Simplifying the Pennsylvania Tax Code = Small Business Expansion and Jobs

Date: April 01, 2015

Small
Business Tax Reform Summary

Like-Kind Exchanges – Prime Sponsors: Rep. Stephen
Bloom (HB700) and Sen. Mike Folmer (SB601)

Under
Federal tax law, a “like-kind” exchange under Internal Revenue Code Section
1031 allows for tax-deferral when property is exchanged for similar property.  This long-standing Federal provision
facilitates efficient investment in the job-creating assets businesses need to
remain competitive.  Every state but
Pennsylvania provides for a similar deferral on the state level (current Pennsylvania
tax law contains no such provision).

This legislation
would allow for like-kind exchanges in Pennsylvania to mirror Internal Revenue
Code Section 1031, thereby removing a disadvantage Pennsylvania small
businesses face when competing with businesses in other states.

Net Operating Loss – Prime Sponsors: Rep. Seth Grove
(HB701) and Sen. John Eichelberger (SB602)

The Tax
Reform Code of 1971 allows corporate taxpayers to deduct Pennsylvania losses from
one year from Pennsylvania Income in subsequent years.  However, there have been several changes in
the carry forward period for Net Operating Losses and limitations on the amount
of Net Operating Loss that can be used in a given tax period.

This legislation
would allow a small business to use the Net Operating Loss deduction.  Since small businesses don’t have access to
the capital larger companies have, their ability to use such tax strategies
helps them have greater control over their financial positions.  For example, if an owner sells some personal
items to help the business make payroll, that owner can take the business loss
against his or her tax bill created by selling the personal items

Section 179 Expense Deductions – Prime Sponsors:
Rep. George Dunbar (HB 702) and Sen. Scott Hutchinson (SB603)

For
Pennsylvania C Corporations, the calculation for Pennsylvania Corporate Net
Income begins with federal taxable income, which is then adjusted for certain
items specified in Article IV of the Tax Reform Code.  Currently, there is no adjustment for Section
179 expenses.  The Section 179 expense
used in the calculation of Federal taxable income is also used in Pennsylvania
C Corporation Net income.

The
Federal limit for Section 179 expenses has been $500,000 for the last four
years.  However, for personal income tax
purposes (S Corporations, partnerships, and individuals), Pennsylvania law
limits the amount of Section 179 deduction to $25,000.

This has
created an inequity for small businesses in Pennsylvania.  Pennsylvania C corporations are allowed a 179
deduction that small businesses are not. 
Senator Hutchinson’s legislation would increase the maximum amount a
taxpayer may elect to expense for Section 179 assets:  to $100,000 per taxable year.  The bill would also increase the phase-out of
this deduction from the current $200,000 to the current federal amount of
$2,000,000.

Please
note:  this increase in the deduction is
not a tax credit, but simply allows a tax deduction earlier in the useful life
of depreciable assets.  The proposed increase
in limits is an incentive to encourage businesses to buy equipment and to invest,
which promotes economic development in Pennsylvania.

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