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Legislative Update

Week Ending June 9, 2006

• Week in Review
• Political News & Notes
• Another Successful Day on the Hill
• Senate Approves Browne’s Small Business Bill
• EMS Correction Bill on the Move
• License Enforcement and Investigation Task Force Meets
• Education Tax Credits Bill Clears Committee
• Inheritance Tax Repealer on the Move
• IRS Directory for Tax Practitioners Now Available
• Qualifications for Energy Efficiency Deduction Unveiled
• IRS Successfully Executes E-filing of Largest Tax Return
• Options for Direct Deposits of Refunds Expanded
• Charities Should Avoid Campaign Activities this Election Season

Week in Review

Legislators returned to session this week for the first time in nearly a month to find good news.finally! Money poured into the state coffers in May at a greater rate than anticipated. The Department of Revenue reported that fiscal year-to-date General Fund collections total $23.5 billion, which is $722.8 million, or 3.2 percent, above estimate. This money will come in handy as legislators and Gov. Rendell begin in earnest to negotiate a 2006-07 budget.

Tuesday marked the PICPA's annual grassroots lobbying day in Harrisburg. PICPA members from across the state heard from all four legislative caucuses as well as the Department of Revenue and the Department of Community and Economic Development.

Speaker of the House John Perzel this week rolled-out his proposed lobbying reform legislation. The proposal requires that any organization or company spending more than $10,000 a year to influence state government decisions must reveal what issue was lobbied and how much was spent.

Political News & Notes

Surprise Announcement. Republican State Rep. Rod Wilt surprised everyone this week by announcing that he was withdrawing as a candidate for re-election this fall. Wilt had no opposition in last month's GOP Primary and was thought to be a sure winner in November. Wilt becomes the 28^th member of the House to voluntarily retire this year.

Fleagle to Run as a Democrat. Incumbent Republican State Rep. Pat Fleagle, who was toppled in the May 16 GOP Primary, will run as a Democrat against Todd Rock, who defeated Fleagle. Fleagle won the write-in race on the Democrat ballot. Rock won the Republican primary by just 111 votes (3,255 to 3,144).

Another Successful Day on the Hill

On Tuesday, June 6, scores of CPAs met in Harrisburg to interact with legislative leaders and representatives from the Rendell administration, as well as to discuss matters of politics and pertinent legislation at PICPA's 6^th Annual Day on the Hill: "A View from the Inside." 

In remarks made at the program's conclusion, David Caplan, CPA, of Lafayette Hill, summarized that, "Nowhere else can we listen to, and interact with, three leaders of the Pennsylvania House and Senate, as well as various other influential people in the government, regarding key business affairs. Every year it is a reminder to me that these legislators are just regular people that look to us for information, and how easy it is to communicate our needs and wants to those who are in a position to make significant change."

Among those lawmakers addressing the group were Senate Majority Leader David Brightbill, Senate Democratic Floor Leader Bob Mellow, House Democratic Floor Leader Bill DeWeese, and CPA House members Reps. Gordon Denlinger and John Maher. The speakers broached topics ranging from the upcoming 2006-07 budget to the recent primary election results. Each spoke of the vital importance of his relationship with the PICPA as an association and CPAs in his district as resources to access when posed with questions of tax and/or business issues.

Also speaking before the gathering was Deputy Secretary of the Department of Community and Economic Development (DCED), Kenneth Klothen, who detailed the provisions of a proposed countywide EIT collection system, the drafting of which PICPA played an important role. The agenda also included a presentation by Robert Freedenberg, Deputy Secretary of Taxation for the Department of Revenue and Eileen McNulty, Executive Deputy Secretary, both of whom outlined Pennsylvania's current budget, proposed tax cuts and newly instituted compliance initiatives implemented by the Department.

The final speaker of the day was David Patti, President and CEO of Pennsylvanians for Effective Government (PEG), who updated the group on the current political climate in Harrisburg, offering insight into the May primaries and the resultant change in leadership in the Capitol, as well as projecting his views regarding the November general elections.

PICPA thanks all participating members for their invaluable input, and we look forward to continuing our dialogues with these key policy-makers.

Senate Approves Browne's Small Business Bill

On Monday, June 5, the state Senate unanimously approved legislation introduced by Sen. Pat Browne, CPA, which would help Pennsylvania's small businesses avoid a pitfall in the law that costs taxpayers thousands in additional tax dollars.

