Tax Reform Package Includes Myriad Benefits Beyond CNI Reduction

By Colin McEvoy on December 15, 2022

Pennsylvania Chamber President & CEO Luke Bernstein speaking at a November news conference at the LVEDC offices about the corporate net income tax reduction.

New legislation reducing the state of Pennsylvania’s corporate net income tax (CNI) has been praised as a long-awaited move that will fuel economic development across the Commonwealth and make Pennsylvania more competitive against other states.

But that tax reduction – which will lower the CNI from 9.99% to 8.99% effective Jan. 1, then reduce it in phases each year until it reaches 4.99% in 2031 – is just one of many ways in which the newly-passed tax reform package will help small businesses and taxpayers in Pennsylvania.

Several other benefits in the legislation have been overshadowed by the CNI changes, including new tax benefits for small businesses, educational tax credits, a new child care enhancement program, and inheritance tax exemptions for Gold Star families.

“The tax reforms we achieved during the 2022-23 budget are the most monumental in nearly three decades and will help businesses of all sizes grow and invest right here in Pennsylvania,” said Luke Bernstein, President & CEO of the Pennsylvania Chamber of Business and Industry.

The tax reform bill was approved by the state House and Senate on July 7 and signed by Gov. Tom Wolf on July 8. Pennsylvania’s previous CNI of 9.99% had been unchanged since 1995 and was the second largest in the nation, behind only New Jersey at 11.5%.

“A reduction of the corporate net income tax has long been on a list of economic policy proposals supported by our organization,” said Don Cunningham, President & CEO of the Lehigh Valley Economic Development Corporation (LVEDC). “We appreciate the efforts of our Lehigh Valley legislators in helping pass this bipartisan bill, which will ultimately benefit all businesses and residents of the state.”

Below are some of the key changes in the tax reform package beyond the CNI reduction:

Tax deductions for capital equipment purchases

One of the key changes in the tax package is the alignment of the state Tax Code with federal tax law that allows small businesses to deduct up to $1 million in capital equipment purchases for qualifying properties from personal income tax liabilities.

Previously, Pennsylvania capped such deductible expenses at $25,000 annually. The new change will make it easier for small business owners and employers to buy equipment and invest, which in turn promotes job growth.

“Like-kind exchanges”

Another change in the tax reform package aligns Pennsylvania with the federal tax code by allowing small businesses to defer personal tax liabilities through “like-kind exchanges” of certain property, freeing them up to invest in job-creating assets needed to help stay competitive.

Pennsylvania had previously been the only state in the country that did not offer this type of deferral, meaning gains from real property through like-kind exchanges were deferred at a federal level, but still considered taxable in the state. This will no longer be the case.

“These resulting tax code changes will benefit small businesses by bringing the state tax law into conformity with the federal law,” said Martin C. Levin, of RLB Accountants and the American Institute of Certified Public Accountants, which includes 21,000 members. Levin said this not only results in tax benefits, but simplifies recordkeeping requirements for those companies who invest in capital equipment and property.

“Additionally, taxpayers who chose to take advantage of the federal like-kind exchange rules in the past found themselves facing a Pennsylvania income tax liability despite the fact that there were no immediate cash proceeds from which to pay the tax,” Levin said. “These new tax law changes in Pennsylvania make these potential investments more attractive.”

Educational Improvement Tax Credits

The new legislation will also significantly increase the available amount of Educational Improvement Tax Credits (EITC), which awards tax credits to businesses contributing to qualified nonprofit organizations, such as scholarship organizations and educational improvement organizations.

The total amount of tax credits available through the EITC program in a fiscal year will rise from $225 million to $340 million under the new tax reform package.

It will also increase the amount of Opportunity Scholarship Tax Credits (OSTC) available to eligible businesses contributing to an Opportunity Scholarship Organization, which in turn provides tuition assistance in the form of scholarships to eligible students at low-achieving schools.

Under the newly passed legislation, the total aggregate amount of all tax credits available through the OSTC program will increase from $55 million in a fiscal year to $65 million.

Child care tax credits

Additionally, beginning in 2023, the tax reform package established the Pennsylvania Dependent and Child Care Enhancement Tax Credit, which creates a refundable personal income tax credit which will return up to 30% of the federal child and dependent care tax credit to taxpayers who qualified for the federal program.

Tax exemptions for Gold Star families

New inheritance tax exemptions have also been established for Gold Star families. Under the new provisions, transfers of property at death by a member of the military on active duty are now exempt from inheritance tax.

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