On July 11, 2024, Pennsylvania Gov. Josh Shapiro approved Act 56 (S.B. 654), omnibus budget legislation containing several notable tax provisions.1 In particular, the legislation increases the net loss carryover (NLC) deduction limitation for corporate net income tax (CNIT) purposes over a four-year period, increasing the current 40% cap in 10% annual increments to align with the federal 80% limitation by the 2029 tax year. Additionally, the legislation amends the related-party intangible expense addback rules to include an election for an affiliated entity to exclude the intangible expense or cost added back by the licensee when determining the affiliate’s taxable income. Finally, the bill makes changes to the bank and trust company shares tax (Bank Shares Tax) rules by clarifying that all goodwill resulting from an acquisition or business combination may be deducted for tax returns filed March 2025 or later.
Increased utilization of net losses
Since the 2018 tax year, Pennsylvania’s net loss deduction has been limited to 40% of post-apportionment taxable income.2 Act 56 provides for a gradual increase to the NLC deduction limitation in 10% increments taking place annually over a four-year period beginning with the 2026 tax year, according to the following schedule:
- 40% of taxable income for tax years beginning in 2025;3
- 50% of taxable income for tax years beginning in 2026;4
- 60% of taxable income for tax years beginning in 2027;5
- 70% of taxable income for tax years beginning in 2028;6and
- 80% of taxable income for tax years beginning in 2029 and thereafter.7
In order to retain the previous 40% limitation for net losses incurred in pre-2025 tax years, the legislation provides a unique formula for calculating the NLC deduction limitation involving net losses incurred in both pre-2025 tax years and post-2024 tax years. For net losses incurred in a pre-2025 tax year, the deduction remains at 40% of taxable income.8 For net losses incurred in 2025 and after, the taxpayer applies the actual percentage for the tax year according to the above schedule and subtracts the actual percentage of taxable income deducted from the pre-2025 net losses.9 That result is then multiplied by the taxable income for the year and added to the deduction claimed for pre-2025 losses.10
An example may be used to illustrate how the above NLC limitation calculation applies in practice. Assume that a taxpayer has $200,000 in Pennsylvania taxable income for the 2027 tax year. The taxpayer has $170,000 in pre-2025 net loss carryforwards and $300,000 in post-2024 net loss carryforwards. Of the pre-2025 net loss carryforwards, the taxpayer is limited to an $80,000 NLC deduction, or 40% of the taxpayer’s 2027 taxable income.
Moving to the post-2024 NLC deduction calculation, while the 2027 tax year NLC limitation percentage is 60% for post-2024 net losses, the taxpayer is limited to a 20% NLC deduction with respect to such losses because 40% of taxable income was already deducted using pre-2025 net losses. Therefore, the taxpayer may deduct another $40,000, or 20% of the taxpayer’s 2027 taxable income. The total NLC deduction allowed for the 2027 tax year is $120,000, resulting in 2027 taxable income of $80,000. The taxpayer also carries forward $90,000 in pre-2025 net losses and $260,000 in post-2024 net losses to future tax years, subject to a 20-year carryforward period.
Intangible expense deduction election for affiliates
Beginning with the 2015 tax year, Pennsylvania enacted a related party addback provision that disallows deductions of certain intangible expenses or costs or interest expenses or costs paid, accrued or incurred by a corporate taxpayer to an affiliated entity.11 The addback rule created an issue beginning with the 2023 tax year, when Pennsylvania’s adoption of economic nexus and market-based sourcing for intangible income became effective.12 As a result, the taxpayer may have been disallowed the deduction while the affiliate would also be subject to tax on the intangible income, resulting in double taxation. To rectify this issue, the legislation allows the affiliate to make an annual election to exclude the intangible expense or cost (or associated interest expense) added back by the licensee entity and paid to the affiliate.13 The affiliate must make the election with the filing of its original return.14
Importantly, the legislation clarifies that the election will have no impact on nexus or apportionment of the licensee taxpayer or the affiliated entity under Pennsylvania’s bright-line economic nexus rule.15 The Department of Revenue (Department) announced that it will publish additional guidelines for taxpayers who have already filed their 2023 returns.
