PICPA Forges Ahead on Pass-Through Entity Tax Reform Initiative
Members of PICPA’s Pass-Through Entities Tax Thought Leadership Committee and the government relations team have been hard at work on an important legislative initiative that addresses the impact of the federal limitation on state and local tax deductions. PICPA’s goal is to get this legislation into this year’s budget deliberations.
The PICPA is advocating for an elective pass-through entity tax (PTE tax). In addition, the PICPA is seeking an amendment to the personal income tax resident credit provisions to permit a resident owner of an interest in a partnership or limited liability company to claim a credit for the resident owner’s share of tax. This latter change would put resident owners of interests in partnerships and limited liability companies on the same footing as resident shareholders of Pennsylvania S corporations. Nearly two dozen states have enacted similar PTE tax legislation.
The federal Tax Cuts and Jobs Act of 2017 set a state and local tax deduction limitation of $10,000 for the 2018 through 2025 tax years. This cap prevents many individuals from being able to fully deduct state and local income tax and property tax on their federal individual income tax returns. This limitation is exacerbated for those with multistate ownership interests in partnerships, S corporations, and certain limited liability companies.
House Bill 1709, sponsored by Rep. Martina White (R-Philadelphia) and pending in the House Finance Committee, would enact a PTE tax structure. The bill represents a good starting point for discussions, but the PICPA Pass-Through Entities Tax Thought Leadership Committee is reviewing the language in House Bill 1709 and advocating for appropriate modifications.
Pennsylvania has an opportunity to enact a PTE tax as part of this year’s budget process to facilitate federal tax deductions for its resident pass-through entity owners, keep pace with numerous other states, and revise its current position of penalizing its resident partners.
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Bill Aligning Local Tax Filing Deadlines Heads to Governor
Legislation that will make the due date to file final local earned income tax and net profit tax returns consistent with the state personal income tax (PIT) and federal income tax return deadlines is headed to Gov. Tom Wolf for his signature. The PICPA supports this bill, which was unanimously approved by the state Senate. House Bill 2058, sponsored by Rep. Zach Mako (R-Lehigh, Northampton), passed the House in December by a unanimous vote.
House Bill 2058 amends the Local Tax Enabling Act by requiring final returns for local earned income tax (EIT) and net profit tax to be filed annually by the deadline that coincides with the filing deadline for final state and federal income tax returns. It is a companion bill to Act 10 of 2021, spearheaded by the PICPA and signed into law last year. Act 10 amended the Tax Reform Code also to align filing deadlines for final EIT and net profits returns with the state PIT, but it was viewed as a temporary fix. The similar changes appearing in House Bill 2058 will make the adjustments permanent.
The PICPA thanks Rep. Mako for his work on this legislation.
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House, Senate Finance Committees Advance Tax Measures
The House and Senate Finance committees recently reported out several tax proposals. The PICPA government relations team has been meeting with lawmakers and staff to discuss these proposals and their impact on taxpayers and tax practitioners in Pennsylvania.
The House Finance Committee voted of 15-8 to move forward on House Bill 2277, sponsored by Rep. Jesse Topper (R-Bedford). The bill would end Pennsylvania’s practice of requiring businesses to pay an estimated sales tax in advance. Currently, businesses are required to prepay the amount of sales tax they expect to collect based on the previous year’s collection. Some businesses are required to make an additional payment at the end of a tax period if they underestimated the amount of sales tax they collected. The PICPA supports this measure.
Senate Bill 349, sponsored by Sen. Scott Hutchinson (R-Butler, Clarion, Forest, Venango, Warren), was also reported from committee by a vote of 15-8. The bill would permit Section 179 property expensing to the extent allowable under the federal Internal Revenue Code. The PICPA supports the measure.
By a vote of 7-4, the Senate Finance Committee approved Senate Bill 771, sponsored by Sen. Ryan Aument (R-Lancaster). The bill proposes a reduction in the state’s corporate net income tax (CNIT) rate, currently 9.99%, to 6.99% in 2024. In a note to senators, the PICPA wrote, “Pennsylvania has one of the nation’s highest statutory corporate tax rates, which often acts as an impediment to the commonwealth’s attractiveness for economic development and new business locations.”
The committee also approved House Bill 199, sponsored by Rep. George Dunbar (R-Westmoreland), and House Bill 333, sponsored by Rep. Eric Nelson (R-Westmoreland). The Dunbar bill aligns the state’s personal income tax with the federal Internal Revenue Code (IRC) for the purposes of calculating cost and percent, depletion of mines, oil and gas wells, and other natural deposits. Nelson’s bill allows conformity to the federal IRC for Section 179 expensing for pass-through entities.
