Pennsylvania’s 2025–26 budget: 7 changes taxpayers and businesses need to know

By Benjamin R. Bostic, CPA

Pennsylvania’s newly enacted 2025–26 budget brings wide-ranging tax changes affecting corporations, individuals, nonprofits, and employers. Governor Josh Shapiro’s administration framed the package as a balance of tax modernization, targeted relief, and economic-development incentives.

This summary walks through the major provisions: what’s changing, when it matters, and who stands to benefit.

1. Corporate Net Income Tax (CNIT): Continued rate cuts and new deductions

Pennsylvania continues its multi-year effort to reduce the corporate tax burden.

Rate reductions continue:

• 99% for tax year 2025
• 49% in 2026
• Gradual annual drops until the rate reaches 4.99% in 2031

2. Expanded Net Operating Loss (NOL) deductions:

Businesses hit with lean years will have more room to carry losses forward, thanks to an expanded NOL cap. Beginning with losses incurred in tax year 2025, companies can deduct a greater share of taxable income:

• 50% in 2026
• 60% in 2027
• 70% in 2028
• 80% in 2029 and after
  (Older losses remain subject to the 40% cap.)

3. Affiliated-entity deduction election

Entities may now elect to deduct related-party intangible or interest expenses that were previously added back, effective retroactively to 2023.

4. Personal Income Tax (PIT): Targeted relief for workers, students, and families

Several PIT updates aim to support working households and employers investing in their workforce.

• Working Pennsylvanians Tax Credit: A new state Earned Income Tax Credit (EITC) provides 10% of the federal benefit—up to $805—for qualifying families.
• Student loan interest deduction: Starting in 2025, taxpayers may deduct up to $2,500 in annual student loan interest (but not below zero taxable income).
• 529 and ABLE account exclusions: Distributions and employer contributions to 529 accounts for college and career training tuition and ABLE accounts to help those with disabilities pay expenses are now fully excluded from taxable income.

5. Employer-focused credits:

Pennsylvania’s budget also encourages employers to play a larger role in helping their employees navigate family care and financial planning with the following:

• Childcare contribution credit: Employers can claim 30% of up to $500 per employee for childcare support.
• 529 employer-match credit: A 25% credit (up to $500 per employee) for employer contributions to PA 529 or ABLE accounts, available 2025–2029.

6. Percentage Depletion Deduction: Landowners and producers can now claim a deduction for percentage depletion for mines, oil and gas wells, and other natural deposits effective for the 2024 tax year. The change aligns the state’s tax law with federal rules, and the deduction varies by resource.

7. Tax appeals: More time to respond

Taxpayers now have 90 days, instead of 60, to appeal assessments to both the Board of Appeals and the Board of Finance and Revenue. The postmark date for timely filing now includes other designated delivery services.

Tips and Overtime Still Taxable

Recent changes in federal tax policy have sparked discussion around wage taxation, but Pennsylvania is holding firm on its approach. Unlike the federal government, which has introduced measures to ease the tax burden on certain supplemental earnings, Pennsylvania will continue to tax tips and overtime pay as part of an employee’s taxable income. This means workers in service industries and those relying on overtime for additional income should plan accordingly, as these earnings remain subject to state income tax. Employers should also ensure payroll systems reflect this distinction to maintain compliance with state regulations.

Bottom line

Pennsylvania’s 2025–26 budget delivers structural tax reforms, targeted relief for working families, and a significant expansion of tax credits aimed at economic development, housing, and workforce support.

For taxpayers and organizations alike, understanding these changes now can help maximize incentives, plan, and position for the opportunities created by a modernized state tax system. If you have questions on how Pennsylvania’s new budget may impact your bottom line, the Boyer & Ritter team is ready to help.

Benjamin R. Bostic, CPA, is a principal of Boyer & Ritter with experience providing tax and accounting services for closely-held businesses and nonprofit organizations. Reach Ben at 717-264-7456 or bbostic@cpabr.com.