On July 11, the Pennsylvania General Assembly passed – and Governor Shapiro signed – the state’s fiscal year 2025 budget.
The financial plan boosts spending by 6.2% to $47.6 billion, with increases in education, economic development and infrastructure, among other areas.
The budget includes a tax code bill with several tax changes. Notably missing, however, was a bill to create a pass-through entity tax or legislative intervention to cure the current disparity in treatment for owners of S corporations and partnerships claiming the resident credit from other states where pass-through entity tax elections were made.
The budget does include several provisions that may be beneficial to both businesses and individuals looking to minimize their state taxes, including:
Pennsylvania Personal Income Tax
The state will now conform to Internal Revenue Code (IRC) to allow for the cost and percentage depletion of mines, oil and gas wells and other natural gas deposits. Other changes include a $2,500 deduction for student loan debt interest, as well as conformity to IRC for rollovers from 529 accounts.
Corporate Net Income Tax
Changes to the net operating loss carryover will take effect for tax years beginning on January 1, 2025. For the 2025 tax year, the carryover will be limited to 40% of taxable income, but that percentage will increase 10% per year until it reaches 80%. Note, however, that as the deduction percentage increases, the calculation of will not be a flat percentage increase. Per the statute, the percentage of the tax year will be retained for that unused NOL. For example, the NOL from tax years beginning on January 1, 2025, will remain 40% until the 2025 NOL is depleted.
For tax years that began on or after January 1, 2023, an affiliate entity that is subject to corporate net income tax is eligible for deduction of the intangible/interest expenses or cost that is required to be added back by the taxpayer. The election must be made on the original return and the taxpayer required to add back the intangibles/interest is not entitled to a credit.
Sales and Use Tax
Services purchased by a restaurant for cleaning or maintaining a storage trap for grease waste are now exempt from tax.
Tax Credits
Two credit programs were created for employers who provided matching contributions to their employees for 529 and child care accounts. Both credits begin for tax years starting January 1, 2025. The 529 contribution credit is capped at $500 per employee and is limited to 25% of the aggregate amount of the matching contributions. The credit also ends for tax years ending before January 1, 2030. The child care contribution credit is capped at $500 per employee and is limited to 30% of the aggregate amount of the matching contributions.
The amount of funds available in other credit programs – including the Neighborhood Assistance Program, the Coal Refuse Energy and Reclamation Tax Credit and the Rural Jobs and Investment Tax Credit – have also been adjusted/increased.
Businesses and individuals should incorporate these tax code changes into their current tax planning to properly take advantage of any benefits available. Schneider Downs’ State and Local Tax and Core Services Tax groups are available to assist with that planning.
About Schneider Downs Tax Services
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To learn more, visit our dedicated Tax Services page.
