PA tax changes in the 22-23 state budget

July 22, 2022

Important PA tax changes in the 2022-2023 state budget

On July 8, 2022 Pennsylvania Governor Tom Wolf signed HB 1342, the legislation for the 2022-2023 state budget. The budget includes several significant and beneficial PA tax law changes summarized below.

Corporate income tax changes, including significant rate reduction

  • Rate reduction phased in over the next 9 years – Significantly, the corporate net income tax rate in PA will be reduced – going from its status as the highest rate in the U.S. at 9.99% to a 4.99% rate by 2031:
Tax Year 2023 2024 2025 2026 2027 2028 2029 2030 2031
CNIT rate 8.99% 8.49% 7.99% 7.49% 6.99% 6.49% 5.99% 5.49% 4.99%
  • Market sourcing of intangibles – Previously, the PA Department of Revenue sourced gross receipts from services based on a cost of performance standard. This legislation codifies market sourcing, rather than cost of performance, 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 PA, 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 – Consistent with several other states, PA has codified an economic nexus rule. This legislation codifies the Department of Revenue-issued Corporation Tax Bulletin 2019-04, related to economic nexus, ensuring that businesses operating in Pennsylvania’s economic marketplace, but located out of state, are subject to PA taxation in a similar manner to businesses with physical operations in Pennsylvania. Under this rule, there is a rebuttable presumption of substantial nexus when a corporation has $500,000 or more of Pennsylvania-sourced income regardless of physical presence.

Personal income tax changes, including conformity for §179 and like kind exchanges

  • 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 million. Current language caps deductible expenses at $25,000. 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 exchanges of property is allowed.
Tax incentives
  • 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.
  • Research and Development Tax Credit - The total aggregate amount of tax credits available for fiscal year award was increased to $60 million from $55 million. The credit maintains the 80/20 split for small businesses. Further, the total aggregate amount of tax credits may not be changed by the legislature before June 30, 2025.
  • Educational Improvement Tax Credit - The total aggregate amount of all tax credits available in a fiscal year increases to $340 million from $225 million.
  • Opportunity Scholarship Tax Credit - The total aggregate amount of all tax credits available in a fiscal year increases to $65 million from $55 million.

Final thoughts
Generally, these tax changes are great news for PA taxpayers, both corporations and individuals. However, notably missing from this tax legislation is an elective pass-through entity tax which would help to minimize the tax impact of the reduced federal limit on the state and local tax deduction, which already exists in most other states. Also missing is the elimination of certain accelerated sales tax payment requirements. Time will tell if the future year provisions, such as the CNI rate reductions, will survive in the next administration.

For any additional information or tax law questions, please contact your Herbein tax consultant at the form below. As always, we will continue to monitor these and other state tax developments and will provide timely updates as appropriate.

Article contributed by Barry D. Groebel.