On July 8, 2022, Pennsylvania Governor Tom Wolf signed into law HB 1342 (Act 53), which amends the Tax Reform Code.
Act 53 made the following changes for Pennsylvania residents:
Corporate Net Income Tax
Rate Reduction: The Corporate Net Income Tax rate will decrease as follows:
Tax Year 2023: CNIT Rate 8.99%
Tax Year 2024: CNIT Rate 8.49%
Tax Year 2025: CNIT Rate 7.99%
Tax Year 2026: CNIT Rate 7.49%
Tax Year 2027: CNIT Rate 6.99%
Tax Year 2028: CNIT Rate 6.49%
Tax Year 2029: CNIT Rate 5.99%
Tax Year 2030: CNIT Rate 5.49%
Tax Year 2031: CNIT Rate 4.99%
Market Sourcing of Intangibles: This legislation codifies market sourcing rules applicable to intangible related receipts and provides specific guidance to taxpayers regarding how to source various items of intangible income. These include sourcing of royalties on intangibles used in Pennsylvania, such as patents and trademarks; sourcing of interest associated with loans to purchase land and buildings; sourcing of interest associated with vehicle loans; sourcing of credit card interest and fees; and a mechanism to handle all other types of intangible receipts.
Economic Nexus: This legislation codifies the Department of Revenue-issued Corporation Tax Bulletin 2019-04, related to economic nexus, ensuring that businesses that are operating in Pennsylvania’s economic marketplace, but located out of state, are subject to Pennsylvania taxation in a similar manner to businesses with physical operations in Pennsylvania.
Personal Income Tax
Section 179 Deductions: Section 179 property placed into service after December 31, 2022, may be treated as a deductible expense only to the extent allowable under Section 179 of the Internal Revenue Code, which currently is set at $1.08 million. An increase from Pennsylvania’s current 25,000 limitations. Pennsylvania will follow all future federal changes to Section 179 automatically.
Like-Kind Exchanges: Effective January 1, 2023, the deferral of tax due on gains from like-kind exchanges of property is allowed.
Dependent and Child Care Enhancement Program: The Pennsylvania Dependent and Child Care Enhancement Tax Credit is established, which creates a refundable personal income tax credit calculated at 30% of the federal child and dependent care tax credit for those who qualified for the federal program
Incentives and Credits
Additional funding has been added to several tax credit programs, including research and development ($5 million increase), film production ($30 million increase), entertainment economic enhancement ($16 million increase), and waterfront development ($3.5 million increase). Both the Educational Improvement Tax Credits (EITC) and the Opportunity Scholarship Tax Credits (OSTC) have significant increases under Act 55 of 2022 (HB 1642).
Sales Tax
Non-fungible tokens (NFTs) were recently listed as taxable for sales and use tax purposes in the commonwealth’s Retailer’s Information guidance, REV-717.
Local Business Privilege and/or mercantile tax (BPT)
Remote work may subject businesses to additional BPT filing obligations based on the activities of teleworking employees.
Certain taxing jurisdictions are seeking to expand their reach by adopting economic nexus standards to reach taxpayers operating outside their jurisdiction.
For example, the city of Allentown became the first PA local jurisdiction outside of Philadelphia to extend an economic nexus concept to the BPT in 2021. Taxpayers with no physical presence in the city of Allentown are considered to have taxable nexus if they generate at least 15 or more transactions to customer locations within the city or have more than $500,000 in gross sales during the calendar year.
The City of Philadelphia has announced reduced tax rates for its:
Changes to the Wage and Earnings tax rates become effective July 1, 2022. The new NPT and SIT rates are applicable to income earned in Tax Year 2022 for returns due and taxes owed in 2023. The new BIRT income tax rate becomes effective for tax year 2023 for returns due and taxes owed in 2024.
Wage and Earnings taxes
Starting on July 1, the new resident rate for the Wage and Earnings taxes is 3.79%. The rates were previously 3.8398%. The new non-resident rates will be a flat 3.44% for Wage Tax and 3.44% for Earnings Tax – they were previously 3.4481%.
Employers must begin withholding Wage Tax at the new rate from all paychecks issued to residents and non-residents after June 30, 2022.
Net Profits Tax
Net Profits Tax (NPT) is decreasing for residents and non-residents. The NPT is tax paid on the net profits you earn from your trade, business, profession, or other for-profit activities conducted in Philadelphia. The new NPT rates are: 3.79% for residents, and 3.44% for non-residents.
Business Income and Receipts Tax (BIRT)
The net income portion of the BIRT will drop to 5.99% from its current 6.20% rate. This rate becomes effective for tax year 2023, for returns due and taxes owed in 2024.