By Peter N. Calcara, PICPA Vice President – Government Relations
Now that September is here, the Pennsylvania General Assembly’s fall session is in full swing. Lawmakers have an array of tax measures that are still potentially in play as final bills for the year are being considered. The tax-related bills range from accelerating the reduction in the state’s corporate net income tax rate, increasing the net operating loss carryover, eliminating the state’s gross receipts tax on cellular phone service, changing the Bank Shares Tax, among others. There are also a number of new tax credit programs lawmakers are weighing.
This article discusses a few of the tax proposals being advanced by the PICPA and its government relations team in Harrisburg. These proposals have all been developed in coordination with the PICPA State Tax Thought Leadership Committee and subcommittees.
In particular, the PICPA is urging the General Assembly to act on legislation that will help small businesses in the state and correct a tax unfairness. 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, and the state stands nearly alone in its adverse tax treatment of small businesses and pass-through entities. This tax policy shortcoming may not be a headline-grabber, but it is top-of-mind for many of Pennsylvania’s small businesses and their owners.
The SALT cap limits the federal deduction allowed on state and local 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 a federal deduction. 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, and House Bill 1584, sponsored by Reps. Nick Pisciottano and Keith Greiner, CPA, would enact an optional SALT cap workaround. The bills are pending in the chambers’ respective finance committees.
Pennsylvania’s neighboring states of Maryland, Ohio, New Jersey, New York, and West Virginia all have SALT cap workarounds to support their pass-through entities and owners. The holdout states represent 5% of the country’s population, of which Pennsylvania represents an overwhelming 77% of that remaining population. Pennsylvania is in the company of 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 related short-coming, 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. Pennsylvania resident partners who are subject to PTET in other jurisdictions may incur a double tax based on the denial of a Pennsylvania resident credit, even though the same amount of tax is being paid to the other states through the PTET as was paid directly by Pennsylvania residents.
The Pennsylvania Department of Revenue (DOR) has articulated its position that a Pennsylvania resident partner is not entitled to a credit against personal income tax for PTET paid to other states. This contrasts with the DOR position that a Pennsylvania resident S corporation shareholder is eligible for a similar personal income tax credit. The PICPA supports legislation that would allow the same credits for resident partners and S corporation shareholders, alleviating this potential for double taxation. Senate Bill 660, also sponsored by Aument, would address this unfairness by allowing Pennsylvania resident partners the same credit for PTET that currently is available to resident S corporation shareholders.
Pennsylvania is the only state that does not conform to the federal grantor trust rules for personal income tax (PIT) purposes. Under the Internal Revenue Code’s grantor trust rules, the grantor of a trust may be treated as the owner of all or part of the trust. The trust is not treated as a separate taxable entity — at least to the extent of the grantor’s interest. As a result, the grantor is taxed on the trust’s income and reports its deductions.
Under the PIT statute, a trust is classified either as revocable or irrevocable. An irrevocable trust is treated as a separate entity, whether the entity qualifies as a grantor trust for federal income tax purposes. In instances where the trust is taxed on income for PIT purposes, but the grantor is taxed on the same income in other states, the DOR does not permit a resident to claim a PIT credit for trust income taxed to the grantor in other states. The DOR treats the trust and the grantor as different taxpayers. As a result, the trust and/or the grantor cannot claim a resident credit for taxes paid to other states on the trust income.
Senate Bill 815, sponsored by Sen. Lisa Baker (R-Luzerne), would conform Pennsylvania law to federal law with regard to which party is obligated to pay the tax owed, noting that it would not relieve the trust’s income from taxation, but rather would permit a resident to claim a credit for trust income taxed in other states. The bill passed the state Senate on Sept. 19 by a vote of 44-2. The bill is now before the House Judiciary Committee for consideration.
The PICPA government relations team is committed to advocating on behalf of our members and to advancing these proposals through the legislative process through the end of this legislative year and beyond if necessary.
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