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Legislative Update

Week Ending March 3, 2006

• Week in Review
• Political News & Notes
• S Corp Election Bill Introduced
• PICPA Urges Adoption of CPA Law Changes
• New DOR Depletion Policy
• Budget Hearings Continue
• IRS Reports on Political Activity Compliance Initiative
• Treasury & IRS Provide Energy Bill Guidance
• Group Lauds PA's Competitive Business Climate
• Save the Date and Make a Difference

Week in Review

Pennsylvania collected $1.5 billion in General Fund revenue in February, $14.9 million, or 1%, less than anticipated. February sales and corporate tax receipts were above estimates, while Personal Income Tax revenue was below estimates. Fiscal year-to-date collections are more than $291 million above estimates, however.

Budget hearings were in full swing in both the House and Senate this week. With its public hearings on the budget now completed, the House returns to regular session March 6. The Senate Appropriations Committee continues delving into the details of Gov. Rendell's $25.4 billion Fiscal Year 2006-07 state spending proposal for another week.

Political News & Notes

Two More Retirements. State Rep. Mark McNaughton of suburban Harrisburg and Philadelphia area Rep. Marie Lederer will not seek re-election this year. McNaughton was first elected in 1996 and Lederer in 1992. A total of 24 representatives and 3 senators have announced that they will not seek re-election this year.

Hoeffel Joins Lieutenant Governor Race... Former Congressman Joe Hoeffel expects to make a formal announcement in a few weeks that he will be a Democratic candidate for Lieutenant Governor this year. Hoeffel joins Allegheny County recorder of deeds Valerie McDonald Roberts and political activist Gene Stilp in challenging Lieutenant Governor Catherine Baker Knoll. Gov. Rendell is reportedly endorsing Knoll, but he's not discouraging others from entering the race.

Dating Game. The AFL-CIO has announced it is "dating" the National Education Association (NEA), the nation's largest teachers' union, and that it will pour $40-million into union political effort on mid-term elections this year. As part of the arrangement, the NEA will allow its local affiliates to join the AFL-CIO. The AFL is targeting 21 states including Pennsylvania in this year's elections. The head of the NEA says the arrangement is not going to lead to a marriage at the national level.

S Corp Election Bill Introduced

Sen. Pat Browne, CPA, has once again introduced legislation, with the PICPA's support, changing the process for electing subchapter S corporate tax status in Pennsylvania. The new legislation, which is similar to Senate Bill 737, makes several technical corrections.

Under Senate Bill 1139, a corporation that elects subchapter S corporate status for federal tax purposes would automatically be treated as an S corporation for Pennsylvania tax purposes as well, unless the corporation elects not to be treated as an S corporation. Currently, there is a separate S corporation election for federal and Pennsylvania tax purposes. In many circumstances, S corporations mistakenly fail to elect S corporation status in Pennsylvania because of our unique law and are unfairly penalized for this oversight. The initial election to elect not to be an S corporation would require the consent of 100 percent of the shareholders and cannot be revoked for 5 years, unless the corporation becomes a qualified subchapter S subsidiary.

In addition, the federal American Jobs Creation Act of 2004 increased the maximum number of eligible subchapter S corporation shareholders from 75 to 100, effective December 31, 2004. This legislation incorporates this change as part of the state Tax Reform Code by adopting the Internal Revenue Code of 1986, as amended to January 1, 2005.

The bill has been referred to the Senate Finance Committee.

PICPA Urges Adoption of CPA Law Changes

PICPA President-elect Andy Weidman told members of the House Professional Licensure Committee that passage of Senate Bill 251 was important to Pennsylvania CPAs because it would increase uniformity with other licensing jurisdictions and permit ease of mobility for CPAs across state lines, in person or electronically, in order to better serve clients and employers outside the state.

The bill, which amends the state CPA Law, was the subject of a public hearing this week. Senate Bill 251, sponsored by the late Sen. Robert Thompson, ushers in the concept of "substantial equivalency", mandates 150-hours of education, changes ownership requirements of a CPA firm and makes changes to the peer review requirements that are consistent with revised national professional standards.

Under the concept of substantial equivalency, if a CPA has a license in good standing from a state with CPA licensing criteria that are essentially equal to those outlined in the Uniform Accountancy Act, i.e., education, examination and experience, then the CPA would be granted the privilege of participating in another state that is not his or her principal place of business.

Individual CPAs who practice across state lines, or who serve clients in another state via electronic technology, would not be required to obtain an additional temporary license if they hold a valid license from another state and if their home state of licensure is deemed substantially equivalent. Passage of Senate Bill 251 would ensure Pennsylvania law meets the UAA criteria.

Also under Senate Bill 251, beginning in 2010, persons seeking a CPA certificate and license would be required to have at least 150 college credits. Senate Bill 251 also provides that, beginning 2010, only one year of experience is necessary. Current law provides that candidates for the CPA certification must have one or two years experience depending on the number of college credits completed.

