[authors: Wendi L. Kotzen, Christopher A. Jones]
The General Assembly recently enacted several laws that make various changes to Pennsylvania taxes. These changes present traps for the unwary as well as planning opportunities for businesses and individuals seeking to reduce their Pennsylvania tax liability.
Single-Factor Apportionment for Corporate Net Income Tax
Pennsylvania traditionally required corporate taxpayers with business both inside and outside of Pennsylvania to apportion business income to Pennsylvania for Corporate Net Income Tax purposes based on (i) the percentage of the taxpayer’s payroll inside of Pennsylvania, (ii) the percentage of the taxpayer’s property inside of Pennsylvania, and (iii) the percentage of the taxpayer’s sales inside of Pennsylvania (the PA Sales Factor). In recent years, the PA Sales Factor has been given increased weight; currently, the PA Sales Factor is given 90 percent of the weight in apportioning business income.
For tax years beginning after December 31, 2012, the payroll and property factors will be eliminated and the PA Sales Factor will be the sole apportionment factor for Corporate Net Income Tax purposes. This change creates a tax benefit to corporations that are located in Pennsylvania and have large numbers of Pennsylvania employees.
Continued Phase-Out of Capital Stock / Foreign Franchise Tax
The scheduled phase-out of Pennsylvania’s Capital Stock / Foreign Franchise Tax remains on schedule to expire effective for tax years beginning after December 31, 2013.
Changes to Corporate Tax Report Obligations
For tax years beginning after December 31, 2012, the deadline for reporting federal changes to the Department of Revenue will be extended from 30 days to six months after the federal change becomes final. Also, for tax years beginning after December 31, 2012, the due date for Pennsylvania corporate tax reports will automatically be extended if an extension to file the federal tax return is granted.
Realty Transfer Tax
New limits will be imposed on so-called 89/11 transactions, where a seller transfers 89 percent of an interest in a real estate company and then waits three years before transferring the remaining 11 percent interest. Under previous law, no realty transfer tax was imposed on such a transaction because there was not a transfer of 90 percent or more of a real estate company within a three-year period.
Under the new law, realty transfer tax will be imposed if (i) there is a “legally binding commitment” to transfer 90 percent or more of a real estate company within a three-year period, (ii) the terms of the transfer are fixed and not subject to negotiation, and (iii) the transferring party receives the full consideration within the three-year period.
The change does not apply to a transaction or a series of transactions that occurs in whole or in part before January 1, 2013.
Expansion of Pennsylvania Tax Credits
Several new laws substantially expand the availability of tax credits:
Educational Improvement Tax Credit
Currently, there is a tax credit available for an eligible business that contributes funds to (i) a scholarship organization, (ii) an educational improvement organization, or (iii) a pre-K scholarship program. The credit is equal to 75 percent of the amount contributed for a single contribution or 90 percent of the amount contributed if the eligible business makes a two-year commitment. The tax credit must be used in the tax year of the contribution and may not be carried forward, carried back, sold or assigned. The new law raises the amount of the credit that an eligible business may claim from $300,000 to $400,000 for the 2012-13 fiscal year and $750,000 for years thereafter (although smaller caps apply to credits for contributions to pre-K scholarship organizations). The new law also makes it easier for the owner of a pass-through entity to claim the credit for a contribution by the pass-through entity. Finally, the annual cap on aggregate credits was increased from $75 million to $100 million.
Job Creation Tax Credit
Currently, there is a tax credit available for the creation of new jobs in Pennsylvania by a qualified taxpayer. The credit may be used to offset tax liabilities in the year the new jobs are created or carried forward for five years. The new law increases the credit from $1,000 per job to $2,500 per job. The annual cap on aggregate credits was increased from $40 million to $55 million. Additionally, the new law clarifies that $11 million of the credits must be set aside for businesses that employ 100 or fewer individuals if such small businesses agree to increase the number of employees by 10 percent within three years.
