus standards in the past, the new trend is to provide for minimum economic standards that would create a tax filing requirement.  Pennsylvania provided for their economic nexus position through Corporate Tax Bulletin 209-04, but now Pennsylvania has changed from this policy statement to actually placing their position in the tax codes (assumption is $500,000 of Pennsylvania revenues creates a filing position for Pennsylvania Corporate Net Income Tax, without having a physical presence within the state.
  • Pennsylvania has changed the sourcing of receipts for apportionment purposes with regards to intangible revenues from a cost of performance measurement to a market-based approach.
  • Pennsylvania has conformed to federal tax treatment for pass through entities for personal income tax purposes with regards to IRC Section 179 deduction and revised the $25,000 limit for Pennsylvania and now provides for the federal limit of $1.08 million.  The Section 179 deduction basically provides that certain property purchased may be claimed as an expense in the year it is placed in service as opposed to depreciating the property over the life of that property. (Tax years beginning after December 31, 2022)
  • Pennsylvania also conformed to federal treatment for pass through entities for personal income tax with regards to deferring gains from a like-kind exchange provided for under IRC Section 1031.  (Tax years beginning after December 31, 2022)
  • Pennsylvania provides for additional revenues available under the Research and Development, Film Tax, and Educational Improvement Tax Credit (EITC) programs.
  • Pennsylvania created a state tax childcare credit equal to 30% of the similar federal credit.

Although the recently passed budget provided for many positive tax changes, the budget did not provide for a proposed Pass-Through Entity (PTE) tax in which many states offer as a means of working around the federal State and Local Tax deduction which limits the deduction to individuals to $10,000 annually.

Pivot will provide thoughts and perspectives to these changes as the months progress including working with the Department of Revenue to ensure these changes are implemented smoothly.