Attorneys
Jennifer Karpchuk, Thu Lam and Olivia Klein Write For The Legal Intelligencer
On July 11, Gov. Josh Shapiro signed into law a $47.6 billion budget for the 2024-2025 fiscal year. Along with investments in education, transportation, and development projects, the budget includes significant tax reform.
An Increase in Net Operating Loss Deduction Limitation
The budget establishes a schedule for increasing the net operating loss (NOL) deduction limitation by 10% over four years. For 2024, the NOL carryforward deduction is limited to 40% of a corporation’s taxable income. Beginning Jan. 1,2026, the NOL deduction limitation will increase to 50% and will increase by 10% annually, until it reaches an 80%limitation beginning Jan. 1, 2029. The budget also establishes a formula to account for losses previously carried forward prior to Jan. 1, 2025. For NOLs incurred prior Jan. 1, 2025, the limitation is 40% of taxable income. For NOLs incurred after Jan. 1, 2025, the limitation is The applicable percentage for the tax year minus the actual percentage of taxable income already deducted for losses incurred prior to Jan. 1, 2025, multiplied by the current year taxable income. This change will ultimately align Pennsylvania law with the federal NOL carryforward deduction limitation of 80% of a corporation’s taxable income.
Intercompany Add-Back
The budget also addresses double taxation issues associated with the disallowance rules for related-party intangible expense or cost, or interest expense or cost deductions. Previously, a taxpayer with intangible or interest expenses or costs related to transactions with an affiliated entity was subject to Pennsylvania’s addback provisions and only received a limited credit against tax due under the statutory formula. Under the new legislation, an affiliated entity with intercompany intangible income can elect to exclude the intangible or interest expenses or costs subject to addback by the taxpayer from the affiliated entity’s taxable income. If the election is made, the taxpayer may not take the allowable credit against tax due.
Notably, the affiliated entity’s election must be made with the filing of its original return. The legislation also specifically provides that the election does not otherwise impact nexus or apportionment of the taxpayer or affiliated entity. The changes apply to taxable years on or after Jan. 1, 2023.
Tax Credit Increases
The budget expands tax credits across multiple industries. First, the budget increases the annual award limit for the Historic Preservation Tax Credit from $5 million to $20 million. The Historic Preservation Tax Credit offsets 25–30% of eligible expenses incurred during the restoration of historic structures into income-generating properties.
Second, the budget increased funding for the Educational Improvement Tax Credit (EITC) and the Opportunity Scholarship Tax Credit (OSTC) voucher programs by $55 million. The budget increased the EITC to $540 million and the OSTC to $90 million. However, some groups are concerned that the increase in these credits came with no new reporting requirements, meaning there is no information regarding who is benefiting from these voucher programs.
Finally, in an attempt to help offset childcare costs in Pennsylvania, and increase employee productivity, the budget includes increases in child credits for individuals and employers. The U.S. Chamber of Commerce provides data that shows that there is a correlation between the lack of childcare and decreased employee productivity. Further, the average annual cost of childcare in Pennsylvania is $12,308 for infants, $11,402 for toddlers, and $10,158 for 4-year-olds. Under the new budget, employers that contribute to their employees’ childcare expenses can now receive a tax credit equal to 30% of the total contributions. However, this credit only applies to the first $500 contributed per employee. The budget also includes $8.1 million for the Childcare Contribution Tax Credit.
The budget includes other tax changes not discussed in this article. Individuals and businesses should review the budget to determine how and if it will impact them during the 2024-2025 fiscal year. The full budget can be found on Pennsylvania’s Office of the Budget website.
Jennifer W. Karpchuk is chair of the state and local tax (SALT) controversy and planning practice at Chamberlain, Hrdlicka, White, Williams & Aughtry. She can be reached at jennifer.karpchuk@chamberlainlaw.com. Thu Lam is a senior counsel in the state and local tax (SALT) controversy and planning practice at the firm. She can be reached atThu.Lam@chamberlainlaw.com. Olivia Klein is an associate in the tax controversy section. Her practice focuses primarily on federal and state and local tax. She can be reached at Olivia.Klein@chamberlainlaw.com.
Reprinted with permission from the August 2, 2024, edition of The Legal Intelligencer © 2024 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.