Bank shares tax goodwill deduction
Act 56 clarifies the extent of the goodwill deduction for purposes of the Pennsylvania Bank Shares Tax. While Pennsylvania law had provided an allowance for a deduction from the taxable amount of shares equal to the value of goodwill recorded,16 it had been the position of the Department to deny deductions for goodwill resulting from an acquisition or business combination that was reported in a banking institution’s reports of condition (i.e., call report). Act 56 clarifies that banking institutions are allowed a deduction for all goodwill resulting from an acquisition or business combination, applicable to the ascertainment of the taxable amount of shares after December 31, 2024 and to tax reports and payments due after March 14, 2025.17
Other notable provisions
Other notable provisions contained in Act 56 include the following:
- CNIT deduction for medical cannabis business expenses: the legislation provides for an additional CNIT deduction from taxable income for a medical cannabis business in the amount of ordinary and necessary expenses that were paid or incurred by the business for tax years beginning after Dec. 31, 2023.18
- Sales and use tax exemption for waste grease removal services: the legislation creates a sales tax exemption for sales of services related to cleaning or maintaining storage traps used by food service or restaurant establishments to collect grease waste, effective for transactions occurring after Sept. 30, 2024.19
- Amendment to computer data equipment sales and use tax exemption: the data center sales and use tax exemption is removed for purchases or use of computer data center equipment for installation in a certified data center if the equipment is used in cryptocurrency mining operations after Dec. 31, 2025.20
Commentary
Pennsylvania’s enactment of omnibus tax legislation represented a swift culmination to a budget negotiation fraught with tension between a politically split General Assembly. The increase to the NLC deduction limitation brings Pennsylvania in line with the federal NOL deduction limitation beginning with the 2029 tax year. Given that the limitation has been historically more restrictive than that of other states,21 the increased limitation is designed to make the Commonwealth more competitive with neighboring states in attracting and retaining corporate businesses. With the complex calculation of the NLC deduction limitation and the resulting need to separate net losses into two groups depending on the year incurred, taxpayers will need to track net losses by year until pre-2025 losses are fully utilized, and consider the resulting financial impact for tax provision purposes.
The technical correction to the related party intangible expense disallowance rules will reconcile the unique double taxation issue created by the new CNIT economic nexus and market-based sourcing methodology for intangible income that began in 2023. With the affiliate election in place, the law change ensures that the affiliated entity may exclude intangible income from its tax base so long as the taxpayer licensee adds it back to taxable income.
Finally, the amendment to the bank shares tax goodwill deduction stands to benefit banking institutions that are actively engaging in mergers and acquisitions, a more common occurrence especially for smaller regional banks. Recently, the Department began denying goodwill deductions involving combinations of bank holding companies that resulted in the combination of subsidiary banks. In confirming that any goodwill is deductible from the Bank Shares Tax, including goodwill as reported in bank call reports, the legislation clarifies the legislative intent behind the goodwill deduction as it was originally enacted.
Absent from the budget legislation once again was a provision that would have created a pass-through entity (PTE) tax regime, making Pennsylvania a notable outlier as one of only five remaining states with a personal income tax that has not enacted an elective PTE tax. The lack of action on a PTE tax is due in part to the Department’s vocal opposition to the tax. Additionally, Pennsylvania notably lacks a crediting provision for resident partners in partnerships that have elected to pay entity-level taxes to other states, while such credit is permitted for resident shareholders in similarly situated S corporations under Pennsylvania law.22 While proposed legislation has been introduced to create a PTE tax regime and permit a resident partner credit for entity-level taxes paid to other states,23 both provisions were eliminated from the budget legislation as enacted.
1 Act 56 of 2024 (S.B. 654), Laws 2024.
2 72 Pa. Stat. §§ 7401(3)4.(c)(1)(A)(VIII); 7401(3)4.(c)(2)(B)(VIII).
3 S.B. 654, § 7, adding 72 PA. STAT. § 7401.1(a)(1).
4 S.B. 654, § 7, adding 72 PA. STAT. § 7401.1(b)(2)(i).
5 S.B. 654, § 7, adding 72 PA. STAT. § 7401.1(c)(2)(i).
6 S.B. 654, § 7, adding 72 PA. STAT. § 7401.1(d)(2)(i).
7 S.B. 654, § 7, adding 72 PA. STAT. § 7401.1(e)(2)(i).
8 S.B. 654, § 7, adding 72 PA. STAT. § 7401.1(a)(1), (b)(1), (c)(1), (d)(1), (e)(1).
9 S.B. 654, § 7, adding 72 PA. STAT. § 7401.1(b)(2)(i), (c)(2)(i), (d)(2)(i), (e)(2)(i).
10 S.B. 654, § 7, adding 72 PA. STAT. § 7401.1(b)(2)(ii), (c)(2)(ii), (d)(2)(ii), (e)(2)(ii).
11 72 PA. STAT. § 7401(3)1.(t)(1).
12 Pa. Act 53 (H.B. 1342), Laws 2022. For further discussion, see GT SALT Alert: Pennsylvania reduces corporate income tax rate.
13 S.B. 654, § 6, adding 72 PA. STAT. § 7401(3)1.(u)(1).
14 S.B. 654, § 6, adding 72 PA. STAT. § 7401(3)1.(u)(2).
15 S.B. 654, § 6, adding 72 PA. STAT. § 7401(3)1.(u)(2).
16 72 PA. STAT. § 7701.1(b.1).
17 S.B. 654, § 8, amending 72 PA. STAT. § 7701.1(b), (b.1), (c).
18 S.B. 654, § 6, adding 72 PA. STAT. § 7401(3)1.(b.2).
19 S.B. 654, § 1, adding 72 PA. STAT. § 7204(76).
20 S.B. 654, 25, adding 72 PA. STAT. § 9931-D(c)(2)(iii).
21 For further discussion, see GT SALT Alert: Pennsylvania grants relief on net loss provision; and GT SALT Alert: Pennsylvania severs net loss carryover provision.
22 72 PA. STAT. § 7314.
23 S.B. 659, S.B. 660.
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