The Long Anticipated Pennsylvania State Budget

The state budget for Pennsylvania has finally been passed for the fiscal year 2009-2010. Over the course of the past few months, many strategies were proposed to alleviate the more than $3 billion budget deficit. Included in those strategies were a personal income tax rate increase, sales and use tax on professional services, and a combined reporting requirement for parent and subsidiary companies.

These items were taken off the bargaining table before the final budget passed. However, the state budget still brought about several significant tax changes. Among the changes were amendments to Pennsylvania's sales and use, personal income, corporate net income, capital stock and franchise, and cigarette taxes. In addition, there is a new gross receipts tax on managed care and a tax amnesty program that will begin in 2010. The following are a few changes that will affect corporate taxpayers:

Net Operating Loss Carryover

Net operating losses were previously limited to the greater of 12.5% of taxable income or $3 million. For tax years beginning after 2008, it is the greater of 15% or $3 million. For tax years beginning after 2009, it is the greater of 20% or $3 million.

Apportionment

Many states have moved to a more heavily-weighted sales apportionment factor in recent years. Pennsylvania has now followed this trend for corporate net income taxes. For tax years beginning after 2008, the apportionment factors will be weighted 8.5% for both payroll and property and 83% for sales. For tax years beginning after 2009, property and payroll apportionment will be 5% each and sales will be 90%.

Capital Stock/Foreign Franchise Tax

The complete phase-out of capital stock and foreign franchise tax, originally scheduled for tax years beginning after 2010, has been moved back to tax years beginning after 2013. The rate will retroactively increase from 1.89 mills to 2.89 mills for tax years beginning in 2009.

In addition to the delayed phase-out of the tax, the fixed formula deduction for tax years after 2009 will increase from $150,000 to $160,000.

Sales & Use Tax

A major change for certain taxpayers is the new semi-monthly reporting requirement for sales and use tax. Beginning after May 31, 2011, sales and use tax licensees who reported at least $25,000 for the third calendar quarter in the preceding year will have to file and pay on a semi-monthly basis.

As a member of the Pennsylvania Institute of Certified Public Accountants (PICPA) State and Local Tax and Legislative Committee, we are working on a compromise that would provide for monthly reporting and prepayment of the following month's estimated tax liability in order to alleviate the burden of filing twice as many returns.

Tax Credits

Pennsylvania tax credit programs have been reduced by a third over the next two years. The reductions in available credits include the Research and Development Tax Credits, Job Creation Tax Credits and the Education Improvement Tax Credit to name a few.

Tax Amnesty

Pennsylvania is offering an amnesty program that will run from April 26, 2010 through June 18, 2010 and includes any tax administered by the Department of Revenue. Taxpayers eligible for this program include entities that have a tax liability from not filing returns or underreporting tax and have not yet been contacted by the Department. This applies to liabilities due within five years prior to June 30, 2009.

For more information on the tax amnesty program or any other amendment brought about by the new Pennsylvania state budget, please contact me.