Gov. Tom Wolf signed House Bill 1342 into law as Act 53 of 2022 marking the first change in Pennsylvania’s corporate net income tax (CNIT) rate since 1995, reducing it by more than 50% over the next nine years: from 9.99% in 2022 down to 4.99% in 2031.
by Drew VandenBrul, CPA, and Michael Semes, JD Dec 15, 2022, 07:00 AM
On July 8, 2022, Pennsylvania Gov. Tom Wolf signed House Bill 1342 into law as Act 53 of 2022, culminating month’s-long bipartisan negotiations. The law marks the first change in Pennsylvania’s
corporate net income tax (CNIT) rate since 1995, reducing it by more than 50% over the next nine years: from 9.99% in 2022 down to 4.99% in 2031.
To achieve this rate reduction, Act 53 modifies certain CNIT receipt apportionment sourcing
provisions and codifies new economic nexus thresholds. From a small-business perspective, Act 53 conforms personal income tax (PIT) provisions to the Internal Revenue Code treatment of Section 1031 deferrals on like-kind exchanges and Section 179
first-year expensing. Act 53 also expands many tax credit provisions, but none of these changes is retroactive.1
The CNIT rate reductions incrementally occur over a nine-year period and move Pennsylvania from the second
highest CNIT rate in the nation to eighth lowest. The graph on this page illustrates the annual rate reductions and a comparison to neighboring states (assuming no changes among neighboring states).
The sourcing provisions create
some uncertainty, but nonetheless provide helpful guidance for sourcing receipts in the modern economy. The small business and tax credit changes will ease compliance and tax burdens on numerous businesses.
In 2014, Pennsylvania moved
to market-based sourcing of services (previously was costs of performance sourcing).2 Act 53 changes the sourcing method for receipts derived from certain types of financial transactions and intangible property. Act 53 does have many interpretive
gaps, but it states that the “Department [of Revenue] shall promulgate the rules and regulations necessary to implement” the CNIT sourcing provisions.
Act 53 mirrors the market sourcing provisions of the Bank Shares Tax for certain types of financial transactions. Specifically, Act 53 sources gross receipts from the following:5
Note that Act 53 specifically states that the loan sourcing provisions described above apply only to a taxpayer that regularly lends funds to unaffiliated entities.6
Act 53 also includes two “catch all” provisions:7 interest described in the paragraph is sourced to the lender’s commercial domicile, and receipts from intangible property not otherwise described are excluded from the sales factor.
Act 53 modifies the CNIT nexus thresholds, generally speaking, to require a corporation with at least $500,000 of receipts (as determined by applying the new sourcing rules) to be subject to CNIT.8 Also, these new nexus rules do not apply to
affiliated foreign entities that are subject to treaty protection.9 Therefore, a foreign licensor with treaty protection that limits its contact with Pennsylvania may not be subject to CNIT.
The annual limits for several existing tax credit programs were increased as well, as shown in the table below.
The Keystone Opportunity Zone (KOZ) program was modified to extend benefits to affiliated entities that previously received an extension of benefits and further extended the deadline to apply for and approve additional KOZs by one year (to Oct. 1, 2023, and Dec. 31, 2023, respectively). Act 53 established Airport Land Development Zones with annual credits of $2,100 for each full-time equivalent employee in excess of those employed prior to Jan. 1, 2021.Act 53’s CNIT rate reduction should make Pennsylvania more attractive to business investment, expansion, and retention. The favorable small-business and tax-credit enhancements should also increase capital investment in Pennsylvania. Finally, productive dialogue between taxpayers and the Department of Revenue will lead to the promulgation of meaningful regulations, create needed certainty, and make Pennsylvania an even more attractive place to do business.
Achieving the full benefits of these tax changes, however, will require Pennsylvania to stay the course and not slow or suspend these reductions.10Drew VandenBrul, CPA, is a state and local tax managing director with Grant Thornton LLP in Philadelphia and an adjunct professor at the Villanova University graduate tax program. He can be reached at drew.vandenbrul@us.gt.com.
Michael Semes, JD, is professor of practice at the Villanova University graduate tax program and of counsel with BakerHostetler in Philadelphia. He can be reached at msemes@bakerlaw.com.
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