Legislation that would shift federal tax liability for pass through entities from taxpayers to the entity would give owners and shareholders financial relief.
Without it, experts say the state will remain an outlier in a negative way for small- to medium-sized businesses which fuel the economy.
State Senate BIll 659, currently in the Senate Appropriations Committee, and a companion bill, Senate Bill 660, currently in the Finance Committee, 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.
The legislation would affect pass-through entities which include sole proprietors, partnerships, LLCs and S Corporations, said Peter Calcara, vice president of Public Affairs, Pennsylvania Institute of Certified Public Accountants.
Calcara said currently, small- to medium-sized business owners pay income tax on profits from their companies with deductions capped at $10,000. With the proposed legislation, he said the tax would be paid by the company, lowering the tax burden on the owner and shareholders.
“This has been approved by the IRS, but Pennsylvania has been slow to do this,” Calcara said, adding that 36 out of 41 states with income tax have passed this legislation. “This is not a red or blue issue, and its revenue neutral.”
Senate Bill 660 would allow state taxpayers to get a tax credit for taxes they pay to other states, said Eric Wenger, managing partner of RKL’s Lancaster office.
“Entities that pay taxes to other states can’t deduct that here,” he said. “The business environment is not as friendly as it could be. We are an outlier in a negative way.”
Calcara explained that resident partners are now subject to personal income tax in Pennsylvania on all their income, including income from partnerships which may do business and be taxed 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.”
The federal workaround will end in 2025, but Calcara said the American Institute of Certified Public Accountants feels it will likely to be reauthorized because it generates revenue.
HB 1584 addresses both issues.
Calcara 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 passe
ed this session.”
“Real life taxpayers are hit by this,” Wenger said. “These companies pay taxes on personal income. The entity doesn’t pay taxes but reports profits and losses. It passes through to the owner who pays the taxes.”
Wenger said with this legislation, instead of following the old rules, the entity would pay the taxes, allowing for deductions at the federal level.
“The federal government has given this its blessing. The Pennsylvania legislature has not,” he said.
“Two years ago, the state had issues with the revenue department’s computer system My Path and the Wolf administration said it was too disruptive to make changes,” Calcara said. “Now any reluctance only benefits a small number of wealthy taxpayers.”
Any taxpayer who owns a home and a business will be above the $10,000 cap, Wenger said.
Calling Pennsylvania a disadvantage for business, Wenger said, “This is another log on the fire that Pennsylvania is not business friendly. I think this is an easy hurdle to clear because it only affects federal taxes.”
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