Proposed State Legislation Could Provide Good News for PA Taxpayers
There are presently two bills going through the Pennsylvania legislature that could provide good news to the state’s taxpayers.
Section 179 Limitation
Section 179 depreciation has been a component of the federal tax code since 1958 and allows for the immediate expensing of certain equipment purchases. With the advent of bonus depreciation in various iterations over the last almost 20 years, the value of Section 179 depreciation to federal taxpayers has seemingly diminished; however, the 179 limit has been steadily increasing from $25,000 in 2001 to $1,050,000 in 2021.
Back in 2001, Pennsylvania tax law matched the federal statute and also allowed for the immediate expensing of equipment purchases up to $25,000. However, as the federal limit increased, the Pennsylvania cap was stagnant.
Since Pennsylvania does not allow pass-through entities to take advantage of bonus depreciation, the incentives that the federal government put in place to purchase equipment were largely lost on small businesses in the state.
House Bill 333, however, aims to reverse that and increase the Pennsylvania limit to match that of the federal tax law for 2021, where the limit is $1,050,000. The bill has passed the state House and will go to the state Senate, where, if it passes, will go to the Governor’s desk for signing.
Presently, the bill appears to be effective for 2021, but delay in passage could impact the effective date.
Corporate Net Income Tax
Another House Bill, this one HB 2300, was introduced at the end of January. This bill would gradually reduce the Pennsylvania corporate net income tax (CNI). Right now, Pennsylvania’s corporate net income tax – the tax born by C-Corporations, not passthrough entities – is 9.99% and is the second highest in the country behind only New Jersey’s 11.5%.
The bill would reduce the rate to 9.74% in 2023 and then 9.49% in 2024. This reduction may not seem significant, but it is a 5% relative reduction in tax. A C-Corporation with $1,000,000 of taxable income would go from paying $99,900 tax in 2022 to $94,900 in 2024. It should be noted, though, that state tax expense is a deduction for federal tax purposes, so the overall effect on these reductions is only 79% of the gross reduction because of the reduced tax expense deduction at the federal level.
The idea of the tax reduction is to make Pennsylvania more friendly to larger corporations, who might presently look to do business elsewhere because of the high tax rates in the Commonwealth. A reduction to 9.74% would put Pennsylvania below New Jersey, Minnesota, and Iowa; the succeeding decrease to 9.49% would PA’s rate lower than Illinois as well. The median state corporate net income tax bracket in the United States is 6.625%.
Gov. Wolf’s budget proposal from early February has the rate going to 7.99% in 2023, 6.99% in 2026, and 5.99% in 2027. These rates are merely suggestions and would have to pass through the PA legislature to be effective.
Continue to check in with Walz Group updates for additional news on these two potential movements in the Pennsylvania state legislature.