Log In | About PICPA | Contact | FAQs

Legislative Update

Week Ending July 7, 2006

• PICPA Initiatives Included in Tax Bill
• State Budget Approved
• Rendell Signs Property Tax Bill
• UCC Changes Approved; Signed Into Law
• Minimum Wage Increase Passes
• Local Tax Collection Law Headed to Governor
• Bill Governing Trusts on Governor's Desk
• Privacy Bill Now Law in PA
• U.S. House Passes Estate Tax Reform
• Separate Returns Need Separate Envelopes
• IRS Clarifies Section 45B Credit Computation
• 2006 Professional Issues Update

PICPA Initiatives Included in Tax Bill

PICPA successfully lobbied the Pennsylvania legislature to include provisions in the omnibus tax bill that ultimately landed on the governor's desk. These changes will save taxpayers more than $12 million annually.

Senate Bill 300 includes these three PICPA initiatives: exempting single-member restricted professional companies from the capital stock and franchise tax (CSFT) - originally proposed in SB 833; conforming subchapter S election to federal subchapter S election; and increasing the number of S corp shareholders to 100 from 75 (both in Senate Bill 1139). Sen. Pat Browne, CPA, championed these changes in the Senate, while Reps. John Maher, CPA, and Gordon Denlinger, CPA, worked behind-the-scenes in the House urging their adoption.

SB 300 also includes an additional one-tenth of a mill reduction in the CSFT, an increase in the CSFT exemption to $150,000, the exemption of contributions to health savings accounts from income tax, and the exemption of contributions, rollovers, earnings, and distributions on all qualified tuition programs (529 Plans) from state income tax.

House Bill 859, a companion tax relief bill to SB 300, provides three significant tax relief measures. First, the net operating loss cap would increase from $2 million to the greater of $3 million or 12.5 percent of the company's taxable income effective Jan. 1, 2007. Second, HB 859 increases the single sales factor to 70 percent for corporate net income (CNI) tax apportionment. The current CNI formula taxes businesses using 20 percent in-state payroll, 20 percent instate property, and 60 percent instate sales. Finally, the bill increases the maximum amount of available research and development tax credits from $30 million to $40 million.

Gov. Rendell signed SB 300 into law on July 6 and is expected to sign HB 859 shortly.

State Budget Approved

Gov. Ed Rendell presented his proposed 2006-2007 budget to a joint session of the General Assembly in February. Negotiations concluded on July 1, when the legislature sent the governor a $26.1 billion state spending plan for the new fiscal year. The 2006-2007 budget increases spending over last year by about 6 percent.

The budget bill (House Bill 2499) was signed by Gov. Rendell on July 1 and includes an overall 5.9 percent increase in basic education spending (up $265 million) for a total of nearly $4.8 billion. This includes additional funding for growth districts, local tax relief, and small district assistance. Individual school districts are guaranteed a minimum 3.5 percent increase in funding.

Amendments to the Public School Code (House Bill 185), including an increase in the Education Improvement Tax Credit program, were also adopted by the General Assembly as part of the budget package. This bill awaits Gov. Rendell's signature.

This year's budget process was eased considerably due to good news coming from the Department of Revenue. The state collected $2.4 billion in general fund revenue in June, $141.6 million, or 6.3 percent, more than anticipated. Fiscal year 2005-2006 general fund collections totaled $25.9 billion, which was $864.4 million, or 3.5 percent, above estimates.

Rendell Signs Property Tax Bill

Promising to provide $1 billion annually in property tax relief to all Pennsylvania homeowners by 2008, or later, depending on the availability of gaming funds, Gov. Ed Rendell signed Special Session House Bill 39 into law on June 27, 2006. The bill repeals Act 72 of 2004, the Homeowner Tax Relief Act.

The legislation, known as The Pennsylvania Taxpayer Relief Act, will give school districts the option to increase their Earned Income Tax (EIT) rate or levy a Personal Income Tax in exchange for a reduction in their property taxes. School districts may only levy a Personal Income Tax after state regulations governing local collections have been approved, a provision sought by the PICPA.

The size of the popular Property Tax and Rent Rebate Program is more than doubled -- with payments increasing by $200 million and more than 422,000 senior citizens being added to the program.

It also makes the backend referendum mandatory for school districts.

UCC Changes Approved; Signed Into Law

On June 30, 2006, Gov. Ed Rendell signed legislation that amends the Uniform Commercial Code (UCC) to clarify the law and to eliminate any confusion with respect to when lien holders must refile. The bill is effective immediately.

In 2001, when Article 9 of the UCC was revised, there was a discrepancy in the enactment, which would have negatively affected financial statements of commercial lending institutions. These statements would have lapsed at midnight on June 30, 2006, and would have become null and void.

House Bill 2542 permits Pennsylvania corporations to file a continuation statement that allows financing statements filed with the Department of State prior to July 1, 2001, to remain as legally effective documents. Under the bill, a continuation statement is filed in a timely manner if the filing occurs before the time the financing statement would expire after June 30, 2006, but not before Dec. 30, 2005.

