SALT Blog - SALT Blawg

On July 11, 2024, Governor Josh Shapiro signed into law a $47.6 billion budget for the 2024-2025 fiscal year. The new budget includes significant tax reform in an attempt to address some of the financial issues facing Pennsylvania residents and businesses.  

First, the budget includes some important, business-friendly changes.  The Net Operating Loss (“NOL”) deduction limitation will increase by 10% over four years. For tax year 2024, the NOL carryforward deduction is limited to 40% of a corporation’s taxable income. However, beginning January 1, 2026, the NOL deduction limitation will increase to 50% and, thereafter, will increase by 10% annually, until it reaches an 80% limitation on January 1, 2029.

Notably, to account for losses previously carried forward prior to January 1, 2025, the budget provides a separate formula.  For NOLs incurred after January 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 January 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.  

Another business-friendly change in the budget relates to changes in the addback provisions.  The budget includes legislative changes to prevent double taxation issues associated with the disallowance rules for related-party intangible expense or cost, or interest expense or cost deductions. Prior to these changes, 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 affiliated entity makes the election then the taxpayer may not take the allowable credit against tax due. 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.  

Finally, to provide relief to taxpayers across multiple industries, the new budget expands tax credits in three (3) key areas. First, the budget increases the annual award limit for the Historic Preservation Tax Credit from $5,000,000 to $20,000,000. 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. 

Third, the budget attempts to alleviate childcare expenses in Pennsylvania and boost employee productivity by increasing the child care contribution tax credit for individuals and employers. Data provided by the U.S. Chamber of Commerce shows that there is a clear link between the lack of childcare and decreased employee productivity. Further, the average cost in Pennsylvania for childcare for infants to four-year-old children is approximately $11,289 annually. Under the 2024-205 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.

This article does not discuss all of the tax changes implemented in the 2024-2025 budget. As a result, individuals and businesses should review the budget to determine how and if it will affect them during the 2024-2025 fiscal year. The full budget can be found on Pennsylvania’s Office of the Budget website. If you have any questions, please reach out to Jennifer Karpchuk (jennifer.karpchuk@chamberlainlaw.com), Thu Lam (thu.lam@chamberlainlaw.com), or Olivia Klein (olivia.klein@chamberlainlaw.com).