On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act of 2017. This table compares the federal treatment to the Pennsylvania treatment of many common tax issues.
| Federal Treatment | Pennsylvania Treatment | |
|---|---|---|---|
Personal Income Tax | Corporate Net Income Tax | ||
Research and Experimental (R & E) Expenditures | Section 174 was amended to prohibit the immediate deduction for R &E expenditures in the tax year that such costs are incurred. For R & E expenditures paid or incurred in tax years beginning after Dec. 31, 2021, the taxpayer is required to charge its specified R & E expenditures to its capital account and is allowed to amortize the expenditures. | Pennsylvania does not incorporate the provisions of IRC § 174 in its personal income tax law. In calculating net profits, Pennsylvania allows a current deduction for ordinary, necessary, and reasonable business expenses currently paid or incurred during the taxable year which are directly related to and necessary for the production and marketing of the taxpayer’s products, goods, and services. Costs associated with property with a useful life employed in a trade or business must be depreciated. R & E expenditures are currently expensed or depreciated depending upon the nature of the expenditure. | Follows federal law. |
Code Sec. 179 | Increase Section 179 expensing to $1 million with a phaseout beginning at $2.5 million and expand definition of qualified property. | For tax years beginning prior to 1/1/2023, the changes to Section 179 have no effect. The expensing limitation remains at $25,000 with a phaseout beginning at $200,000. For tax years beginning 1/1/2023 and after, Act 53 of 2022 changed PA PIT law to incorporate the federal expense limitations. | Follows federal law. |
Bonus Depreciation | Extension, expansion, and phase down of bonus depreciation (sunset 12/31/26) | N/A Bonus depreciation is not allowed in calculating taxable income. | Act 72-2018 requires companies to calculate depreciation under the modified accelerated cost recovery system. See Corporation Tax Bulletin 2018-03 [PDF]. |
Limitation of Net Interest Deduction to 30% of Adjusted Income | Disallows a deduction for net business interest expense in excess of 30% of a business’s adjusted taxable income plus floor plan financing interest. | No effect – the limitation does not apply to Personal Income Tax. Valid business interest will be fully deductible in calculating taxable income. | Follows federal law. See Corporate Tax Bulletin 2019-03 [PDF] for more details. |
Small Business Accounting and Modification | Cash method of accounting/inventories/inventory cost/long-term contracts. The inclusion rules cause an acceleration in the recognition of income for many taxpayers. | Generally will follow. Taxpayers may use the cash or accrual method of accounting so long as the method is acceptable by standards of the accounting profession, is not inconsistent with the regulations of the department, and clearly reflects income. | Follows federal law. |
Repeal like-kind exchanges except for real property | Code section 1031 allows like-kind exchanges only of real property. | For tax years beginning prior to 1/1/2023, the changes to Section 1031 have no effect. Gain from sales of property involved in a federal Like-Kind exchange must be recognized for PA PIT. For tax years beginning 1/1/2023 and after, Act 53 of 2022 changed PA PIT law to allow deferral of the gain if the requirements of IRC Section 1031 are met. See PA PIT Bulletin 2006-07 [PDF] (Revised September 27, 2022) for additional details. | Follows federal law. |
Applicable recovery period for real property | Replaces the separate definitions of “qualified leasehold improvement property,” “qualified restaurant property,” and “qualified retail improvement property” with “qualified improvement property.” Recovery life of “qualified improvement property is 39 years. | Generally will follow. PA Personal Income Tax does not have specific rules regarding asset lives. | Follows federal law. |
Note: per Congressional conference reports, Congress intended to include “qualified improvement property” in the definition of 15 year property. However, the actual statutory language of the Tax Cuts and Jobs Act of 2017 omitted the property from IRC 168(e)(3)(E) (the code section that defines 15 year property). Until technical corrections are made to the statute, the property will be treated as 39 year property. | |||
Repeal deduction for income attributable to domestic production activities | Deduction under Section 199 is repealed for tax years beginning in 2018 and after. | No effect - PA Personal Income Tax does not allow a Section 199 deduction in calculating taxable income. | Follows federal law. |