The Senate committee also approved House Bill 324, sponsored by Rep. Martina White (R-Philadelphia), which extends the ability of businesses operating in Philadelphia to carry forward net operating losses (NOLs). The PICPA has expressed support for this measure.
All the bills now go before their respective chambers of a vote.
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Senate Approves Cannabis Banking Bill
The state Senate gave bipartisan approval to legislation authored by Sens. John DiSanto (R-Dauphin/Perry) and Sharif Street (D-Philadelphia) to give state-legal cannabis businesses better access to banking and insurance services.
Senate Bill 1167 authorizes, but does not require, financial institutions and insurers to provide services to state-legal cannabis businesses. The bill also protects against state penalties for banks and insurers that service the industry. This codifies the existing climate of regulatory nonenforcement.
Despite the U.S. Treasury’s Financial Crime Enforcement Network (FinCEN) 2014 guidance for servicing cannabis-related businesses, proceeds from the industry still may be considered illegal at the federal level, say the senators. This view has greatly restricted access to conventional banking and insurance services.
Pennsylvania is one of 37 states to have legalized medical cannabis.
Senate Bill 1167 now goes to the state House for consideration.
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IFO Issues Analysis of Wolf’s Revenue Proposals
The Independent Fiscal Office (IFO) released its annual review of the revenue proposals contained in Gov. Wolf’s proposed 2022-2023 fiscal year state budget.
The analysis focuses on Wolf’s expansion of the corporate net income tax (CNIT) base and the lowering of the tax rate as well as an increase in the state minimum wage.
Wolf’s budget includes four proposals affecting CNIT: it would broaden the current add-back provision, codify Corporation Tax Bulletin 2019-04 regarding economic nexus, adopt market-based sourcing for intangibles, and reduce the CNIT rate. All proposals would be effective for tax years beginning on or after Jan. 1, 2023. Combined, the proposals are projected by IFO to reduce CNIT revenues by $67 million in fiscal year 2022-2023 and by $967 million in fiscal year 2026-2027.
Regarding the state minimum wage, the IFO analysis projects that increasing the minimum to $12.00 per hour would affect roughly 635,000 low-wage workers, who would receive an average wage gain of $1,700 per annum. It also likely would result in a reduction of 5,000 employment opportunities.
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Proposal to Send Cash to Pennsylvanians from American Rescue Plan Funds
Gov. Wolf is calling on the General Assembly to pass legislation for his $500 million PA Opportunity Program, which would be funded by the American Rescue Plan Act (ARPA).
Democratic leaders in the Senate and House have committed to introducing bills to support the PA Opportunity Program, which would use $500 million in ARPA dollars for direct payments of up to $2,000 to Pennsylvania households with an income of $80,000 or less. The program aims to help families still recovering economically from the COVID-19 pandemic or support them with covering pandemic-related costs and managing the current increasing cost of living.
Pennsylvania is sitting on more than $2 billion in federal ARPA dollars that remain without a plan and uncommitted. These funds will be sent back to the federal government by Dec. 31, 2024, if state lawmakers take no action.
Wolf’s $1.7 billion proposal also taps ARPA funds by including $225 million in support for small businesses, $204 million for direct property tax relief, $325 million for Pennsylvania’s health care system, and $450 million to invest in conservation, preservation, and revitalization of Pennsylvania communities.
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Russian Divestiture Bill Passes Pennsylvania House
The Pennsylvania House passed legislation sponsored by House Majority Leader Kerry Benninghoff (R-Centre, Mifflin) that would divest the commonwealth from Russian and Belarusian financial assets and prohibit future investment of Pennsylvania funds in financial assets of those countries.
House Bill 2447 passed the House unanimously. It now heads to the Senate for consideration.
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Voter Registration Deadline Is May 2
If you want to vote in Pennsylvania’s May 17 primary election you must be registered no later than Monday, May 2. To be eligible to vote in the primary, you must be a citizen of the United States for at least one month before the election, a resident of the election district in which you register to vote for at least 30 days before the primary, and at least 18 years of age on or before the date of the primary.
Under Pennsylvania law, only voters registered as Republicans or Democrats may vote for candidates in the primary election. You may register to vote online, or visit your county voter registration office.
Not sure of your registration status? Check it here.
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