Tag: finance

Legislation to reduce the federal tax burden on Pennsylvania pass-through entities was introduced in the House of Representatives July 18. 

The bill would amend the Tax Reform Code of 1971 and provide a workaround of the federal 2017 Tax Cuts and Jobs Act, known as the SALT tax, that capped individual tax deductions at $10,000. 

Two Senate bills that address the issue were introduced earlier this year. The legislation would affect pass-through entities which include sole proprietors, partnerships, LLCs and S Corporations. 

Rep. Keith Greiner, R-Lancaster, a sponsor of the bill, said, “This is critical for Pennsylvania to be competitive with other states. Only a handful of other states haven’t passed this legislation.” 

Peter Calcara, vice president of government relations for the Pennsylvania Institute of Certified Public Accountants, said a small business that makes $200,000 a year, could see between $6,000 and $30,000 in federal tax savings per year, if the legislation is approved. 

Larger businesses making $1 million could save an estimated $30,000 to $150,000 per year, he said. 

“Ensuring Pennsylvania small business owners are not at a competitive disadvantage to those in other states will help our Commonwealth attract and retain innovative entrepreneurs who keep our small-town main streets vibrant and our local economies strong,” said Sen. Ryan Aument, R-Lancaster, co-sponsor of the senate bills. “I am hopeful that my colleagues in the legislature will continue to work with me to get this simple, yet impactful change passed this session.” 

Calcara said the when the 2017 Tax Cuts and Jobs Act capped the federal tax deduction at $10,000, states tried to create workarounds.  

“When the IRS gave its blessings to the workarounds, states started to immediately pass legislation,” he said. “Thirty-six states have passed it and Pennsylvania is the largest state left that hasn’t.” 

Calcara said this is not a partisan issue and at the state level it is revenue neutral, meaning it won’t cost Pennsylvania anything. 

Drew VandenBrul, managing director of State and Local Tax at accounting company Grant Thornton’s Philadelphia office, said the legislation would simply allow pass-through entities to reduce their federal tax burden. 

“What the owners pay in state personal income tax would be deducted from their federal income tax because this would move it from personal income to a business deduction,” VandenBrul said. 

The Senate bills are currently in the finance committee, he said. The legislation is split into two bills because the issue involves a resident credit change. 

“Resident partners would be treated the same and not double taxed,” VandenBrul said, explaining that if the entity does business in another state and pays income tax there, Pennsylvania does not allow for a credit.  

“SB 660 modifies the tax code to allow Pennsylvania resident partners a credit against personal income tax for entity-level taxes imposed on the partnership in other state(s).  This credit is already allowed for Pennsylvania resident S corporation shareholders and would make the treatment consistent between these two types of pass-through entities,” VandenBrul said. 

Calcara explained that currently, resident partners are subject to personal income tax in Pennsylvania on all of their income, including income from partnerships which may do business and be subject to tax in other states. 

“The tax code currently allows a resident credit when the tax in the other state is paid directly by the partner but doesn’t allow a similar credit if the partnership elects to pay an entity-level tax in one or more of the 36 states with a pass-through entity tax, he said.  “This means that without SB 660, the partner would pay tax on a portion of the income in other states, then pay tax on all of the income in Pennsylvania without the benefit of the credit, resulting in double-taxation.”  

HB 1584 addresses both issues. 

Greiner said the current provision is unfair from a business perspective. 

“Why not set your business up in the next state if you can get larger federal deductions there? It’s a double taxation issue,” he said.  

Greiner, who co-sponsored the bill with Rep. Nick Pisciottano, D-Allegheny, said he thinks there is a lot of potential to get the bills passed this session.  

“This is detrimental to the business community, and we don’t have a tax bill yet,” he said. “It did get hung up last session, but the environment of working with business makes more likely it will get done.” 

Calcara said since Pennsylvania is an outlier, being only one of a few states not to have enacted the workaround, legislators have been able to look at what other states have passed and can pick and choose how they want the bill to read.  

“Small businesses are our economic drivers,” Greiner said. “We need to make sure they can be competitive.”