Pennsylvania’s Corporate Net Income Tax statute permits taxpayers with net losses to carry the losses over to future tax years. See 72 P.S. § 7401(3)4.(b), (c)(2)(A). However, the amount of the net loss deduction that may be taken in a particular year is currently subject to both a “flat cap” and a “percentage-based cap.” For the 2013 tax year, for example, the deduction was limited to the greater of $3 million or 20% of a taxpayer’s taxable income. See 72 P.S. § 7401(3)4.(c)(1)(A)(IV). The cap is being raised incrementally until it reaches a $5 million “flat cap” and a 30% “percentage-based cap” in 2015.
Various taxpayers have filed appeals arguing that the net loss cap violates the Uniformity Clause of the Pennsylvania Constitution because the cap produces “progressive” effective tax rates and improperly subjects companies with large amounts of income to a higher effective tax rate. In the past, the Department of Revenue agreed to settle some appeals filed by taxpayers with NOLs in excess of the statutory cap. However, the Commonwealth has been considering moving forward with argument to the Commonwealth Court. By letter dated April 16, 2014, the Council on State Taxation (“COST”) submitted a letter to the Secretary of Revenue urging the Department to (1) continue its “practice of allowing this issue to be settled with taxpayers in recognition of the constitutional infirmity of the NOL cap;” and (2) “have the Department of Revenue support a permanent, legislative solution by eliminating the cap on a prospective basis.”
Corporations with unused net loss deductions in excess of the NOL cap for prior years should consider filing protective refund petitions, if they have not already done so.