PA to halve corporate taxes and more in new tax reform measures
By Brian Kutz and Chuck Sabol
As part of Pennsylvania’s recently passed Act 53 of 2022 tax reform legislation, the state is cutting its Corporate Net Income Tax (CNI) in half by 2031, along with other significant steps to improve the commonwealth’s business climate.
Additional changes in Act 53 include allowing small businesses to defer tax liabilities on gains from like-kind property exchanges and expanding deductions to help companies buy equipment.
The following is a closer look at some of the significant changes under Act 53 that will help Pennsylvania businesses:
From the highest CNI to the sixth lowest
Pennsylvania held the unenviable record of having the highest flat CNI rate in the country at 9.99 percent. But a phased reduction is expected to make the state among the sixth lowest in the country.
Under the tax reform package, the CNI will drop 1 percent this year and then .5 percent a year through 2031:
- 2023: 8.99 percent
- 2024: 8.49 percent
- 2025: 7.99 percent
- 2026: 7.49 percent
- 2027: 6.99 percent
- 2028: 6.49 percent
- 2029: 5.99 percent
- 2030: 5.49 percent
- 2031: 4.99 percent
“Like-kind exchanges” of real estate finally allowed
Effective January 1, 2023, Pennsylvania joined every other state in allowing business owners to defer personal income liabilities on the sale of certain properties through “like-kind exchanges,’’ also known as 1031 exchanges.
Under general federal tax rules, gain or loss is recognized whenever business or investment property is sold. Section 1031 of the Internal Revenue Code allows an exception to the general rule whereby taxpayers can defer the gain from the exchange of like-kind properties under certain circumstances. Historically only PA C-Corporations were able to get this benefit. However, Act 53 expands this benefit for all taxpayers who complete an eligible exchange.
An eligible exchange starts with a taxpayer reinvesting the proceeds from the sale of the original property into like-kind property. The taxpayer then must adhere to a certain timeline. For example, there is a 45-day time limit to identify replacement property and a 180-day time limit to receive the replacement property and complete the exchange.
The obvious benefit to a like-kind exchange is kicking the tax can down the road resulting in immediate tax deferral. It can be a great planning opportunity that now includes PA individual taxpayers. The rules around 1031 exchanges can be complex, and taxpayers must follow the timeline.
Increased business deductions
Under Act 53, Pennsylvania mirrors some of the same small business pass-through tax deductions allowed in the federal tax code.
For property placed in service after December 31, 2022, Pennsylvania is expanding equipment expense deductions from $25,000 to $1.08 million. Owners of pass-through entities can now take full advantage of the same Section 179 federal income tax deduction for purchasing qualifying business equipment on their state income taxes.
According to the IRS, under the federal Tax Cuts and Jobs Act (TCJA):
Section 179 allows taxpayers to deduct the cost of certain property as an expense when the property is placed in service. For tax years beginning after 2017, the TCJA increased the maximum Section 179 expense deduction from $500,000 to $1 million. The phase-out limit increased from $2 million to $2.5 million. These amounts are indexed for inflation for tax years beginning after 2018.
The Section 179 deduction applies to tangible personal property such as machinery and equipment purchased for use in a trade or business, and if the taxpayer elects, qualified real property. The TCJA amended the definition of qualified real property to mean qualified improvement property and some improvements to nonresidential real property, such as roofs; heating, ventilation and air-conditioning property; fire protection and alarm systems; and security systems.
Act 53 of 2022 is the first major Pennsylvania tax reform legislation since the mid-1990s and offers a real boost to the commonwealth’s businesses. The Boyer & Ritter tax team is ready to answer your questions and help you take full advantage of all the potential tax benefits.
Boyer & Ritter has a dedicated tax team, as well as experts in real estate taxation who can consult on your 1031 tax questions. For questions or additional information, contact Brian or Chuck at 717.761.7210 or firstname.lastname@example.org / email@example.com.
About the Authors:
Brian J. Kutz is a manager at Boyer & Ritter with experience providing tax and accounting services for business clients and individuals. He works with clients in multiple industries and has prepared and reviewed income tax returns in over forty states. His previous employment experience includes working as a part of the tax department at a national firm.
Chuck Sabol is a supervisor in Boyer & Ritter’s Tax practice group. He brings several years of public and private accounting experience, specializing in tax, and has worked with clients of various sizes.