Pennsylvania Basic Business Taxes 2010
Pennsylvania's economic development, finance and tax organizations provide a range of incentive programs to initiate new business and commercial investment. Specific programs include a corporate net income tax, state tax credits, and a capital stock/foreign franchise tax.
Feb/Mar 10
Pennsylvania's Corporate Net Income Tax rate is 9.99 percent based on federal taxable income before the net operating loss deduction with certain modifications (e.g., addition of taxes based on income and federal "bonus" depreciation and deduction of dividends received). Generally, Pennsylvania follows the federal rules for depreciation, except that Pennsylvania does not allow for the deduction of post-9/11 "bonus" depreciation. For corporate net income tax purposes, limited liability companies are treated in the same manner as for federal income tax purposes.
Pennsylvania Corporate Net Income Tax is calculated on a separate company basis, meaning each corporation in the state, regardless of its affiliation with any other entity, individually computes its income or loss and apportions the income or loss with regard to activities of related group members.
Pennsylvania does not require adjustments for inter-company expenses (e.g. interest and royalty).
Pennsylvania does not impose a "throwback" or "throw out" rule in calculating Pennsylvania receipts.
Income is apportioned to Pennsylvania using a three-factor formula consisting of payroll (8.5 percent), property (8.5 percent) and receipts/sales (83 percent) for 2009. For 2010 and beyond, the three-factor formula will consist of payroll (five percent), property (five percent) and receipts/sales (90 percent). Weighing the sales factor more heavily reduces some of the tax detriments of increasing a company's property and payroll in the state. It also favors in-state companies that are selling out of state.
Net operating losses (NOL) may be deducted to reduce state income tax. For tax year 2009, the deduction for net operating loss is the greater of 15 percent of taxable income, or $3 million, and for tax year 2010, the NOL deduction is the greater of 20 percent of taxable income, or $3 million. This is an increase from the prior limit of 12.5 percent of taxable income. Net operating losses may be carried forward for 20 years.
State Tax Credits and/or abatements may be applied to reduce state corporate net income tax. Credits include:
• Job Creation Tax Credit
• Educational Improvement Tax Credit
• Neighborhood Assistance Tax Credit
• Enterprise Zone Tax Credit
• Tax credits, abatements and exemptions for investment in a Keystone Opportunity Zone (KOZ)
• Research and Development Tax Credit
• Resource Enhancement and Protection Tax Credit
Taxpayers can now sell or assign a research and development tax credit. The one year holding period for the transfer or assignment of the credit has been removed.
Pass-through entities are now eligible for The Neighborhood Assistance Tax Credit. If the entity cannot use this credit, the entity may elect, in writing, to transfer the credit to its shareholders, members or partners in proportion to the share of the entity's distributive income to which the shareholder, member or partner is entitled. This credit may now be sold or assigned.
The Effect of Apportionment on the Corporate Net Income (CNI) Tax Rate:
Although the base rate for Pennsylvania's Corporate Net Income tax is 9.99 percent, the effective rate can vary greatly, depending on a number of factors, particularly on how a company's property, payroll and sales are apportioned. For example, with Pennsylvania's 2009 apportionment formula (8.5 percent payroll, 8.5 percent property and 83 percent sales), a company operating in Pennsylvania with 40 percent in-state property, 50 percent in-state payroll, and five percent in-state sales would have an effective CNI rate of 1.18 percent.
Capital Stock/Foreign Franchise Tax:
This tax is based on a corporation's capital stock value apportioned to Pennsylvania. For capital stock/foreign franchise tax purposes, limited liability companies are treated as separate "corporations" and are taxed as separate entities. The capital stock value is based on a fixed statutory formula expressed as:
[.5 x (average net income / .095 + (.75)(net worth)] - $150,000
For taxable years beginning after December 31, 2009, the exclusion exemption is increased from $150,000 to $160,000. Thus, for tax years beginning January 1, 2010, the formula is:
[.5 x (average net income / .095 + (.75)(net worth)] - $160,000
Average net income equals the preceding 4 years of book income plus the current year divided by 5 (average net income is capitalized by dividing by .095).
Net worth is generally the value of outstanding stock, surplus and retained earnings on the last day of the tax year, but may be computed as an average if the ending value is more than twice or less than half of the beginning value. In the case of a parent entity this value is based on the consolidated values of the parent and subsidiaries.
