Mike Weber and Lisa Wiegand, leaders in GYF’s Tax Services Group, presented State Tax Updates at our firm’s annual CPE Day. The fast-paced presentation covered a number of recent Pennsylvania tax changes, as well as potential changes for the 2025 tax year.
NOTE: Shortly after this presentation, the Pennsylvania Department of Revenue announced that Act 45 of 2025, was enacted as part of the state budget. Act 45 makes significant changes to Pennsylvania’s CNIT by decoupling from several federal provisions enacted under the OBBBA. Please see related post for more details about these changes.
2025 Pennsylvania Updates
Pennsylvania has several changes for the upcoming 2025 tax year. Mike and Lisa reviewed key points for the following topics.
Corporate Net Income Tax (CNIT)
C-Corporations organized or doing business in PA with PA-sourced income are required to pay Corporate Net Income Tax (CNIT). These entities will be subject to a 7.99% tax rate this year, which is a 0.50% decrease from 2024. The rate will continue to decrease by 0.50% until it reaches 4.99%, starting on January 1, 2031. Historically, Pennsylvania’s CNIT rate has been considered one of the highest tax rates in the United States. With this incremental decrease over the next several years, PA will be more appealing to individuals looking to organize and open new businesses.
NOL Carryforward Limitation
Another change that will benefit PA taxpayers is Senate Bill 654, which updated the net operating loss (NOL) carryforward limitation. For the 2026 tax year, taxpayers can offset 50% of state net income, and this will increase annually by 10% until 2029. The NOL carryforward limitation will cap at 80% in 2029, matching the federal 80% limitation. Any NOLs generated before January 1, 2025, will remain subject to the 40% cap, and all NOLs will have a 20-year carryforward period.
Pennsylvania Grantor Trusts
Senate Bill 815 became effective January 1, 2025, allowing Pennsylvania to incorporate federal grantor trust rules. Grantors of an irrevocable grantor-type trust are required, under IRC Sec. 671-679, to report the trust’s income and pay state income tax at the individual level. Prior to the enactment of S.B. 815, the trust was considered a disregarded entity and would file a grantor letter for federal purposes. For PA purposes, however, the trust was treated as a separate taxpayer from the grantor and would file a PA-41. Moving forward, individuals must consider how this will impact their own returns and adjust their 2025 estimated tax payments accordingly.
Pennsylvania Annual Reports
Although not new to tax year 2025, Pennsylvania Annual Reports are a relatively new requirement for taxpayers. Effective January 1, 2025, PA for-profit and nonprofit entities are required to file an informational report. The reports are filed online and have a filing fee of $7. Annual reports are due on either June 30, September 30, or December 31, depending on type of entity. See related post for more details on how and when to file.
Potential Legislative Changes
Potential changes Pennsylvania taxpayers should look out for in the future include Senate Bill 206 and House Bill 1742. The companion bills would amend the act of March 4, 1971 – Tax Reform Code of 1971 and would terminate state tax for resident individuals, estates, and trusts. The provisions would not require employers to withhold tax on employee wages if the employee had no personal income tax liability for the preceding tax year and anticipates no liability for personal income tax for the current tax year. S.B. 206 and H.B. 1742 are still in the early stages of the process of being passed or denied, but would be effective immediately upon enactment.
Federal to PA Non-Conformity
Pennsylvania tax law differs in some ways from the federal tax law. Pennsylvania Schedule M itemizes some of these differences to show what is added back or subtracted out from federal income to arrive at PA income. These differences include:
Net Operating Loss Deductions and Carryforward Period
- Federal: 80% cap with an indefinite carryforward
- PA: 40% cap with a 20-year carryforward period
Depreciation
- Federal: Allows Section 168(k) Depreciation
- PA: Disallows Section 168(k) Depreciation
Meals and Entertainment
- Federal: 50% deductible meals and 100% nondeductible entertainment
- PA: 100% deductible meals and entertainment
Section 174 Research & Experimental Expenditures
- Post-TCJA/Pre-OBBBA:
- Federal: Expenditures were capitalized and amortized
- PA: Expenditures were fully expensed
- Post-OBBBA: Both Federal and PA will fully expense the expenditures
Section 163(j) Business Interest Expense
- Federal: Business interest deduction is limited
- PA: Interest expense is fully deductible for personal income tax
Public Law 86-272
The Interstate Income Tax Act of 1959, or Public Law 86-272, was created to ensure uniformity in state tax treatment. Stemming from Northwestern States Portland Co., v. Minnesota in 1959, P.L. 86-272 prohibits states from imposing net income tax on out-of-state businesses whose only in-state activity is soliciting orders for tangible personal property, and when order fulfillment is done from outside of the state. Companies are still required to file a state income tax return even when protected by P.L. 86-272. Regarding apportionment considerations, states can follow the throwback rule, throw-out rule, or not follow any rule. Pennsylvania does not follow any rule, creating a tax advantage as sales in states protected by the Act are not included in apportionment at all and, therefore, they are not taxed at the state level.
As internet-based commerce has evolved, the Multistate Tax Commission (MTC) issued updated guidance in 2021. The guidance states that interactions with in-state customers via the internet are considered to be in-state business activities. Some activities not protected under P.L. 86-272 include providing technical assistance via chat or email, enabling cookies for marketing or inventory purposes, and soliciting business-specific online credit card applications. Activities that are protected under P.L. 86-272 include having a static FAQ list on the website as well as enabling cookies used for remembering items placed in the cart during previous sessions and storing customers’ personal information. States have responded differently from one another with some adopting the new guidance while others explicitly state they will not be following the new guidance.
The Interstate Commerce Simplification Act of 2025 is a proposed amendment to P.L. 86-272. This amendment would expand the definition of “solicitation of orders,” to include business activities that serve an independently valuable business function apart from the solicitation of orders. Broadening the definition would create another layer of protection for companies that could potentially face excessive state taxation.
The increased popularity of remote workers in recent years has increased the complexity of interpreting P.L. 86-272. Ultimately, having remote workers triggers nexus for income taxes, sales and use taxes, payroll taxes, and franchise taxes. Any remote workers participating in non-soliciting activities will not be protected under P.L. 86-272.
Domicile vs Residency in PA
The distinction between whether one qualifies as a PA resident or is domiciled in PA plays a huge role in the filing requirements for an individual.
An individual can only have one domicile at a time, which is their legal home and permanent address. Common ways to prove domicile include motor vehicle registration, driver’s license address, and voter registration. Generally, these tangible factors provide strong enough evidence for proof of domicile, however, one’s intent and conduct in the state also factor in greatly. The intent to remain in that state permanently must be made known and demonstrated through consistent actions that reflect that intention. A domicile state taxes all income, regardless of the state it’s sourced from.
An individual can have multiple residences, which is where they physically live. Most states follow a Statutory Test of Residency where presence in a state for a specific number of days, 181 days for PA, qualifies the individual for residency in that state. Similar to q domicile state, statutory residents are taxed on all income, regardless of the state it’s sourced from which can result in double taxation on income. Keeping detailed reports on where one stays, and for how long during the year they stay in a state, is crucial for appropriate and accurate filing considerations as demonstrated by Hvizdak v. Pennsylvania in 2012.
Click here to access copies of the slides, links to resources and a video of the presentation
About GYF’s CPE Day: The firm presents this program each year to bring together clients, friends of the firm, and other professionals who are interested in gaining knowledge. The day is always filled with interesting presentations and great networking opportunities, and is generally attended by 300+ guests. If you have any questions about the material covered, or other issues we did not have time to address, please reach out to your GYF Executive or contact the office at 412-338-9300. We look forward to seeing everyone next year!
