Alert: Pennsylvania Tax Amendments - the Good, the Bad and the Ugly
Earlier this month, the Pennsylvania legislature passed legislation making various changes to Pennsylvania tax law. Governor Corbett has signed the law. The significant changes include the following:
- The Capital Stock and Franchise Tax have been extended for two more years at declining rates. In 2014, the rate is .67 mills and in 2015, the rate is .45 mills. The amended statute provides for the Capital Stock and Franchise Tax to expire in 2016.
- The Realty Transfer Tax was amended, effective January 1, 2014, to tax transfers of holding companies, i.e., companies that own interests in real estate companies and to provide that an interest in a real estate company is considered transferred if it is subject to a binding put or call. The intent of these amendments was to eliminate 89/11 transactions and to reach sales of holding companies. These provisions are similar to those which have been in effect in Philadelphia for quite some time. They do not eliminate the ability to effectuate an 89/11 transfer where the prior owners keep a real 11% interest with no put or call agreement with respect to the 11%. Further, we have utilized other tax minimization techniques in the past. This remains a deeply flawed tax that can reach transactions with no change in equitable ownership and fail to reach transactions with significant ownership changes.
- The legislation attacks the so-called “Delaware loophole”. A deduction is denied for certain intangible expenses or interest expense between affiliated entities. This provision does not apply if the transaction did not have a principal purpose of avoiding tax under Pennsylvania law and if the transaction was done at arm’s length.
- Partnerships and Pennsylvania S-Corporations are liable for taxes on underreported income, when the partnership or S-Corporation underreported income by more than $1,000,000. This liability attaches to and is assessed against the partnership or S-Corporation, although the amended statute explicitly says that the provision shall not relieve the partner or shareholder of their liability for the underreported income. Partners and shareholders will be allowed a credit for the amount paid by the partnership or S-Corporation. This provision applies to partnerships that have eleven or more partners who are individuals; partnerships that have at least one partner that is a corporation, limited liability company, partnership or trust; or, a partnership that elects to be subject to the provision. For S-Corporations, the requirements apply to S-Corporations that have eleven or more shareholders or that elect to be subject to the provision. This provision is effective immediately.
- Partnerships, estates and trusts with resident partners or beneficiaries or partnerships, estates and trusts with Pennsylvania source income and Pennsylvania S-Corporations have additional reporting requirements and also must maintain accurate lists of partners, beneficiaries or shareholders.
- The amount of net operating loss deductions permitted is increased for years beginning after December 31, 2013, to the greater of 25% of taxable income, as determined under the statute, or $4,000,000, and for years beginning after December 31, 2014, to the greater of 30% of taxable income, as determined under the statute, or $5,000,000.
- The method by which income is sourced is changed, including sourcing sales from services to the location at which the service is provided.
If you have questions about any of these items, please call Larry Arem, 215.569.4142 or Jennifer O’Leary, 215.569.4928. In particular, clients with Pennsylvania real estate should be considering restructuring ownership structures to allow realty transfer tax to be minimized in the future.
Any advice expressed above as to tax matters was neither written nor intended by the sender or Klehr | Harrison | Harvey | Branzburg LLP to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer. If this document is delivered to any person or party other than to our client to whom the advice is directed, the recipient may not and should not rely upon any advice expressed above for any purpose and should seek advice based on the recipient’s particular circumstances from an independent tax advisor.