Pennsylvania’s new budget for 2022-23 includes several business tax changes, including lower taxes for corporations.
The new budget cuts the corporate net income tax from 9.99% to 8.99% as of Jan. 1, 2023, and then gradually reduces (0.5%) it each year in phases until 2031, when it reaches 4.99%.
Pennsylvania’s corporate net income tax rate is currently the second highest in the nation, behind only New Jersey at 11.5%, according to the Tax Foundation. The 2031 rate will make Pennsylvania’s corporate net income tax the sixth lowest, according to the Pennsylvania Chamber of Business and Industry (PCBI).
Other business tax changes that start Jan. 1 include:
Market Sourcing for Sales of Certain Intangibles
Examples of sales of intangible property include receipts from patents, royalties, franchise agreements, sale or exchange of securities, and interest in connection with loans. Under current law, receipts from the sale of such property are not apportioned based upon where the purchaser receives or uses the property. The new rules will align the apportionment rules governing sales of intangible property with the sales of tangible personal property, real property and services to be consistent with market sourcing, meaning where the purchaser paying for the sale or using the property is located.
Economic Nexus for Corporations with $500,000 or More in Pennsylvania Sales
The budget codifies a 2019 bulletin requiring out-of-state corporations with $500,000 or more of Pennsylvania sales to file corporate tax reports in Pennsylvania.
Conforms with the Federal 179 Expense Deductions for S Corps and Partnerships
The budget increases the limit from $25,000 to match the federal limit – currently $1,080,000 for 2022 – on Section 179 property that may be treated as a deductible expense for S Corps and partnerships. There are no changes to the C Corporation rules and regulations.
Conforms with the Federal 1031 Like-Kind Exchanges for S Corps and Partnerships
The budget conforms state 1031 Like-Kind Exchange rules for S Corps and partnerships to the federal rules. This will allow state income tax on the gain from real property to be deferred if the proceeds are re-invested in similar property as part of a qualifying like-kind exchange.
SALT Deduction CAP Workaround
A so-called workaround to the $10,000 cap on the federal deduction for state and local taxes (or SALT) was not included in the final budget so there will not be a Pennsylvania pass-through entity tax for the foreseeable future.
Tax Credit Programs
The new state budget also increased funding for the following business tax credits:
- Research and Development Tax Credit: Increases the annual cap by $5 million (from $55 million to $60 million).
- Film Production Tax Credit: Increases the annual cap by $30 million (from $70 million to $100 million).
- Entertainment Economic Enhancement Program Tax Credit: Increases the annual cap by $16 million (from $8 million to $24 million).
- Waterfront Development Tax Credit: Increases the annual cap by $3.5 million (from $1.5 million to $5 million).
Individual Tax Changes
The new Pennsylvania budget also enacted some individual tax changes including:
- The creation a state child care tax credit equal to 30 percent of the federal child and dependent care credit.
- A one-time 70 percent property tax rebate for income-eligible senior citizens or permanently disabled individuals 18 years or older.
- Additional funding for Pennsylvania’s Educational Improvement Tax Credit program that provides tax credits towards private school tuition. Both businesses and individuals can benefit from these tax credits.
While these tax changes don’t start until Jan. 1, now is a good time to start discussing with your CPA how you can best take advantage of them for your business. Please contact us if you’re interested in scheduling a tax planning consultation.