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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.