Pennsylvania NOL Deduction Cap Increased, Other Changes Enacted

Posted · Add Comment

Pennsylvania Governor Tom Wolf has signed legislation amending the corporate income tax net operating loss (NOL) deduction, creating a Manufacturing Innovation and Reinvestment Deduction, amending the film production tax credit districts, and requiring that before a tax credit can be awarded the Department of Revenue can make a finding that the taxpayer has filed all tax returns and paid all balances due. Finally, the legislation makes changes regarding personal income tax withholding, deductions and refund checkoffs.

Specifically, the NOL deduction is amended by removing the $5 million hard NOL cap and increasing the percentage cap to 35% in 2018 and 40% in 2019 and after. The change takes effect after the Department of Revenue publishes a notification that all or a part of the net loss deduction has been deemed unconstitutional as a result of a recent decision by the Pennsylvania Supreme Court. The court issued a judgement  finding part of the Pennsylvania NOL deduction rules unconstitutional earlier this month.

The Manufacturing Innovation and Reinvestment Deduction is available to taxpayers who make a capital investment in excess of $100 million for the creation of new or refurbished manufacturing capacity within three years of a designated start date. The project must be completed within five years. The Pennsylvania Department of Community and Economic Development will determine the maximum deduction for the taxpayer. The deduction must be equal to 5% of the private capital investment utilized and may be utilized each year for the 5 tax years. The deduction is nontransferable, the taxpayer cannot reduce its liability by more than 50% and any unused portion shall expire at the end of the corresponding tax year.

The Film Production Tax Credit is amended to state that the Department of Revenue can designate up to two tax credit districts for the purpose of enhancing, promoting and expanding film production. The tax credit districts must be located on deteriorated property and contain at least one qualified production facility and six sound stages. The property must be occupied by two or more qualified businesses that make a total capital investment of at least $400 million within five years after the designation of the district. Tax credits may be authorized in fiscal year 2019-20 and thereafter.

Finally, the legislation extends the application date for additional Keystone Opportunity Zones that are currently allowed in law from October 2016 to October 2018.

Personal income tax changes include:

  • Amending the Pennsylvania ABLE (Achieving a Better Life Experience) Act to allow a deduction for contributions to an ABLE account and exempting undistributed earnings in the ABLE account as well as distributions from the ABLE account
  • Making the Wild Resource Conservation Fund, Organ and Tissue Donation Awareness Fund, Military and Family Relief Assistance Fund, Children’s Trust Fund, and American Red Cross checkoffs permanent
  • Requiring withholding of Pennsylvania income tax by the Pennsylvania State Lottery or the person making the lottery prize payment if Federal income tax is withheld
  • Entities making rent and royalty payments on Pennsylvania property to nonresident over $5,000 must withhold personal income tax on those payments
  • Companies that bring out-of-state independent contractors into Pennsylvania for work in excess of $5,000 must withhold personal income tax
  • Businesses are required to electronically file 1099-MISC forms for all employees and all classes of Pennsylvania source income

Please contact Bob Grossman, Don Johnston or Shawn Firster with questions or comments.