Pennsylvania’s Budget and the Tax Implications
On July 8th, Governor Tom Wolf signed his final budget as Governor of Pennsylvania. After negotiations on the $45.2 billion budget, the 2022-23 fiscal year spending plan focuses on investments in education, infrastructure, and community safety. Here are a few of the budget items we found noteworthy on the tax side of things.
Corporate Net Income Tax Rate
One of the most notable tax items is one that Governor Wolf has been trying to accomplish in every one of his proposed budgets – a decrease to the Corporate Net Income Tax rate. Pennsylvania currently has one of the highest corporate income tax rates in the country, and a decrease will likely attract more business to the state. The Corporate Net Income Tax rate will decrease from 9.99% to 8.99% in January of 2023 and will gradually go down to 4.99% by the year 2031. The budget partially makes up for this revenue hit by codifying economic nexus, solidifying Pennsylvania’s ability to impose tax on out of state businesses operating in Pennsylvania. The budget also codifies the state’s market sourcing rules, which inform taxpayers how to source various items of intangible income such as patents and trademarks, sourcing of interest associated with loans, among other types of intangibles.
Personal Income Tax Changes
A notable personal income tax change is the increase to the limit on 179 deductions. Previously the limit was set at $25,000 and phased out when 179 eligible investments were over $225,000. Now Pennsylvania is in line with the federal 179 limit of $1 million, allowing most taxpayers to immediately expense their capital investments. The budget also allows for like-kind exchanges in Pennsylvania which results in a potential tax deferral on exchanges of similar real property. This brings the state in line with federal tax law and other states which allow this treatment. Both of these changes are effective starting January 1, 2023.
Governor Wolf is known for making investments in education and this budget is no different. The budget sets aside $1.8 billion towards education which includes investments in special education, K-12 school districts, and Level Up funding for the state’s poorest school districts. The investment in K-12 school districts includes a $125 million increase to the state’s EITC and OSTC programs. Similar to prior years, this money is only going to certain programs, so if you’re looking to grab some of those credits you’ll need to make sure you’re applying and donating to the correct program. If you have any questions on applying for these credits, please reach out to us.
A few other notable items include $375 million for affordable housing, $140 million to the Property Tax Rent Rebate program, $25 million for a new Child Care Tax Credit for working families with children in child care, and $2.1 billion to the rainy day fund, bringing the balance to a historic level of almost $5 billion. If you have any questions about the Pennsylvania budget or tax planning, McKonly & Asbury’s experienced professionals are here to help. Please contact us or visit our website to find out more about our Tax Services.