Pennsylvania’s 2024-2025 Budget Expands NOL, But Does Not Include a PTET Election

On July 11, 2024, Pennsylvania passed S.B. 654, as part of its 2024–2025 budget. 

The enacted provisions include the following important tax changes:

Expansion of NOL Deduction

The current 40% of taxable income cap for net operating loss (NOL) deductions under Pennsylvania’s corporate net income tax (CNIT) will be gradually increased to 80% of taxable income over four years in 10% increments: effectively phasing in an 80% cap for taxable years beginning after 2028. Accordingly, the expansion is phased-in as follows:

• 40% for tax years beginning in 2025.
• 50% for tax years beginning in 2026.
• 60% for tax years beginning in 2027.
• 70% for tax years beginning in 2028.
• 80% for tax years beginning in 2029.

Concerning losses carried forward from prior limitation years, the allowable NOL deduction in each year is computed as follows: 

1. For an NOL incurred in a tax year beginning prior to January 1, 2025, deduct 40% of taxable income; and
2. For an NOL incurred in a tax year beginning on or after January 1, 2025, deduct -
   • the applicable percentage for the tax year specified above less the actual percentage of taxable income deducted under 1. above, multiplied by
   • taxable income for the tax year.

Affiliated Entity Expense Deduction Election

The CNIT disallows a deduction (i.e., addback of deduction) for intangible expenses or costs or interest expense or costs made to an affiliated entity. This addback became a problem in 2023 when Pennsylvania’s economic nexus and market-based sourcing for intangibles became effective; resulting in double taxation because the taxpayer was not allowed a deduction and the affiliate paid tax on intangible income. 

The change creates an annual election for the affiliated entity to exclude the expense or cost added back by the taxpayer when determining its taxable income. The affiliated entity must make the election upon the filing of its original return. The changes are effective for tax years beginning on or after January 1, 2023.

Expansion of Historic Preservation Tax Credit

The bill expands the availability of Pennsylvania’s Historic Preservation Tax Credit, increasing the program’s annual award limit from $5,000,000 to $20,000,000. The credit helps offset 25–30% of qualified expenditures to restore historic structures into income-producing properties.

Deduction for Medical Cannabis Businesses

The budget provides a CNIT deduction from the taxable income of a medical cannabis business in the amount of the ordinary and necessary expenses that were paid or incurred by the business during the tax year. The medical cannabis business expense deduction is effective for tax years beginning after December 31, 2023.

Tax Credit for Employers Helping Employees with Childcare Costs

Employers can claim a credit for up to 30% of their aggregate contributions to employees’ eligible childcare costs. The credit is capped at $500 per employee, and contributions from employers are excluded from the income of the receiving employees. This credit is applicable for tax years after December 31, 2024.

Student Loan Interest Payment Deduction

The budget creates a Pennsylvania personal income tax deduction for student loan interest paid during a tax year by a Pennsylvania resident. There are two limitations: the deduction cannot exceed $2,500 per year; and the deduction may not result in taxable income being less than zero. The student loan interest payment deduction is effective for student loan payments made after December 31, 2023.

Bank Shares Tax Goodwill Deduction

The budget clarifies that goodwill reported by banks on their FDIC call reports is to be deducted from the bank shares tax base for reporting periods beginning after December 31, 2024, and from the report and the payment of the bank and trust company shares tax due after March 14, 2025.

Sales Tax Exemption Changes

The budget creates an exemption from sales tax for sales of services related to cleaning or maintaining storage traps used by food service or restaurant establishments to collect grease waste. Pennsylvania provides that specifically enumerated services, including building maintenance and cleaning services, are subject to sales tax. The exemption applies to transactions occurring after September 30, 2024. 

An additional change effective after December 31, 2025, is that cryptocurrency mining operations will be excluded from the sales tax exemption for purchasing data center equipment. 

Point to Note: No Pass-Through Entity Tax (PTET) Election

A rejected change was an election to allow pass-through entities (PTEs) to be taxed at the entity level, which would allow PTEs to elect to be subject to Pennsylvania income tax instead of its owners as a workaround to the federal cap on state and local tax deductions. Pennsylvania is one of only a handful of states which have a Personal Income Tax but no PTET election.

The 2017 Tax Cuts and Jobs Act caps individual taxpayer deductions for state and local taxes (SALT) at $10,000 for tax years 2018 through 2025. That SALT cap prevents many individual taxpayers from fully deducting state and local income or property taxes for federal income tax purposes.

In response, many states have enacted PTET laws to mitigate the impact of the SALT cap for individual taxpayers that own interests in PTEs. A PTET election allows PTEs, which are not subject to the SALT cap, to deduct the state income taxes on the PTE’s activities for federal income tax purposes. 

Herbein’s highly experienced tax professionals are ready to help with your questions concerning these newly enacted Pennsylvania changes, as well as any other State and Local Tax needs.

Article contributed by Lou Palladino.