On July 8, 2022, Pennsylvania Gov. Tom Wolf signed the fiscal year 2022-2023 budget and supporting legislation.
On July 8, 2022, Pennsylvania Gov. Tom Wolf signed the fiscal year 2022-2023 budget and supporting legislation, adopting a number of corporate and personal income tax changes including a scheduled corporate rate reduction, codification of the $500,000 receipts nexus threshold previously issued through Pennsylvania Department of Revenue guidance, changes to intangible sourcing and federal conformity to sections 179 and 1031. A summary of the more impactful tax changes follows below.
Pennsylvania has long-imposed one of the highest corporate net income tax rates in the country at 9.99%. House Bill 1342 provides a schedule of rate reductions beginning Jan. 1, 2023. The first reduction is a full percentage point in 2023, followed by half-percentage point reductions each year after until the rate reaches 4.99% beginning Jan. 1, 2031. A reduction of the corporate net income tax rate has been debated for years considering the commonwealth’s neighbor, New Jersey, has the only higher rate at 11.5% at its maximum. While the scheduled rate reduction is welcome news, Pennsylvania taxpayers should also recall the phase-out of the capital stock/foreign franchise tax that was extended multiple times, sunsetting over five years from the original scheduled phase-out.
Issued about a year following the 2018 South Dakota v. Wayfair decision, Corporate Tax Bulletin 2019-04 explained that the department deemed there to be a rebuttable presumption that corporations without physical presence, but having more than $500,000 of receipts sourced to the commonwealth, will have established nexus for corporate income tax purposes. House Bill 1342 codifies that presumption into statute effective for tax years beginning after Dec. 31, 2022, although the original guidance is still in effect.
Amending the sourcing for intangible sales, House Bill 1342 replaces the cost-of-performance rule for a market-based scheme that provides specific rules for sourcing revenues a-sociated with various categories of intangible property. Examples of intangible property include patents, royalties, franchise agreements and sales or exchanges of securities. The sourcing for sales of services was previously amended to market-based sourcing in 2014. The sourcing change for intangible property aligns the sourcing rules with those applicable for both tangible personal property and services. The revised sourcing provisions are effective tax years beginning after Dec. 31, 2022.
Conforms the commonwealth’s section 179 deduction allowable for the personal income tax to federal law, i.e., eliminates the $25,000 limit and conforms to the federal limit of $1.08 million and allows an election to deduct certain qualifying property in the year the property is placed into service instead of over the depreciable life of the property. This provision is effective for property placed in service in tax years beginning after Dec. 31, 2022
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Before President-elect Donald Trump proposed it at the federal level, Alabama passed a law exempting overtime wages from taxes back in November 2023. Act 2023-421 (H.B. 217) excluded any amounts received by a full-time, hourly wage employee as compensation for work performed above 40 hours a week from state income taxes, starting January 1, 2024.
