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They’re Off and Running….

 

On January 28-30, 2019 both the House and Senate were back to kick off the 2019/2020 legislative session and wasted no time to introduce bills, which are of interest to tax practitioners. I’ve grouped the legislation by type for ease of reference. As in the movie Groundhog Day, some legislation is back for a second or third round.

Corporate Net Income Tax (CNI)

The House introduced bills to reduce the CNI to:

5.99% (HB70; Rothman); and 3.07% (HB72; Rothman)

 

The Senate joined in with proposals to reduce the CNI:

to 6.99% by reductions of .5%/yr. through 2024 (SB32; Brooks)

 

Also, of note is the resurrection of last session’s trio of bills to conform PA law to the IRC: like-kind exchange bill (HB105; Cox), which will parallel IRC §1031. The Senate companion bill is SB 201 (DiSanto). The NOL bill (SB 202; J. Ward); and Section 179 bill (SB 203; Hutchinson)

 

Deferral of capital gains on sale of stock of a business to an ESOP (IRC §1042)(SB 179; Browne)

Deferral of capital gains on investments in QOZ (SB 180; Browne)

 

Personal Income Tax

Impacts on PIT may be the result of bills which:

— authorize per diems to support necessary, ordinary and reasonable   business expense (HB 69; Ryan)

—repeal the 1099-MISC non-resident withholding requirement (HB34; Ryan)

—impose a statute of limitations of 10 years (HB17; Ryan)

— increase the poverty tax exemption by an annual index (HB123; D. Miller) and Senate companion increases the exemption to $10,500 and $34,00 (SB 220; Hughes)

— authorize a delinquent income tax grace period (HB25; Snyder)

—-establish a first responders’ tax credit; (HB 208; Deasy)

 

Other tax credits under consideration will be:

— educational investments in economically depressed areas (HB 42; Snyder)

—pediatric cancer research (HB174; Caltagirone)

— REAP credit eligibility clarification to include “individuals filing jointly”  (HB 241; Pickett)

—film tax credit carry forward, carry back and assignment among a consolidated group (SB225; Killion)

—increases cap on Manufacturing Tax Credit from $4mm-12.5mm (SB 266; Hughes)

—50% of toll expenses (HB 329; Warren)

—Adoption ($1,000) and foster care ($500) (HB296; Toohil)

 

Inheritance Tax

The House will consider bills designed to:

—eliminate the inheritance tax in full (HB77; Rothman)

—eliminate the inheritance tax for children age 21 and under (HB262; Metzgar)

And on the Senate side:

—phase out over 8 years the inheritance tax for siblings (SB27; Brooks)

—reduce inheritance tax on non-sibling relatives and phase out to 0 by 7/1/29 (SB28; Brooks)

Sales and Use Tax

            Both the House and the Senate are attempting to provide some relief for  firefighters:

—exclusion for purchase of firefighting equipment from firefighters’ own DiSanto (SB121)  

funds (HB209; Deasy) with a similar bill authorizing a tax credit of up to $500 (HB 376; Owlettt)

—exemptions on sales of prepared foods by volunteer fire companies (SB 83; Martin)

Solar energy use encouraged via exemption from sales tax (SB 148; Hughes)

—exemption for equipment for the visually impaired (SB 175; Browne)

And the House is looking out for banks in clarifying the application of sales  and use tax on canned and customized software for financial institutions(HB 19; Sankey)

—exemption clarification for traffic signals to include foundations, posts and mast arms ((HB 304; Toohil)

Home safety and school safety are the focuses of a sales tax exemption and a news sales tax imposition:

—exemptions on gun safe and vault purchases (SB103; Hutchinson)

—imposes a new 10% sales tax on video games with adult only or mature ratings (HB109; Quinn)

Realty Transfer Tax

            —exemption for children or surviving spouse if family home is sold within 5  yrs. of death (HB269; Driscoll)

 

 

Property Tax

— imposes real estate tax on PASSHE, state-related colleges, community colleges and independent colleges (HB191; Cruz)

—Authorizes local taxation of natural gas hazardous liquids pipelines (SB 264; Dinniman)

—Requires school boards to calculate and disclose unfunded pension liability

—property tax clean up legislation (HB 330; Emrick)

Tax Increment Financing

            —Includes wage tax revenue (SB 171; Browne) and state and local sales tax  (SB 172; Brown) in tax increment.

