The 2013-2014 PA Budget will have a more widespread impact on businesses and individuals throughout the Commonwealth, with some noteworthy changes to the tax code introduced in the form of several bills. While the $28.3 billion spending plan was approved by the General Assembly and signed by Governor Tom Corbett on June 30, several bills were signed July 9 including the General Fund Budget bill (HB 1437), the Tax Reform Code bill (HB 465) and the Public Welfare Code bill (HB 1075). The Fiscal Code bill (SB 591) is still awaiting action.
The plan spends about $28.3 billion, or $645 million (2.3) percent more than the 2012-2013 budget. The General Operating Budget calls for spending of $67 billion, including an additional $11 million for the continuation of the Department of Revenue’s Technology and Modernization project. Absent from the final budget agreements are any of the “Big 3” legislative initiatives – pension reform, liquor privatization and transportation funding – that Governor Corbett had been seeking.
Corporate Tax Changes of Significance (under House Bill 465)
- Capital Stock Tax – Delay of the complete phase-out. Instead of the planned reduction to 0% in 2014, the tax will be imposed at.89% for 2013 (no change); .67% for 2014, .45% for 2015 and (we’ll see) 0% in 2016. [effective tax year 2014]
- Board of Finance and Revenue reformation to a three-member tribunal. Two members will be appointed by the Governor and confirmed by the Senate. The Treasurer will appoint the third member and retain administration of the Board. The new process had the support of the Department of Revenue and is intended to expedite the appeal process, provide greater transparency and allow compromise authority. [effective April 1, 2014]
- Corporate tax expense add-back provision to require add-backs of intangible expenses (patents, royalties, insurance, trademarks, royalties, etc.) between related parties unless the purpose of the transaction in not tax avoidance and the transactions were made at arm’s-length. [effective 1/1/2015 ]
- Change to corporate tax sales factor apportionment formula requiring market based sourcing for sales of services. [effective 1/1/2014]
- Guidance on sales tax apportionment for satellite TV service receipts. [effective 1/1/2014]
- Increase to the cap for the NOL deduction
- $4 million or 25% of Taxable income for 2014. [effective 2014 ]
- 5 million or 30% of Taxable Income for 2015. [effective 2015 and thereafter]
- An additional $500 non-filer penalty for C-Corporations. [effective 1/1/2014 ]
Personal Income Tax Changes
- A $5,000 start-up business deduction. [effective 1/1/2014 tax year ]
- Intangible drilling cost deduction
- Taxpayers can amortize over 10 years or expense 1/3 of costs as defined by IRC Sect. 263. [effective tax year 2014]
- Elimination of the resident credit for taxes paid to foreign countries. [effective 1/1/2014]
- Enhanced provisions for enforcement of pass-through entities. [effective 1/1/2013 ]
- Requires partnerships to maintain complete record of all partners.
- Required withholding of taxes at the entity level.
- Assessment of taxes owed at the entity level.
- Requires Trusts and Estates to withhold taxes from non-resident beneficiaries.
- Requires non-resident Trusts and Estates with resident beneficiaries to file a report
- Elimination of several “check-off” boxes. [effective tax year 2014 ]
- Creation of two new “check-off” boxes. [effective tax year 2014]
- Children’s Fund Credit
- American Red Cross Credit
Sales and Use Tax Changes
- Tax exclusion for the repair of fixed-wing aircraft. [effective 90 days after passage ]
- A reduction of the appeal period from 90 to 30 days.
- A repeal of the local (county) receivers of use tax.
- A repeal of the Call Center Tax Credit. [effective 7/1/2013 ]
- A requirement for the Department of Revenue to draft a report of state of compliance with regard to the Federal Marketplace Fairness Act. [effective 90 days after passage of federal legislation]
Other Important Changes Included in H.B. 465
- A significant change to the Bank Shares Tax [effective CY beginning 1/1/2014]
- Replaces the six-year average valuation formula with a one-year valuation formula.
- A reduction of the tax rate from 1.25% of Total Equity Capital to .89% of Bank Equity Capital.
- Elimination of the Inheritance Tax for small business (on transfer of business assets among family members). [effective 7/1/2013]
- An elimination of the 89/11 loophole for Realty Transfer Taxes. [effective 1/1/2014]
- Realty Transfer tax exemption related to Volunteer Fire and Emergency Organizations. [effective immediately]
- The bill establishes the City Revitalization and Improvement Zones (CRIZ) program. [effective immediately]
- Changes to several existing tax credit programs.
- Technical changes to the Film Production Tax Credit. [effective 7/1/2013 ]
- Changes to the Educational Opportunity Scholarship Tax credit related to eligibility for students who live in non-approved districts. [effective 7/1/2013 ]
- Repeal of Coal Waste Removal and Ultraclean Tax credit [effective immediately]
- A new Mobile Telecommunications Broadband Investment tax credit [effective tax year 2014]
- A new Innovate in Pennsylvania tax credit. [effective immediately]
Senate Bill 591, the Fiscal Code bill, is currently pending in the House which will not reconvene until September. Contained in the Fiscal Code bill is:
- A repeal of the Corporate Loans Tax. [effective 1/1/2014]
- A prohibition against the use of contingent fee auditors.
- An e-filing mandate for 3rd party preparers.
- A requirement of electronic payment of corporate tax payments in an amount of $1,000 or more (formerly $10,000).
Contributed by Frank Tobias, CGFM, (firstname.lastname@example.org) a principal in RKL’s Tax Services Group. He specializes in the area of multi-state planning and compliance with extensive experience in all areas of Pennsylvania taxation. Frank brings a well-rounded perspective on state and local tax issues with his experience in both public accounting and his previous professional experience overseeing the administration of PA Corporation taxes for the PA Department of Revenue.
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