Limitation on deduction by employers of expenses for fringe benefits | Repeals deductions for entertainment, amusement, and recreation if directly related to the operation of a taxpayer’s trade or business; generally would retain the 50% deduction for food and beverage expenses. Disallows deduction for employee transportation fringe benefits. | No effect – PA Personal Income Tax rules with regard to business expenses has not changed. Expenses, including entertainment, etc., are 100% deductible as long as they meet the PA definition of a valid business expense. | Follows federal law. |
Repeal of advance refunding bonds | Would subject to tax the interest on bonds used to pay principal, interest, or redemption price on a prior bond issue. | No effect – Interest income is taxable for PA Personal Income Tax unless it is from direct obligations of the U.S. government, or the Commonwealth of Pennsylvania and/or its municipalities. See REV-1643, Tax Exempt Obligations for Pennsylvania Personal Income Tax Purposes. | Follows federal law. |
Creation of Qualified Opportunity Zones (QOZ) | Temporary deferral of capital gains reinvested in a QOZ until the date the investment is exchanged/sold or 12/31/2026, whichever is earlier. It also provides for the permanent exclusion of capital gains from the sale or exchange of an investment held for 10 years or more in a QOF. | Under Act 13-2019 net gains or income, net losses, and dividends which are excluded from federal income in a Federal Opportunity Zone are also excluded from PA personal income tax for tax years beginning after December 31, 2019. This income is taxable for years beginning prior to January 1, 2020. | Follows federal law. |
Repatriation Transition Tax | One-time tax to be imposed on U.S. shareholders that own 10 percent or more of the shares of foreign corporations. | See Corporation and Personal Income Tax Informational Notice 2018-01 [PDF]. | See Corporation and Personal Income Tax Informational Notice 2018-01 [PDF]. |
Global Intangible Low-Taxed Income (GILTI) | Code section 951A would require a U.S. shareholder of a CFC to include GILTI in its income. | ||
Foreign Derived Intangible Income | Allows deduction equal to a percentage of its “foreign-derived intangible income” (“FDII”). Percentage varies by tax year. | See Corporation Tax Bulletin 2019-02 [PDF].
| |
Federal Treatment | Pennsylvania Treatment | |
|---|---|---|
Personal Income Tax | ||
Qualified Business Income Deduction | Deduction of up to 20% of qualified business income under Section 199A for sole proprietors, self-employed individuals, partners in partnerships, beneficiaries of trusts, and shareholders in S corporations. | PA Personal Income Tax does not allow for a Section 199A deduction. |
| Partnership Technical Termination §708(b)(1) | Eliminates the requirement for a technical termination of the partnership when there is a transfer of 50% or more of interests in capital and profits within a 12-month period. | PA Personal Income Tax will also eliminate technical terminations. |
Excess Business Losses | Disallows a current year deduction for business losses in excess of $500,000 for Married Filing Joint taxpayers and $250,000 for all other filing statuses. | PA Personal Income Tax has no limit on a business loss that can be claimed. A business loss, however, can only offset other business income (cannot offset any other class of income). |
Moving Expenses | Restricts deduction for moving expenses to only members of the armed forces on active duty (and their spouses and dependents) who move due to a military order that is a permanent change of station. | Expenses for moving 35 miles or more from your current location to start or keep a job are still deductible as Unreimbursed Business Expenses as long as they are not reimbursed. |
Section 529 Plans Qualified Expenses | Section 529 plans can now be used to pay up to $10,000 of costs for elementary or secondary public, private or religious schools. | PA Personal Income Tax will also consider such costs as qualified expenses. |
State and Local Tax Deduction | Deduction for state and local taxes is limited to a total of $10,000 per year. | N/A. PA Personal Income Tax does not allow for itemized deductions. Please refer to Answer ID 3618 at https://revenue-pa.custhelp.com/app/answers/detail/a_id/3618 |
Personal Exemption Deduction | Deduction for personal exemptions is eliminated. | PA Personal Income Tax does not allow for personal exemptions. Note: dependency must still be determined if you are claiming tax forgiveness on Schedule SP |