Film Production Tax Credit
Currently, there is a 25 percent tax credit available to a film production company that spends at least 60 percent of its total film production budget in Pennsylvania. The credit may be used to offset tax liabilities in the year the expenses are incurred or carried forward for three years. Additionally, a film production company may apply for approval to sell or assign the credits. The new law expands the existing credit to include an additional 5 percent credit for filming in a "qualified production facility" located in Pennsylvania. Additionally, the new law allows a purchaser or assignee of credits during 2010 to carry the credits forward for use against 2011 or 2012 tax liabilities and allows, in future years, banks and insurance companies to purchase the credits. Finally, the annual cap on aggregate credits in future years was set at $60 million.
Educational Opportunity Scholarship Tax Credit
A new tax credit is available for an eligible business that contributes to a new organization formed to offer opportunity scholarships to students residing within the area of a public school that is ranked in the lowest 15 percent in the state based on certain academic criteria. The credit is equal to 75 percent of the amount contributed for a single contribution or 90 percent of the amount contributed if the business makes a two-year commitment. The tax credit must be used in the tax year of the contribution and may not be carried forward, carried back, sold or assigned. The annual cap on total credits is $400,000 for the 2012-13 fiscal year and $750,000 for years thereafter.
Historic Preservation Tax Credit
A new tax credit is available for taxpayers that incur qualified expenditures to rehabilitate a qualified historic structure. The Department of Community and Economic Development, together with the Department of Revenue, will release guidance implementing technical aspects of applying for and claiming the credits but, beginning on July 1, 2013, a taxpayer will be able to apply for approval and, upon making approved qualified expenditures, receive a credit of up to 25 percent of the qualified expenditures, up to a maximum $500,000 per taxpayer. The annual cap on total credits is $3 million. Additionally, a taxpayer may apply for approval to sell or assign the credits.
Community-Based Services Tax Credit
A new tax credit is available, effective for the fiscal year July 1, 2013, for an eligible business that makes a contribution to a nonprofit entity that provides community-based services to individuals with intellectual disabilities or mental illnesses. An eligible business may receive a credit of up to 50 percent of the qualified contributions, up to $100,000 per business. The tax credit must be used in the tax year of the contribution and may not be carried forward, carried back, sold or assigned. The annual cap on total credits is $3 million.
Pennsylvania Resource Manufacturing Tax Credit
A new saleable and assignable tax credit is available to an eligible business that purchases ethane for purposes of manufacturing ethylene at a facility in Pennsylvania in the amount of $0.05 per gallon of ethane used between January 1, 2017 and December 31, 2042. This credit is only available for an eligible business that makes a capital investment of at least $1 billion and creates at least 2,500 new jobs. This credit is designed to provide an additional incentive for Shell Chemical LC to build a $4 billion petrochemical complex in an area of Beaver County that previously was designated as a Keystone Opportunity Zone.
Sales and Use Tax
Welcome relief has been provided to taxpayers required to make prepayments of sales tax as a result of a 2011 change to the sales and use tax law. Under the new law, taxpayers with reported sales tax liability between $25,000 and $100,000 during the third quarter of the previous year are required to make a prepayment equal to or greater than 50 percent of the current month’s liability as opposed to 50 percent of the preceding year’s liability for the same month.
Also, there are new exclusions and exemptions from sales and use tax:
Wrapping and packaging services are excluded from sales tax if the property wrapped or packaged is resold.
Egg processing services are excluded from sales tax.
Volunteer firefighters’ relief associations are exempt from sales and use tax.
Business taxpayers that make non-wage payments that are reportable on IRS Forms 1099-MISC are required to submit copies of the forms to the Department of Revenue.
A surviving spouse is permitted to file a joint return with his/her deceased spouse for the tax year of the spouse’s death if a joint return could have been filed if the spouse was living.
The Department of Revenue has the ability to attach bank accounts of delinquent businesses that fail to comply with deferred payment plans.
Transfers of family farms between members of the same family are excluded from the Pennsylvania inheritance tax.
If you have questions about the new laws or any other Pennsylvania tax issues, please contact Wendi L. Kotzen at 215.864.8305 or firstname.lastname@example.org, or Christopher A. Jones at 215.864.8424 or email@example.com.