Senate Bill 1139 makes two changes to the Tax Reform Code. First, it changes the process for electing Subchapter S corporate tax status in Pennsylvania. Currently, if a corporation elects subchapter S corporate status for federal tax purposes, it is NOT automatically treated as an S corporation on the state level. This is a law unique to Pennsylvania, and as such, many corporations are unaware that there is a separate federal/state S corporation election process. This quirk in the law often results in unsuspecting small businesses paying taxes at a rate of 9.99 percent-one of the highest levels in the country-versus 3.07 percent.

Under Sen. Browne's legislation, a corporation that elects subchapter S corporate status for federal tax purposes would automatically be treated as an S corporation for Pennsylvania tax purposes, unless the corporation elects not to be treated as an S corporation. The initial election 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.

Second, this legislation will increase the maximum number of eligible subchapter S corporation shareholders from 75 to 100 to reflect the change that the American Jobs Creation Act of 2004 made to this provision on the federal level.

The measure now goes to the House for consideration.

EMS Correction Bill on the Move

Legislation amending the Emergency and Municipal Services Tax law, Act 222 of 2004, was reported from the House Rules Committee on Tuesday, June 6. Senate Bill 157 is now on the House Calendar for consideration; however, additional amendments are being drafted and could be offered to the bill as early as next week.

The legislation, as amended in committee, would change the name to the Local Services Tax (LST). It also would require every municipality to exempt individuals earning less than $12,000 from the LST based on income in the year the tax is levied. Also, it provides that the combination of the school district's levy of the LST and the municipality's levy many not exceed $52.

Generally, the bill allows only the municipality in which the employee is primarily employed to levy the LST. In the case of concurrent employment, the bill outlines which taxing jurisdiction has priority imposing the tax. The bill includes language that specifically provides that only one municipality may levy the LST per payroll period and clarifies that an employer is not responsible for payment of the LST in an amount exceeding the amount withheld, if the employer has complied with the requirements of the act.

Senate Bill 157 also requires employers to withhold the tax based on the frequency of the employee's payroll schedule.

License Enforcement and Investigation Task Force Meets

Over the past two weeks, the House Professional Licensure Committee Task Force on Enforcement and Investigation has met to discuss a number of bills drafted to protect the safety of citizens and enhance the accountability of Pennsylvania's professional and occupational licensees.

On June 1, the Committee Task Force - one of three formed by Committee chairman Rep. Tom Gannon - met to consider House Bills 2104, 2105 and 2108. All three bills are part of a ten-bill package titled, "Increasing Public Safety and Accountability of Licensees," which was developed last year by the Committee. The other task forces are those concerned with Victim Rights and Patient Safety.

House Bill 2104 would require cases to be referred to a district attorney if, during an investigation, the investigator for the Department of State uncovers facts and circumstances he reasonably believes violates a provision of the Pennsylvania Crime Code or other criminal statute. House Bill 2105 would call for the voluntary surrender of a license when a licensee is being sentenced by the court for an offense graded as a third degree misdemeanor or higher. Finally, House Bill 2108 would add holders of professional and occupational licenses to the list of persons and officers protected by the aggravated assault statute.

On June 8, the Committee met once again to consider, among other bills, House Bill 2106, which would make impersonating the holder of a professional or occupational license a crime.

Although no votes were taken on the legislation, testimony was heard from various parties to allow Task Force members to better understand the effects these new policies would have on different occupations, as well as on the Bureau of Professional and Occupational Affairs (BPOA).

PICPA will continue to monitor the bills as they are considered by the three task forces, and report any conclusions they reach that may affect the industry.

Education Tax Credits Bill Clears Committee

The House Finance Committee on Wednesday, June 7, reported out a bill that increases the cap on the Education Improvement Tax Credits program. The bill will be referred to the House Appropriations Committee for a fiscal note before moving to the House Calendar.

House Bill 2585 increases the maximum amount of allowable Education Improvement Tax Credits (EITC) in a fiscal year to $64 million. Of this amount, $42,666,667 shall be used to provide tax credits for contributions from business firms to scholarship organizations and the remainder, $21,333,333, shall be used to provide tax credits for contributions from business firms to educational improvement organizations.