 

Property Tax and Rent Rebate Program

Amends the Taxpayer Relief Act of 2006 to:

—increase the income cap from $35,000 to $40,000

—prohibit assignment of rent rebates to a landlord (HB207; Deasy).

—exclude Medicare Part B payments from income(SB 272; J. Ward)

 

State Long-Term Leases

—requires legislative approval of state long-term leases which appear to have been used to circumvent legislative or voter approval of state  debt issuances. (HB 363; Lawrence)

Collection of Delinquent Taxes

—creates independent authority to act as clearinghouse for all state and local delinquent taxes

Constitutional Amendments

            —limits growth in state spending to the lower of two indices: avg. change in personal income for the 3 preceding calendar yrs. OR the avg. inflation rate plus the avg. percentage change in the state population over the  preceding 3 yrs. (SB116; Bartolotta)

—requires a 2/3 vote of the legislature to increase taxes. (SB121; DiSanto)

—exempts 100% disabled vets without the “injury due to war service” (HB 287; Simmons)

— eliminates all property taxes as of 7-1-26 (HB 382; Diamond)

 

Fasten your seat belts and call the State and Local Tax group or the Government Relations practice group at McNees Wallace & Nurick LLC for more information.

SB 1056, amends the Tax Reform Code to align state law with the federal law’s 100% bonus depreciation. Signed in the House and the Senate on June 22, 2018.

SB 735, would amend the Real Estate Tax Sale Law to establish an optional County Demolition and Rehabilitation Fund in certain counties, funded by the fee assessed for properties sold for delinquent taxes. The fund would be used for the demolition or rehabilitation of dilapidated buildings on blighted properties. Authorizes fee no greater than 10% of the assessed value of the property being sold for delinquent taxes. Final Passage in the Senate on June 22, 2018.

SB 653, would amend the Local Tax Enabling Act, to further consolidate the collection of local, non-real estate taxes at the county regional level, as was done with the collection of Earned Income Taxes under Act 32.

HB1511, would amend the Tax Reform Code, in hotel occupancy tax applying the state sales and the local hotel occupancy tax to the full price paid by the consumer at the point of sale for booking a hotel room (not the lower price paid by on line travel companies such as Orbitz, Travelocity, Expedia to hotels). Establishes the Hotel Tourism Fund, into which tax collected by intermediaries would be deposited and disbursed upon appropriation for tourism. Voted favorably as amended from House Finance Committee, first consideration in House. Re-referred to House Rules.

SB1214, was introduced and referred to the Senate Finance committee on Friday. SB1214 would amend the Film Tax Credit (FTC) Program within the Tax Reform Code.   The legislation proposes to create additional incentives for related Pennsylvania companies to utilize film tax credits without having to transfer or sell those credits to an unrelated business.  It would allow a corporate taxpayer who receives film tax credits to allocate those credits among its parent or sister companies that are part of the same consolidated federal income tax group.

Also, on Friday,the Senate Finance Committee unanimously voted out the nomination of Paul Gitnik to the Board of Finance and Revenue. The nomination now moves to the Rules and Executive Nomination Committee. Mr. Gitnik’s bio is shown, below.

PAUL J. GITNIK

Paul J. Gitnik is an Energy attorney with Pittsburgh law firm Keevican, Weiss, Bauerle and Hirsch. In 2011, Mr. Gitnik founded ShaleEnergyUSA.com, Inc. With its three interconnected websites – www.ShaleEnergyUSA.com, www.MarcellusUSA.com and www.UticaUSA.com – ShaleEnergyUSA.com provides resources and tools, including the recorded oil-gas leases, royalty percentages, dates, documents, instruments, permits, well dates, records, regulations and information about Shale Oil-Gas in the Appalachian Basin.

