By Peter N. Calcara, PICPA Vice President - Government Relations
State budget negotiations are in full swing in Harrisburg, which is when many tax bills are proposed and agreed to. This year, the PICPA is urging the General Assembly to act on legislation that will help small businesses in the state and correct a tax unfairness. Because Pennsylvania is one of only five states with no statutory workaround to the federal $10,000 State and Local Tax (SALT) cap enacted as part of the 2017 Tax Cuts and Jobs Act, the state stands nearly alone in its adverse tax treatment of small businesses and pass-through entities. This shortcoming in good tax policy may not be a headline-grabber, but it is top of mind for many of Pennsylvania’s small businesses and their owners as the General Assembly considers budget legislation.
The Trump-era SALT cap limits the federal deduction allowed on state taxes paid, including the personal income taxes imposed on owners of pass-through entities such as partnerships, S corporations, and limited liability companies. To date, 36 out of the 41 states that impose personal income taxes have enacted pass-through entity tax (PTET) legislation to facilitate federal deductions (see AICPA's PTET chart). These PTET efforts are generally revenue-neutral and have benefitted from strong bipartisan support. Three of the remaining states (including Pennsylvania) have introduced legislative proposals. Senate Bill 659, sponsored by Pennsylvania Sen. Ryan Aument, would enact an optional SALT cap workaround. As of the publishing of this blog, Aument’s bill is pending in the Senate Finance Committee.
Pennsylvania’s neighboring states of Maryland, Ohio, New Jersey, New York, and West Virginia have all enacted SALT cap workarounds to support their pass-through entities and owners. The holdouts represent 5% of the country’s population, of which Pennsylvania represents an overwhelming 77% of that remaining population. Pennsylvania is standing alongside small-market states such as Delaware, Maine, North Dakota, and Vermont. The lack of a PTET workaround could make Pennsylvania a less-attractive state in which to own or operate a business.
In a final twist, Pennsylvania does not allow its resident partners to claim a credit for PTET paid to other states – effectively double-taxing these owners. Other states have corrected similar issues, again leaving Pennsylvania as an outlier. Senate Bill 660, also sponsored by Aument, would address this unfairness by allowing Pennsylvania resident partners the same credit for PTET currently available to resident S corporation shareholders.
Aware of the impact of this situation, the PICPA firmly believes it is in the best interest of Pennsylvania’s residents for the state to enact a workaround in line with nearly all other states. PICPA members are encouraged to contact their state legislators and urge them to support Aument’s legislation.
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The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.