By Jonathan Liss
The City of Philadelphia imposes myriad taxes on businesses, but the one levied on all types of business entities is the business income and receipts tax (BIRT). For those of you who have been around a while, the tax was formerly known as the business privilege tax (BPT). Any type of entity carrying on or exercising within Philadelphia any trade, business, profession, vocation, or commercial activity for gain or profit may be subject to the BIRT. There are exceptions for nonprofit organizations, political subdivisions of the Commonwealth, public utilities, and certain investment companies. Philadelphia follows the federal entity classification rules. So, entities that are disregarded for federal income tax purposes, such as single-member LLCs, are required to file a BIRT return under the owner’s name and business tax account number.
In response to the 2018 U.S. Supreme Court decision in South Dakota v. Wayfair Inc., Philadelphia adopted an economic nexus standard for the BIRT effective Jan. 1, 2019. Under this standard, a remote business with no physical presence in Philadelphia has nexus in the city if it generates at least $100,000 in Philadelphia gross receipts during any 12-month period ending in the current year.
There are two components to the BIRT: tax on net income and tax on gross receipts. Public Law 86-272 applies only to the net income portion of the BIRT. Both components of the BIRT are reported on a separate entity basis. Combined or consolidated BIRT filings are not permitted. Many small businesses may qualify for a BIRT exclusion (more on that below).
Based on Net Income
BIRT taxpayers make an irrevocable election to compute net income by using either “Method I” or “Method II.” The method chosen must be used by the taxpayer in all succeeding years.
Under Method I, a taxpayer reports the net gain from the business in accordance with the accounting system used. Taxpayers electing Method II start the computation of Philadelphia net income with federal taxable income, prior to exclusions for dividends received and net operating losses (Line 28). In computing net income under Method II, taxpayers then add or subtract various adjustments to federal taxable income. (These adjustments are not addressed here.)
Once the appropriate adjustments to federal taxable income are made, the resulting income is subject to apportionment and allocation. Since 2015, Philadelphia has used a single sales factor to apportion the business income of BIRT taxpayers. Receipts included in the sales apportionment factor are determined by reference to the definition of receipts for gross receipts tax purposes. Recently, though, an ordinance signed by Philadelphia Mayor Jim Kenney in June 2022 adopts market-based sourcing for sales of services and intangibles. This change in sourcing methodology requires state-authorizing legislation and will be effective for the tax year after the year the state legislation is enacted.
Taxpayers are permitted to carry forward net operating losses (NOLs) from prior years to offset income apportioned to Philadelphia. The city’s NOL deduction is calculated independently of the federal deduction and is applicable to taxpayers who have elected to report BIRT net income under either Method I or Method II. Losses incurred in tax years prior to 2022 may be carried forward for three years. For losses incurred in tax years 2022 and thereafter, the NOL carry forward period is 20 years.1
Based on Gross Receipts
The definition of receipts is very broad, consisting of “cash, credits, property of any kind or nature, received from conducting any business or by reason of any sale made, including re-sales of goods, wares, or merchandise taken by a dealer as a trade-in or as part payment for other goods, wares, or merchandise or services rendered, or commercial or business transactions without deduction therefrom an account of the cost of property sold, materials used, labor, service or other cost, interest or discount paid, or any other expense.”2 The first $100,000 of taxable receipts are excluded from the gross receipts tax base. There is also a corresponding deduction from the net income tax base. Other exclusions from taxable receipts include receipts from the sale of goods delivered to a location outside the city limits and receipts from the services performed outside the city limits. In addition, there are exclusions for receipts from other members of the same affiliated group, such as dividends, interest, and royalties.
Beginning with tax year 2020, businesses that have $100,000 or less in taxable gross receipts do not owe the BIRT and are not required to file a complete BIRT return. To avoid nonfiler notices, the Department of Revenue strongly encourages taxpayers to file a “No Tax Liability” (NTL) online form through the Philadelphia Tax Center (see below). A No Tax Liability paper form may be submitted by those who prefer to file paper returns. The city’s three-year statute of limitations begins with the filing of an NTL form.
Finally, though not insignificant by any means, Philadelphia has replaced its mainframe-based tax system with a cloud-based system, including the public-facing Philadelphia Tax Center website. The new tax system was launched in two phases. Phase 1, launched in November 2021, included most business taxes. Phase 2, which added real estate and all other taxes to the website, was launched in October 2022. All Philadelphia taxes and online services are now available on the Philadelphia Tax Center. In addition to filing, amending, and paying Philadelphia taxes, the new site includes the ability to share secure information with the Department of Revenue, apply for credits and payment programs, request third-party access, and view and manage tax accounts.
Hopefully this brief excursion into the BIRT will help you as we head into the upcoming tax filing season. Should you have any technical tax questions, please address them to email@example.com.
1 The Commonwealth of Pennsylvania enacted authorizing legislation (PA H.B. 324) on Nov. 3, 2022.
2 Section 301, BIRT Regulations.
Jonathan Liss is senior revenue policy analyst for the Philadelphia Department of Revenue. He is also an adjunct professor at Drexel University and Villanova University School of Law. He can be reached at firstname.lastname@example.org.
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