The Pennsylvania Department of Revenue (DOR) has issued tax bulletins that impact the way hedging transactions and those associate with certain intangible income are taxed. This article was compiled to give Pennsylvania business owners and operators important information on how these changes may impact the ways they deduct certain types of income and the ability to file for some types of tax deductions.
Background Information: Corporate Tax Bulletins #1 & #2
Corporation Tax Bulletin 2019-01 – Corporate Net Income Tax Hedging and Foreign Currency Transactions
This bulletin addresses the apportionment factor for PA Corporate Net Income Tax. It states that receipts from hedging transactions are to be excluded from the numerator and denominator when calculating the apportionment fraction.
Corporation Tax Bulletin 2019-02 – Pennsylvania Corporate Net Income Tax Treatment of Global Intangible Low-Taxed Income and Foreign-Derived Intangible Income This much awaited bulletin addresses how Global Intangible Low-Taxed Income (GILTI) and Foreign-Derived Intangible Income (FDII) is treated for PA Corporate Net Income (CNI) and Personal Income Tax (PIT) purposes.
What are the GILTI & FDII Deductions?
For federal tax purposes GILTI is treated in a manner similar to Subpart F income as it is deemed to be repatriated in the year it is earned. The GILTI and FDII deductions are considered special deductions for federal income tax purposes and are not allowed in the calculation of PA CNI tax. Pennsylvania treats Subpart F income as dividend income for CNI tax. Therefore, GILTI income will also be treated as dividend income. CNI taxpayers should include GILTI in their tax base in the year it is recognized.
A deduction is allowed for corporations receiving dividends from foreign corporations for CNI tax. The GILTI income will fall into this definition. However, the deduction may be less than 100% depending on the ownership interest in the entity generating the GILTI.
The bulletin also discussed the treatment of GILTI for PIT purposes. Because the GILTI is a “deemed dividend” and not an actual cash distribution, it is not a dividend subject to tax under PA PIT. When an actual distribution of cash out of the current or accumulated earnings and profits of the foreign entity is made to a PIT taxpayer, it will be subject to PIT as a dividend.
Restricted Tax Credit Bulletin 2019-01 – Claiming Donation-Based Tax Credits after the Tax Cuts and Jobs Act and Restricted Tax Credit Bulletin 2018-02 – Claiming Education tax Credits after the Tax Cuts and Jobs Act.
Pennsylvania is addressing chairity-related taxable deductions and credits. To be clear, the state has attempted to clarify the rules around the deductibility of charitable donations in exchange for PA tax credits. The federal Tax Cuts and Jobs Act limited the amount of state and local tax deduction to $10,000. As a result, some states discussed legislating a work around to allow taxpayers to get a charitable deduction in lieu of taxes. In response, the Internal Revenue Service issued a clarification limiting the amount of the charitable deduction to the amount donated in excess of the credits received. This created some confusion and uncertainty for taxpayers wanting to take advantage of the PA Educational Improvement Tax Credit, the Opportunity Scholarship Tax Credit, the Waterfront Development Tax Credit, and the Neighborhood Assistance Tax Credit.
The PA statute states that the donations to organizations in order to qualify for the credit cannot for activities that are a part of a business firm’s normal course of business. Pennsylvania has stated that if the payment is not made in the normal course of a commercial transaction, a taxpayer may claim the state credit for payments made to eligible organizations even if the taxpayer claimed a deduction for federal income tax purposes. However, for personal income tax purposes a pass-through entity must adjust its PA income by the amount claimed as a deduction on its federal income tax return. The Department still considers the contributions to be charitable in nature.
Sales and Use Tax Bulletin #1
Sales and Use Tax Bulletin 2019-01 – Maintaining a Place of Business in the Commonwealth
This bulletin is in response to the U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc. This decision upheld South Dakota’s economic nexus statute that required out-of-state vendors who sold more than $100,000 worth of property or had more than 200 separate transactions into South Dakota to collect and remit sales tax. Pennsylvania joins nearly forty states by implementing the economic nexus standard for the collection of sales tax for out of state vendors. Effective July 1, 2019 out of state vendors selling more than $100,000 worth of property into Pennsylvania will be required to collect and remit Pennsylvania sales tax. PA does not have a transaction threshold. Vendors selling between $10,000 and $100,000 into Pennsylvania have the option to collect and remit or notice and report.
Philadelphia Responds to Wayfair
In response to the Wayfair decision, Philadelphia amended its regulations regarding the Philadelphia Business Income and Receipts Tax (“BIRT”). An economic nexus standard is added for tax years starting on or after January 1, 2019. If a business with no physical presence in Philadelphia has at least $100,000 in Philadelphia gross receipts during any 12-month period ending in the current year, it will be considered having nexus for the gross receipts portion of the BIRT. The “active presence standard” for nexus with Philadelphia is also amended to provide that an “active presence” will subject the taxpayer to at least the gross receipts portion of the BIRT. “Active presence” is defined as purposeful, regular and continuous efforts in Philadelphia in the pursuit of profit or gain and the performance in Philadelphia of activities essential to those pursuits.
In addition, activity rising to the level of “solicitation plus” will result in both the gross receipts and net income portions of the BIRT. “Solicitation plus” refers to cases in which the taxpayer’s business activities exceed solicitation.