Inheritance Tax Repealer on the Move

Legislation providing for the phase-out of Pennsylvania's inheritance and estate taxes was approved by the House Finance Committee this week. As originally written, the bill proposed phasing out only Class A and Class D inheritance taxes. Committee chair Dennis Leh amended the bill to include Class B.

Under House Bill 906, all Pennsylvania inheritance tax rates would be 0% for the estates of decedents dying on or after Jan. 1, 2010. The bill also clarifies that the inheritance tax rate shall be 0% upon the transfer of jointly held property from a child to their parent. Under current law, such a transfer would be taxed at 4.5%.

After the House Appropriations Committee attaches a fiscal note to the bill, House Bill 906 will go to the House Calendar for full consideration.

IRS Directory for Tax Practitioners Now Available

Tax practitioners can download a "PDF" of key IRS personnel in Pennsylvania, New Jersey, New York, and Delaware. Visit PICPA's Taxation Practice area to download the directories.

Qualifications for Energy Efficiency Deduction Unveiled 

Commercial building owners or leaseholders can now qualify for a tax deduction for making their building energy efficient. The IRS has issued a notice that establishes a process to certify the required energy savings in order to claim the deduction.

The commercial building deduction, which was enacted in the Energy Policy Act of 2005, allows taxpayers to deduct the cost of energy-efficient property installed in commercial buildings. The amount deductible may be as much as $1.80 per square foot of building floor area for buildings that achieve a 50-percent energy savings target. The notice provides that buildings below the 50-percent threshold may, nevertheless, qualify for a deduction of up to 60 cents per square foot of building floor area if they meet a 16⅔-percent energy savings target.

The notice also announces that the Department of Energy will create and maintain a public list of software that must be used to calculate energy savings for purposes of providing the certification. It also provides a process that software developers must use if they desire to have their software included on that list.

IRS Successfully Executes E-filing of Largest Tax Return

The IRS announced significant progress in its corporate e-file program, including the successful e-filing of the nation's largest tax return from General Electric (GE). On paper, GE's e-filed return would have been approximately 24,000 pages long. The file was 237 megabytes.

This is the first year that certain large corporations with assets in excess of $50 million were required to file electronically. The IRS expects more than 10,000 of these large corporations to e-file by the extended filing date of Sept. 15, 2006. More than 4,750 large corporations have already e-filed this year, including 3,042 with assets of $50 million or more.

Corporations that have assets of $50 million or more and file at least 250 returns annually are mandated to electronically file their 1120/1120S income tax returns for tax years ending on or after Dec. 31, 2005.

After the first effective year, the requirement will affect corporations that have assets of $10 million or more.

Options for Direct Deposit of Refunds Expanded

Hoping to encourage higher savings and more banking, the IRS will create a new program to allow taxpayers who use direct deposit to divide their refunds in up to three financial accounts.

A new form, Form 8888, will give taxpayers a choice of selecting up to three accounts such as checking, savings and retirement accounts. Taxpayers who want all their refund deposited directly into one account can still use the appropriate line on the Form 1040 series.

Charities Should Avoid Campaign Activities This Election Season

The IRS has put procedures into place for the 2006 election season to more quickly address instances of potential prohibited activity on the part of charities, churches and other tax-exempt organizations. These new procedures are meant to ensure that public referrals, as well as activities the IRS itself uncovers, are reviewed expeditiously and treated in a consistent, fair and nonpartisan manner.

As a rule, charities, religious organizations such as churches, educational organizations and other groups that are tax-exempt under section 501(c)(3) of the tax code may not participate or intervene in any political campaign on behalf of or in opposition to any candidate for public office.

This prohibition means 501(c)(3) organizations may not endorse candidates, distribute statements for or against candidates, raise funds for or donate to candidates or become involved in any activity that would be either supportive or opposed to any candidate.

Whether an organization is engaging in prohibited political campaign activity depends upon all the facts and circumstances in each case. For example, organizations may sponsor debates or forums to educate voters. But if the debate or forum shows a preference for or against a certain candidate, it becomes a prohibited activity.

Federal courts have ruled that it is not unconstitutional for the tax law to impose conditions, such as the political campaign prohibition, upon exemption from federal income tax. This position was most recently upheld in Branch Ministries v. Rossotti, 211 F.3d 137 (D.C. Cir. 2000).