United States: Summary of Pennsylvania Tax Changes - Act 52 of 2013

Taxation and Wealth Planning Alert

August 2013

HB 465, signed into law by Governor Corbett on July 9, 2013, provides a number of amendments to the Tax Reform Code of 1971 (as amended). The following highlights the major changes.

Capital Stock/Franchise Tax

This tax, which is imposed on corporations (including limited liability companies), has been in a phase-out mode for a number of years. Under the current phase-out legislation, tax year 2013 would have been the final reporting year for this tax. Revenue needs caused the phase-out to be extended for another two years, through tax year 2015. As part of the extended phase-out, the tax rate has been reduced to 0.67 mills for tax year 2014 and 0.45 for tax year 2015.

Corporate Net Income Tax

(a) Closing a Tax Loophole: The Use of  Delaware Holding Companies

Effective for tax years after December 31, 2014, with certain exceptions, no deduction will be allowed for an intangible expense or cost, or an interest expense or cost, paid, accrued or incurred directly or indirectly in connection with transactions with an affiliated entity. This is an effort to address the state tax planning technique of forming Delaware holding companies with a situs in Delaware to hold intangibles (the income from which is exempt in Delaware) while at the same time causing related corporations subject to Pennsylvania's Corporate Net Income Tax to reduce their tax liability.

(b) Net Loss Deduction Limits

Effective for tax years beginning after December 31, 2013, the net loss deduction is increased from 20 percent of taxable income or $3 million to 25 percent or $4 million. For tax year beginning after December 31, 2014, the amount will increase to 30 percent or $5 million.

Capital Stock/Corporate Net Income Tax

For tax years beginning after December 31, 2013, receipts from services will be sourced to Pennsylvania "if the service is delivered to a location in" in Pennsylvania. Where the service is delivered both within and without the Commonwealth, a percentage will be used based on the total value of the services provided in Pennsylvania. Where the "place of delivery" cannot be determined, the sale will be sourced to the customer's billing address.

Failure To File Corporate Tax Reports Penalty

Effective for tax years beginning after December 31, 2013, the penalty for failure to file, or for a knowingly false report is increased to $500 plus 1 percent of any tax due over $25,000.

Corporate Loans Tax

Effective January 1, 2014, the Corporate Loans Tax is repealed.

Personal Income Tax

(a) Resident Credit for Tax Paid to Foreign Country Eliminated

Effective January 1, 2014, the resident credit for personal income tax paid to a foreign country is eliminated.

(b) Partnership/ S Corporation Level Tax

A partnership or S Corporation that underreports income more than $1 million for any tax year will be liable for the tax (exclusive of interest and penalties) at the applicable tax rate on the underreported income without regard to the tax liability of the partners for the underreported income. The partners/shareholders will not be assessed for their distributive share of the underreported income nor will they be liable for the tax due thereon where the tax has been paid at the entity level. To the extent the tax is not paid by the partnership/S Corporation, the partners/shareholders will be liable for their share of the underreported income and the tax due thereon. The cited provision will apply to specific partnerships/S Corporations. For example, the provision will not apply to a partnership/S Corporations with less than 11 partners/shareholders, all of whom are natural persons.

(c) Non-Residents – Estates and Trusts

Estates and Trusts will be required, as is the case with partnerships and S Corporations, to pay a withholding tax on income allocable to a non-resident beneficiary with respect to Pennsylvania source income.

(d) Non-Resident Estates and Trusts – Pennsylvania Beneficiaries

Non-Resident Estates and Trusts will be required to file Pennsylvania tax returns if they have Pennsylvania resident beneficiaries or Pennsylvania source income.

(e) Pass-Thru Entities Required to Maintain List

Pass-Thru entities (partnerships, Pennsylvania S Corporations, Estates and Trusts) are required at the end of the entity's taxable year to maintain an accurate list of partners, members, shareholders and beneficiaries, including their current address and tax identification number and information relating to those admitted or withdrawing during the taxable year.

Realty Transfer Tax

Effective January 1, 2014, what is commonly referred to as the 89/11 rule has been "tightened" in the sense that an option or commitment to transfer an interest in real estate in the future will be treated as a transfer of real estate. Consequently, the option or commitment will be counted for purposes of whether 90 percent or more of the ownership interest in a corporation or association holding real estate has been transferred so as to meet the definition of a "real estate company" under the statute. Further, a corporation or association will be deemed to be a "real estate company" if it holds a 90 percent or greater ownership interest in a corporation or association that meets the definition of a "real estate company." In determining whether a corporation or association is a "real estate company" under the statute, real estate held everywhere will be counted for purposes of the determination whereas previously only Pennsylvania real estate was counted.

Inheritance Tax

Effective July 1, 2013, there is a small business exemption for transfer of a family-owned business interest in a proprietorship or in an entity to one or more family members.   After the transfer, the family-owned business interest must be owned by a qualified family member for a minimum of seven years after the decedent's date of death.  The interest must relate to a business with less than 50 full-time equivalents, has a net asset book value of less than $5 million, and has been in existence for at least five years, as of the decedent's date of death. The principal purpose of the business cannot relate to the management of investments or income producing assets owned by the business. An annual certification is required to be filed with the Department of Revenue showing the family-owned interest continues to qualify for the exemption.  If it fails to qualify at any time during the seven year period, notice must be given to the Department within thirty days of the date that if fails to qualify.

Philadelphia Sales/Use Tax

Based on 2009 legislation, the 7 percent Philadelphia Sales/Use Tax contained an additional interim 1 percent tax rate. This has been made permanent, thereby making the current tax rate 8 percent.

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