Q&A with the Pennsylvania Department of Revenue

According to the Interpretation of Section 1374, "no tax is imposed on the net recognized built-in gain of an S-corporation if the 7th year of the applicable recognition period ended before the tax year.” Is the gain excluded so as to make the tax zero?

Jul 22, 2015
Q:

According to the Interpretation of Section 1374, "no tax is imposed on the net recognized built-in gain of an S-corporation if the 7th year of the applicable recognition period ended before the tax year.” Is the gain excluded so as to make the tax zero? Does this mean that PA should similarly not tax the gain?

A:

For the calculation of Pennsylvania Corporate Net Income tax, 72 P.S. §7401(3)1.(p) defines the taxable income of a Pennsylvania S corporation as the corporation’s net recognized built-in gain as determined for federal income tax purposes under section 1374(d)(2) of the Internal Revenue Code of 1986. The American Recovery and Reinvestment Act of 2009 did not amend the recognition of built-in gains under this section of the Internal Revenue Code.

This act amended paragraph (7) of section 1374 (d) by providing special provisions for imposing the tax on certain built-in gains. Any built- in gains recognized under section 1374(d)(2) of the Internal Revenue Code are included in the calculation of Pennsylvania Corporate Net Income Tax of a Pennsylvania S corporation even if they are not included in the calculation of the federal built-in gains tax.




PICPA State and Federal Taxation Committees

Pennsylvania Department of Revenue

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These documents provide a summary of the answers provided by the Department of Revenue to the PICPA Committee on State Taxation at its annual question and answer session. These documents are classified as revenue information issued for informational purposes only for the convenience of PICPA members. Pursuant to 61 Pa. Code Section 3.4, these documents should not be relied upon for any purpose or used in tax appeals. Taxpayers requiring a binding opinion on their specific fact situation may request a written letter ruling under 61 Pa. Code Section 3.3.