Pennsylvania Reduces Corporate Net Income Tax as Part of State Budget

The 2022–2023 state budget bill was approved by a bipartisan Pennsylvania Senate and House of Representatives and was signed into law by Governor Wolf on July 8, 2022. The $45.2 billion spending plan, which will be split between federal and state funds, was released eight days after the start of the fiscal year. The bill includes an annual reduction of the corporate net income tax, a childcare tax credit, an increase in school spending and allocation of federal dollars for environmental programs.

Below are several of the key tax provisions in the PA State budget for the 2022-2023 fiscal year.

Highlights of the Pennsylvania State Budget for Fiscal Year 2022-2023

Corporate Net Income Tax Reduced

In April, the Pennsylvania State House of Representatives passed House Bill 1960, which reduced Pennsylvania’s corporate net income (CNI) tax. Now, under House Bill 1342, a part of Act 53 of 2022, this has been signed into law. The state’s CNI tax rate will be reduced from 9.99% to 8.99% beginning January 1, 2023. An additional 0.5% will be reduced each year until 2031, when the tax rate will reach 4.99%. The reduction over the next several years will take PA from having one of the highest CNI tax rates in the country, to the sixth lowest.

Lowering the corporate net income tax will provide PA with an economic boost along with improving the state’s business climate. This reduction applies to companies organized as C Corporations and does not apply to small businesses such as LLCs, LLPs and S Corporations. These smaller businesses are often referred to as “pass-through entities,” since their profits pass through to their owners’ personal income tax returns.

Economic Nexus Standard & Market Sourcing Rule Codified

The economic nexus rules currently in place as part of the Department of Revenue Corporation Tax Bulletin 2019-04 are now codified. These standards could require certain out-of-state corporations who previously did not file to file corporate tax reports in PA. Multi-state companies that do business in PA are required to report sales based upon the location of their customers or use of intangible property in PA by applying market sourcing rules.

Conformity with Federal IRC§ 179 Expense Deductions

The Section 179 expense deduction had been capped at $25,000 per year at the state level under the Tax Reform Code of 1971. Moving forward, the Section 179 expense deduction will be allowed under PA’s personal income tax (PIT) and will conform to the federal tax law, which is currently $1,080,000 for the 2022 tax year.

Conformity with Federal IRC§ & 1031 Like-Kind Exchange Income PA has been the only state without a state-level deduction for exchanges until now. The budget creates a state-level tax deduction for 1031 exchanges, which allows someone who makes a gain from selling a property to defer capital gains taxes if they take their proceeds and buy a similar property in a related transaction.

Research & Development Tax Credit Annual Cap Increased

The annual cap for the R&D tax credit program increased by $5 million and is now $60 million per fiscal year. The credit still maintains the 80/20 split regarding small business carve-out by dedicating $1 million of the $5 million increase to the small business set aside.

Entertainment Economic Enhancement Program Tax Credit Annual Cap Increased

The credit is eligible to Concert Tour promotions companies, Concert Tour management companies or other Concert management companies that produce a series of live musical concerts with performances featuring live musical performers in front of a live audience. The annual cap for the tax credit program increased by $16 million to now be $24 million per fiscal year to expand the concert rehearsal and tours in PA.

PA Child & Dependent Care Enhancement Program Established

A new tax credit is established to be applied against an individual’s personal income tax liability for employment-related expenses incurred for dependent care costs while working or seeking employment. The PA tax credit follows the same rules of the Federal Child and Dependent Care Credit and is equal to 30% of the Federal tax credit amount. The credit will be claimed on an annual PIT return and will be refundable to the taxpayer if the credit exceeds the tax liability.

School Spending Increased

The PA budget under House Bill 1100, increased school spending by $1.8 billion to benefit students from pre-K to college. The plan for the basic education subsidies increased by $525 million where PA schools will see funding go up by 8%. The State Educational Improvement Tax Credit (EITC), where businesses can receive tax credits for donations in return for donations to schools, will now make $405 million in credits available per year.

COVID-19 Relief Dollars Allotted Environmental Programs Distributed

The last key provision in the PA budget is the allotment of $640 million in the unspent federal COVID relief dollars for environmental programs under the Growing Greener III program. The funds will be split up with $320 million in federal funds for local water and sewer projects statewide and $220 million to reduce water pollution.

Tax House Bills 430 and 581 Signed into Law

On July 11, Governor Wolf signed House Bill 430 which amends the Local Tax Collection Law. This will allow taxpayers who fail to receive a tax notice during their first year of occupancy to receive a waiver of penalties and additional costs from the tax collector, after being shown proof of property transfer.

House Bill 581 creates the Affordable Housing Unit Tax Exemption Act. This law authorizes local taxing authorities to provide for tax exemptions for improvements to deteriorated areas and improvement of affordable housing.

If you have any questions on how Pennsylvania’s budget tax cuts will affect you, please contact your BSSF advisor.

About Author

Fox, MatthewMatthew Fox, CPA, is a Principal at Brown Schultz Sheridan & Fritz (BSSF) and a key member of the Firm’s Tax Department. He received his Bachelor of Science degree in Accounting from Pennsylvania State University. Matt has over 15 years of public accounting experience. He leads the Craft Beverage Group at BSSF, specializes in Research & Development (R&D) Tax Credit consulting and serves a variety of industries including craft beverage, insurance, construction, real estate, manufacturing and financial services.

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