Pennsylvania Reduces Corporate Net Income Tax Rate
Angela Lawrence, Paraprofessional at Klatzkin, contributed to this post.
Pennsylvania lawmakers finally reached an agreement this summer to reduce the state’s corporate net income tax (CNIT) rate. With the enactment of House Bill 1342 as a component of the 2022-2023 fiscal year state budget, signed into law by Governor Wolf in early July, the nation’s second highest state corporate tax rate will see a substantial decrease.
Starting January 1, 2023, the Pennsylvania CNIT rate, currently 9.99%, will be reduced by 1 percentage point to 8.99%. Each subsequent year, the rate will decrease 0.5 percentage points until it reaches 4.99% at the beginning of 2031, making it potentially the ninth lowest corporate tax rate in the nation. This structural tax reform will help the state and taxpayers handle the challenges of inflation. Although the change doesn’t provide financial relief in the short term, it helps the economy respond to inflationary demand and will continue to yield benefits even after an inflationary period has faded. The more competitive rate will also aid the state in attracting new business.
Another change that will be a part of the budget is an increase in the amount of capital investment pass-through business owners can deduct on their individual income tax returns the year the investments were made. House Bill 1342 helps alleviate the previous bias against small business expenses associated with investments in machinery, equipment, and other short-lived capital assets. The state’s tax code previously required most of these items to be deducted over time according to a depreciation schedule and only allowed $25,000 in immediate expensing of such property. Sec. 179 of the federal Internal Revenue Code, however, currently allows small business owners to deduct up to $1 million of investment in the year the investments were made. The new bill now conforms the state to the federal deduction allowance under tax law at the time the property is placed in service, which will encourage growth for small businesses.
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©2022 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date and should not be construed as accounting, tax, or financial advice. Please consult your tax advisor concerning your specific situation.