Earlier in his career, in 1991, Mr. Gitnik founded SOCRATES, INC., which provided claims recovery outsourcing, technology and consulting services and solutions to the health payor industry which he sold in 2007. Mr. Gitnik stewarded the development of SOCRATES, INC.’s proprietary Subrogation Outsourcing Case Review and Tracking Empowerment System (“SOCRATES”) and the MY SOCRATES family of proprietary software programs.
Mr. Gitnik was on the adjunct faculty of Duquesne University School of Law, where he taught Business Planning; Mercyhurst College, where he taught Estate Planning; and Penn State Continuing Education for Accountants, where he taught Choice of Business Entities.

Active in the community, Mr. Gitnik is or has been a member of numerous nonprofit boards, including the Allegheny County Bar Foundation, Allegheny Regional Asset District Board, Animal Friends, Phipps Conservatory and Botanical Gardens, Pittsburgh Opera, Pittsburgh Mercy Foundation, Diocese of Pittsburgh Foundation Advisory Board, Hamot Health Foundation, St. Vincent Health Center, Preservation Pennsylvania, Erie Art Museum and Jefferson Health System.

Quick Links: The Department of Revenue has published in The Pennsylvania Bulletin the real estate valuation factors which are to be used for Pennsylvania Realty Transfer Tax purposes from July 1, 2018 to June 30, 2019.

 

Tax Practitioners and Finance VPs should keep an eye out this week  for significant activity coming out of the Pennsylvania  legislature  that will  align the PA tax structure with that of the feds—in some areas.

The House Finance Committee will vote on  June 19 on SB 1056, which will align PA bonus depreciation with the feds for property placed in service after September 27, 2017.

The recently enacted Federal Tax Cuts and Jobs Act makes major changes to corporate income taxes, one of which is that C-corporations will be able to deduct 100% of the cost of their capital investments (e.g. plant and equipment) immediately, for the next five years. The federal 100% bonus depreciation rule applies through 2022 and then will be phased down over the succeeding five years. In response to the new federal bonus depreciation rules, the Pennsylvania Department of Revenue issued Corporation Tax Bulletin 2017-02. The bulletin interprets certain sections of Pennsylvania tax law as requiring the amount of a 100% deduction under federal rules to be added back to Pennsylvania taxable income and provides no additional mechanism for cost recovery with respect to the qualified property until it is either sold or disposed of in some other manner. The bulletin not only “decouples” Pennsylvania from the federal rules, but it denies businesses the ability to claim depreciation deductions indefinitely. By disallowing this important deduction indefinitely, Pennsylvania would be unique among states and would create a business climate that discourages investment and spawns economic contraction rather than opportunity and expansion.

The House Finance Committee will vote on June 20 on  HB 2303, which would permit the executor or administrator of a decedent’s estate to elect to file a combined annual income tax return for an estate and revocable trust during the period the estate is open. Under federal law, the estate of a decedent who dies with a revocable trust in place can elect to file a single annual income tax return (Form 1041) that reports income earned by both entities (the estate and trust). Pennsylvania does not permit this practice so that a decedent’s estate and revocable trust are required to file separate income tax returns (Form PA 41) to report income earned by each during the year.

 

 

On December 22, 2017, the Pennsylvania Department of Revenue (“Department”) issued Corporation Tax Bulletin 2017-02, which announced that Pennsylvania will no longer allow the 100% deduction for depreciation of qualified property under IRC § 168(k) for property placed in service after September 27, 2017.  Accordingly, any taxpayers who take advantage of the 100% bonus deduction for federal purposes must, when computing its Pennsylvania corporate net income tax, add the 100% bonus deduction to income.  Additionally, the Bulletin notes that the taxpayer may take an additional deduction when the qualified property is sold or otherwise disposed of during a taxable year to the extent the amount of depreciation claimed has not been fully recovered.

On January 22, 2018, Representative Francis Ryan, realizing that the Department’s approach to bonus depreciation is not necessarily business friendly at a time when Pennsylvania is trying everything possible to attract businesses to invest in Pennsylvania, introduced House Bill 2017.  That bill changes the definition of taxable income to include the deduction for depreciation of qualified property equal to the depreciation on the qualified property for the taxable year and determined in accordance with sections 167 and 168 of the Internal Revenue Code of 1986 (26 U.S.C. §§ 167 and 168) without regard to section 168(k) of the Internal Revenue Code of 1986 (26 U.S.C. § 168(k)).