Senate Bill 251 increases the ownership percentage for an accounting practice for non-licensed persons to 49%. This provision is consistent with the Uniform Accountancy Act. Non-licensed persons may own up to a 33% interest in an accounting firm under current law.

Members of the Committee were generally receptive to the changes contained in Senate Bill 251. Others testifying in support of the legislation included the Bureau of Professional and Occupational Affairs, the Pennsylvania Securities Commission, KPMG Professor of Accounting Dr. Charles Smith and Widener University Associate Professor of Accounting Dr. Joseph Haragadon.

New DOR Depletion Policy

The Department of Revenue has adopted a statement of policy relating to allowance of deduction for cost depletion and percentage depletion. The statement of policy was published in the Feb. 25, 2006, Pennsylvania Bulletin and is effective immediately.

The policy statement is intended to clarify the scope and application of allowances of deductions for cost depletion to the state Personal Income Tax. The allowance of deductions for percentage depletion is not generally acceptable by standards of the accounting professional and constitutes an unconstitutional item of tax preference under the state Constitution after the cost of recoverable units has been fully recovered.

In addition, the policy statement defines the allowable set of circumstances for a deduction for percentage depletion.

Budget Hearings Continue

Budget hearings on Gov. Rendell's proposed 2006-07 state spending plan were in full swing this week. The Departments of Community and Economic Development, Education, Public Welfare, Banking and Revenue, as well as the Treasurer and Attorney General, marched before the House and Senate Appropriations Committees to answer questions from lawmakers.

Secretary Greg Fajt had a similar message for the members of the Senate Appropriations Committee that he shared with the House Committee a week earlier. In addition to outlining the administration's proposed business tax cuts in the 2006-07 budget, Fajt urged the committee to enact Gov. Rendell's business tax reform proposals.

Sec. Fajt was also queried about property tax reform. In response to a question concerning the Commonwealth Caucus's property tax plan, the secretary explained that the Department of Revenue has determined it will take $10 billion to eliminate school property taxes, and the Caucus's plan is "woefully short".

Another senator inquired what percentage of budget revenues come from business tax payments versus individual tax payments. Sec. Fajt replied 37% of revenue comes from the PIT, 33% from the sales tax and 18% from business taxes. He noted that the percentages used to be different but business taxes have dropped as a percentage because of subchapter S corporations and LLCs paying a 3.07% tax rate.

Questioned about how the Department can force companies to reveal information about abusive tax shelters, Fajt explained that the IRS defines abusive tax shelter, and the Department is "piggybacking" on IRS investigations.

When asked about the Delaware tax loophole, Sec. Fajt replied the Delaware tax loophole is not illegal, but it clearly is a loophole the Governor wants to close. He offered that the Governor wants to use the money earned from combined reporting for business tax cuts. Sec. Fajt indicated that 17 states have implemented some form of combined reporting.

IRS Reports on Political Activity Compliance Initiative

The IRS recently released a report on the agency's examination of political activity by tax-exempt organizations during the 2004 election campaign. In connection with the report, the IRS is also unveiling new procedures for the 2006 election season, which provide additional guidance to charities regarding political activities. As part of its approach to combating this activity, the IRS has begun its educational and enforcement efforts to help ensure that charities have enough advance notice of the statutory rules against engaging in political activities. 

Treasury & IRS Provide Energy Bill Guidance 

The Treasury Department and the IRS issued guidance items to help taxpayers claim various tax credits allowed under the Energy Policy Act of 2005. The news releases on credits from the 2005 Energy law link to technical guidance for: Home builders, Homeowners, and Companies seeking credits for coal and gasification projects. 

Group Lauds PA's Competitive Business Climate

A new, independent report by a bipartisan tax education organization shows that Pennsylvania's business climate is one of the best and most business friendly among mid-Atlantic and New England states.

The Washington D.C.-based Tax Foundation this week lauded the Commonwealth's overall tax environment for business - ranking 16 among the 50 states with a more business-friendly tax code, and far ahead, and more competitive, than neighbors such as Maryland, Ohio, New Jersey and New York. In fact, the report claims only New Hampshire and Delaware have better business climates than Pennsylvania in the region.

Save the Date and Make A Difference

You can help enhance and build the professional image of Pennsylvania's CPAs by participating in the 6^th annual PICPA Day On The Hill program on Tuesday, June 6, 2006 from 8:00 a.m. to 4:00 p.m. in Harrisburg.

The program allows you to educate legislators on issues critical to the profession and your clients, and helps build relationships. You will also learn more about the legislative process and how to be more proactive in achieving positive results for all CPAs.

To register, go to http://www.picpa.org/govt/dayonthehill/index.asp.