Minimum Wage Increase Passes

Before leaving for their post-budget summer break, the General Assembly passed legislation that will bump the state's minimum wage from its current $5.15 per hour to $6.25 per hour in January 2007, and up to $7.15 per hour six months later. For smaller employers with ten or fewer employees, the raise would only be to $5.65 an hour for the first half of 2007 and to $6.65 for the remainder. By July of 2008, however, all employers would be required to pay an hourly minimum wage of $7.15.

If, as expected, Senate Bill 1090 is signed into law by the governor, this will mark the first increase to Pennsylvania's minimum wage since 1988.

Local Tax Collection Law Headed to Governor

The state House acted on legislation that will clarify the Commonwealth's local tax collector law and help ensure the safety of tax collection records. The bill is now on the governor's desk for his signature.

Under House Bill 1725, a tax collector is required to maintain and have legal custody of tax collection records in his or her possession. The bill also states that the collector would not be considered an agency of the taxing jurisdiction for purposes of the Right-to-Know Law. In addition, former tax collectors are required to transfer possession of tax records to the taxing district or its new tax collector when service ends.

House Bill 1725 also addresses the issue of timely payment in the event that the last day in which a payment may be made without a penalty falls on a weekend or a legal holiday. A tax payment will be considered timely paid if the payment is tendered or postmarked on the first business day following the weekend or holiday.

Bill Governing Trusts on Governor's Desk

The General Assembly passed and sent to the governor legislation to codify, update and improve the laws governing trusts in Pennsylvania. Gov. Rendell is expected to sign the legislation, which will go into effect 120 days after enactment, with certain exceptions.

Senate Bill 660 amends the Probate, Estates and Fiduciaries Code (Title 20) with the proposed Pennsylvania Uniform Trust Act, or UTA, recommendations of the Joint State Government Commission's Advisory Committee on Decedents' Estates law. Most of the UTA is a codification of existing practice and case law regarding trusts.

Privacy Bill Now Law in PA

Senate Bill 601, which establishes the confidentiality of an individual's Social Security number, was signed into law by Gov. Rendell on June 29. The bill will be effective in 180 days.

As of the effective date of this act, it is illegal for a person, entity, state agency, or political subdivision to publicly post or display any person's Social Security number; print an individual's Social Security number on any card required for the person to access products or services provided by the entity; require an individual to transmit his or her Social Security number via the Internet unless it is encrypted or the connection is secure; require an individual to use his or her Social Security number to access an Internet Web site unless a password or other authentication device is also required; print an individual's Social Security number on any materials mailed to the individual, unless required by state or federal law; or disclose, except to the issuing agency, the Social Security number of an individual who applies for a license under the Fish or Game Codes.

This bill is not applicable to financial institutions covered by the Gramm-Leach-Bliley Act, a covered entity under regulations promulgated pursuant to HIPAA, or an entity subject to the Federal Fair Credit Reporting Act.

U.S. House Passes Estate Tax Reform

The U.S. House passed a bill last week that mirrors recommendations to reform the estate tax system that the AICPA has suggested for a number of years.

The bill (H.R. 5638), permanently reduces, but does not repeal, the estate tax. H.R. 5638, approved by a vote of 269 to 156, would do the following if passed into law:

• Exempt all estates worth less than $5 million per person.
• Tax estates between $5 million and $25 million at the capital gains rate, which is currently 15 percent.
• Tax estates above $25 million at double the capital gains rate (30 percent). However, the bill could result in a rate as high as 40 percent if Congress does not extend the lower rates on capital gains and dividends, which are scheduled to expire in 2010.

H.R. 5638 also includes a provision that would index the $5 million exemption to inflation. The outlook for passage of an estate tax reform bill in the Senate is uncertain.

The AICPA's recommendations include making permanent the technical changes Congress made to the generation-skipping transfer tax (GSTT) in 2001, increasing the exemption to eliminate the filing burden for all but the wealthiest Americans, indexing the exemption for inflation, retaining the full step-up in basis to fair market value for inherited assets, and creating a uniform exemption amount for estate, gift, and GSTT purposes.

Separate Returns Need Separate Envelopes

The IRS Tax Exempt operating division advises exempt organizations and persons who prepare returns for them that an organization's annual return and its unrelated business income tax return (Form 990-T), if required, should be mailed in separate envelopes. This will help to reduce errors and expedite processing of these returns.

IRS Clarifies Section 45B Credit Computation

Because some states have a different minimum wage than the federal rate, employers have sought clarification from the IRS as to whether they should use the federal or the state minimum wage when computing the Section 45B credit.

Employers should use the federal minimum wage when computing the Section 45B tax credit on Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips. Additional information about the employer's Section 45B credit is on IRS.gov and in the instructions included with Form 8846.

2006 Professional Issues Update-A Must for all CPAs

Join PICPA President Andy Weidman and CEO Bert Trexler as they travel across the state to discuss the issues that matter most to you and your profession. In just two hours, you'll learn what's affecting the profession and hear how PICPA is advocating on your behalf. You will also be able to share your opinions with leadership and earn valuable CPE. Register for the Professional Issues Update in your area.