By Peter N. Calcara, PICPA Vice President – Government Relations

As part of the recently enacted Pennsylvania budget agreement, lawmakers and Gov. Josh Shapiro approved an omnibus amendment to the Tax Reform Code. Senate Bill 654, now Act 56 of 2024, was signed into law on July 11. It presents a mixed bag for taxpayers. The act includes the positive tax changes of prospectively increasing the net operating loss (NOL) cap, updating the treatment of related-party intangible payments (a PICPA sponsored initiative), confirming the treatment of goodwill for Bank Shares Tax, allowing student loan interest deductions, and creating new tax credits for employer contributions to 529 and ABLE accounts and childcare costs.

On the other hand, the act falls short of delivering broader, more comprehensive improvements to Pennsylvania’s tax system. The Department of Revenue (DOR) fought against several pro-taxpayer measures this year. These measures included critical reforms for the Board of Finance and Revenue (Senate Bill 1051/House Bill 1994) and an elective pass-through entity tax filing option to aid in the federal deductibility of state income taxes (Senate Bill 659/House Bill 1584). Most concerning, however, was the exclusion of legislation designed to shield certain Pennsylvania resident taxpayers from double taxation (Senate Bill 660/House Bill 1584). This double taxation results from DOR's application of the Pennsylvania resident partner credit for taxes paid to other states. The DOR asserts that a resident partner is not entitled to a credit against personal income tax for pass-through entity tax (PTET) paid to other states. This is confounding considering the DOR does allow the very same credit to resident S corporation shareholders. Despite acknowledging this discrepancy, the DOR not only did not seek to clarify the provision but also opposed three measures designed to fix it during budget negotiations.

It is important to note that the proposed changes had little to no fiscal impact on the commonwealth’s General Fund. Further, these proposals would have better aligned Pennsylvania with other states, especially the 45 states which either have no PIT or which have enacted provisions facilitating federal deductibility of pass-through entity taxes.

The PICPA did achieve a legislative victory with Act 56. Under Pennsylvania’s corporate net income tax (CNIT) law, certain intangible expenses or costs paid to an affiliate must be added back. When the affiliate is also subject to income tax (in Pennsylvania or elsewhere), a credit is currently allowed, calculated using the taxpayer’s CNIT apportionment. This can result in double taxation. The issue is exacerbated by the establishment of an economic nexus standard and a shift to market-based sourcing of intangibles per Act 53 of 2022. These changes, effective beginning with the 2023 tax year, are expected to significantly increase the number of affiliates subject to CNIT. In response, the PICPA supported corrective legislation to provide an alternative to the current credit mechanism with a simpler deduction, thereby avoiding unnecessary complexity and relieving double taxation. Act 56 allows an affiliate subject to CNIT a deduction equivalent to the intangible expenses or costs added back under the current law.

Inclusion of this PICPA-backed provision is a win for taxpayers, but it only draws attention to the regulatory intransigence that has led to significant missed opportunities. The DOR’s opposition to reform represents a setback for all Pennsylvanians.

For more on how you can help the PICPA push these bills over the legislative goal line in the upcoming fall legislative session tune into the PICPA’s Legislative Update webcast on Aug. 1 at 9:00 a.m.

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