On July 11, Pennsylvania Gov. Josh Shapiro signed into law the 2024-2025 budget (S.B. 654), which amends several important business and individual tax provisions. The bill’s most notable changes include:
- Gradually increasing the net operating loss (NOL) deduction limitation.
- Clarifying the bank shares tax deduction for goodwill.
- Providing an election affecting the affiliated entity intangible expense add-back.
- Creating a state-level deduction for medical cannabis business expenses.
- Establishing new personal income tax deductions.
Increase in the Net Operating Loss Deduction Limit
Beginning with the 2018 tax year, the Pennsylvania corporate net income tax (CNIT) provided an NOL deduction limitation of 40% of taxable income. The budget increases the cap to 80% of taxable income over four years in 10% increments, starting in 2026, as follows:
- 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.
S.B. 654 also provides formulas for deducting NOLs whose use was subject to previous limitation. For NOLs incurred in a pre-2025 tax year, the deduction is 40% of taxable income. For NOLs incurred in 2025 and later, the budget provides a unique formula for the deduction:
- Take the applicable percentage for the tax year, as listed above (e.g., 50% for 2026), minus the actual percentage of taxable income deducted from pre-2025 NOLs;
- Multiply that amount by the taxable income for the year.
The current cap has been criticized for discouraging economic development in the commonwealth; loosening it may spur growth by allowing businesses to use NOLs sooner. CNIT taxpayers who have posted ASC 740 valuation allowances for Pennsylvania NOLs should consider reevaluating their ability to deduct NOLs in light of the new law.
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. The Pennsylvania Department of Revenue had previously denied such goodwill deductions.
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. Food manufacturers and restaurants should review whether this exemption applies to their business operations.
On the other hand, the budget narrows the sales tax exemption for the purchase of data center equipment by removing the exemption for equipment used in cryptocurrency mining operations after December 31, 2025.
Notable Deductions From Taxable Income
Affiliated Entity Intangible Expense Deduction Election
Since 2015, the CNIT has disallowed a deduction for intangible expenses or costs or interest expense or costs (as defined under the CNIT law) made to an affiliated entity via addback provisions. That became a problem in 2023 when Pennsylvania’s economic nexus and market-based sourcing for intangibles took effect. The 2023 change resulted in double taxation because the taxpayer was not taking a deduction and the affiliate paid tax on intangible income.
The budget creates an annual election for the affiliated licensor entity to exclude the intangible expense or cost added back by the licensee entity when determining the affiliated licensor entity’s taxable income. The affiliated licensor entity must make the election upon the filing of its original return.
For the tax year ending December 31, 2024, Pennsylvania Form RCT-101, “PA Corporate Income Tax Report,” is due May 15, 2025. Corporate taxpayers should assess their filing positions accordingly.
S.B. 654 provides that making this election will have no impact on nexus or apportionment of the licensee taxpayer or affiliated licensor entity (Pennsylvania imposes a bright-line sales nexus standard, enforced administratively since the CNIT 2020 tax year).
The changes are effective for tax years beginning on or after January 1, 2023.
Medical Cannabis Business Expenses
The budget provides an additional 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 term “medical cannabis business” means a dispensary or grower/processor that has an active grower/processor permit during the tax year for which the deduction is sought.
The medical cannabis business expense deduction is effective for tax years beginning after December 31, 2023.
Student Loan Interest Payment Deduction
The budget creates a Pennsylvania personal income tax (PIT) deduction for the amount of student loan interest paid during a tax year by a Pennsylvania resident. However, there are two limitations to taking the deduction. First, the deduction cannot exceed $2,500 per year. Second, 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.
Matching Contribution Tax Credit
The budget creates an employer childcare contribution tax credit effective for PIT tax years beginning after December 31, 2024. Employers can claim a tax credit for contributions made toward an employees’ childcare expenses, not to exceed $500 per employee during the tax year.
No Pass-Through Entity Election
Notably missing from the budget is a pass-through entity tax (PTET) election, which allow pass-through entities (PTEs) to be elect to subject to state income tax in lieu of the owners.
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 prevented 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.
Pennsylvania is one of only five states, along with Delaware, Maine, North Dakota, and the District of Columbia, to have a PIT but no PTET election.
To learn how BDO can help navigate state tax rules, please visit our page.