The capital stock value is apportioned based on one of two apportionment methods. The first is an equally weighted three-factor apportionment formula, consisting of payroll (33.33 percent), property (33.33 percent) and receipts (33.33 percent). Manufacturing entities utilizing this apportionment method may exclude from the property and payroll numerators the Pennsylvania property and payroll utilized in manufacturing activities.
The second apportionment formula is a single factor exempt asset formula (i.e., taxable assets divided by total assets). The following are exempt from the capital stock and franchise tax:
• Assets used in manufacturing, processing or research and development
• Tangible assets located outside of Pennsylvania
• Pollution control devices
• Certain government obligations
• Stock of Pennsylvania corporations
• Stock of majority-owned foreign corporations
There is neither a minimum nor a maximum capital stock/foreign franchise tax.
The Capital Stock and Franchise tax is being phased out, and is currently scheduled to expire after 2013.
State Tax Credits and/or abatements may be applied to reduce the capital stock and franchise tax. Credits include:
• Job Creation Tax Credit
• Educational Improvement Tax Credit
• Neighborhood Assistance Tax Credit
• Enterprise Zone Tax Credit
• Tax credits, abatements and exemptions for investment in a Keystone Opportunity Zone (KOZ)
• Research and Development Tax Credit
• Resource Enhancement and Protection Tax Credit
Sales and Use Tax:
The sales tax is imposed on the sale at retail within Pennsylvania of tangible personal property and certain specifically-enumerated services.
The use tax is the complementary tax imposed on the use within Pennsylvania of tangible personal property and on taxable purchases within Pennsylvania upon which no sales tax has been paid. Additionally, certain specifically-enumerated services delivered within Pennsylvania are also subject to the use tax.
The state rate is 6 percent. Allegheny County (including the City of Pittsburgh) and Philadelphia County are the only municipalities that impose an additional local sales and use tax. Allegheny County imposes an additional one percent, and effective October 8, 2009, the city of Philadelphia is increasing its local sales and use tax from one to two percent. Taxability of transactions is consistent between Pennsylvania and these counties.
Purchases of materials to be consumed in manufacturing or those to be used directly in manufacturing (e.g., equipment, raw materials, etc.) are exempt from the sales and use tax.
The following specifically-enumerated services are subject to sales and use tax in Pennsylvania. All other services are excluded from sales and use tax.
• Cleaning, inspecting, lubricating, polishing, washing or waxing motor vehicles
• Applying or installing tangible personal property as a repair or replacement part of personal property other than clothing or shoes
• Altering, cleaning, dry-cleaning, dyeing, fitting, laundering, mending, pressing or repairing tangible personal property other than clothing or shoes
• Imprinting or printing of tangible personal property of others
• Labor or service charges by a vendor for delivering, installing or applying tangible personal property sold by the vendor
• Lobbying services
• Adjustment, collection or credit reporting services
• Secretarial or editing services
• Disinfecting or pest control services, building maintenance or cleaning services
• Employment agency or help supply services
• Lawn care services
• Self-storage services
It is important to note that purchases of custom computer software, as well as purchases of computer services (i.e., programming, customization, etc.) are not subject to Pennsylvania state or local sales and use tax.
Property Tax:
Pennsylvania does not impose real property taxes at the state level. Real property taxes are imposed by counties, municipalities and school districts. Real property taxes are imposed on the assessed value of the property as established by the local assessor. The assessed value is multiplied by the county's common level ratio (i.e., assessment ratio) and the tax rate (millage).
Pennsylvania and its counties do not impose a tax on personal property, whether tangible or intangible.
Realty Transfer Tax:
The realty transfer tax is based on the value of property transferred within Pennsylvania, and is imposed on any person, association, or corporation that makes such a transfer. The rates are as follows:
• State level 1 percent
• County level 1 percent
• Philadelphia 3 percent
• Pittsburgh 2.5 percent
The county and local taxes are imposed in addition to the 1 percent state tax.
Personal Income Tax:
The Pennsylvania personal income tax is imposed on eight classes of income, including wages/compensation. The tax is generally applicable to gross income and does not allow for broad deductions similar to those allowed when calculating the Federal personal income tax. This tax is imposed at a 3.07 percent flat rate.
Pennsylvania State Contact:
Governor's Action Team
Pennsylvania Department of Community and Economic Development
Commonwealth Keystone Building
400 North Street
Harrisburg, PA 17120-0225
(717) 787-8199
Fax: (717) 772-5419
Incentive and tax information is provided to Area Development by each state's economic development or commerce agency for information purposes only and is subject to revision at any time by the state government. Please contact the state agency directly for full requirements and offerings.