If you are in favor of House Bill 2017, please contact Representative Francis Ryan and let him know.  We will follow the progress of that bill and update you as necessary.

On July 27, 2017, the Pennsylvania Senate passed a revenue plan that includes a new 2% natural gas severance tax and the requirement that online marketplaces such as Amazon and eBay collect sales tax on sales they conduct on behalf of vendors.  This plan contained in HB 542 was the result of a deal between GOP members of the Senate and Governor Wolf.  The measure now goes to the House where the fate is uncertain. We will continue to monitor this development.

On Tuesday, February 7th, Governor Wolf presented his 2017 budget address to a joint session of the Pennsylvania General Assembly.   The Governor’s proposal includes a $1 Billion increase in the tax burden on Pennsylvania businesses and individuals. While the Governor stated that he was proposing no “broad-based tax increases,” his budget does raise revenues significantly while not addressing pension liability. We are currently analyzing the specifics of the Governor’s budget proposal and will provide more information in future posts. For now, however, here are some high level takeaways on the tax front:

  • Severance Tax on Natural Gas Extraction
    • rate of 6.5% of the value of the natural gas, effective July 1, 2017
    • amounts paid in Impact Fees may be taken as credit
    • Tax Impact: $293.8 million
  • Corporate Net Income Tax
    • a net operating loss cap of 30% of taxable income, effective for tax years beginning January 1, 2018 and after
    • a change in the base of the Corporate Net Income tax to combined reporting, effective for tax years beginning after January 1, 2018, in conjunction with a steadily declining Corporate Net Income rate reduction to 6.49% by 2022
    • Tax Impact: $81.2 million
  • Sales and Use Tax
    • elimination of Sales and Use Tax exemptions for custom software and computer services, prepared food sold to airlines, aircraft sales, maintenance and repairs, and certain business storage, effective July 1, 2017
    • Tax Impact: $489.8 million
  • Insurance Premiums Tax
    • application of the Insurance Premiums Tax for most insurance entities that were previously exempt, effective for tax years beginning after January 1, 2018
    • Tax Impact: $141.5 million
  • $25 Police Charge
    • a $25 per person charge for those individuals residing in a municipality relying exclusively on the Pennsylvania State Police

The proposal also includes a $100 million reduction in available tax credits. Further, the Governor estimates that his proposal to raise the minimum wage to $12.00 an hour will generate an additional $95 million in revenue.  This year’s proposed General Fund Budget is $32.3 Billion, an increase of 1.8% over last year.

Also significant is the Governor’s estimated savings of $2 billion from planned consolidation of four state agencies and eliminating shared and duplicative state government functions, divesting unused state property and not filling vacant staff positions. There are already comments from the Republican majority House and Senate questioning whether these actions can provide such savings.

Additionally, the Governor proposed increased funding to support Schools that Teach. This includes:

  • $125 million in new basic and special education funding;
  • $8.9 million in new funding for the Pennsylvania State System of Higher Education universities;
  • $75 million in new early childhood education funding;
  • $3 million for Career and Technical Education Equipment grants; and
  • $62 million for Career and Technical Education.

The Governor stated his proposal also supports his Jobs That Pay initiative as follows:

  • Providing a “one-stop shop” at the Department of Community and Economic Development to provide small businesses with access to services that allow the business to grow;
  • The Manufacturing PA Initiative links job training to careers that provide higher incomes and career advancement; and
  • New policies with regard to funds issued to businesses for job creation and strengthening its “clawbacks” when jobs are not created especially for businesses who relocate from Pennsylvania.

At this juncture, the Pennsylvania Senate and House Appropriations Committees will review the Governor’s proposal and ask questions in budget hearings with state agencies and interested parties who rely on government funding. The General Assembly will respond and work towards an agreed upon spending and revenue plan with the goal of reaching agreement with the Governor to have a budget by June 30, 2017.

We will be watching budget hearings and continue to study these proposals and will post regularly throughout the budget process. Please let us know should you have interest in any specific subject that affects your business.