PA Legislature Considering Small Business Tax Reform

The federal Tax Cuts and Jobs Act of 2017 (TCJA) was seen by many as the most significant federal tax reform in decades. One notable provision of the TCJA was the provision to cap the state and local tax deduction at $10,000 through 2025. This cap prevents many individuals from being able to fully deduct state and local income taxes and property taxes paid on their federal individual income tax returns.

This limitation is especially felt by those with ownership interests in entities like partnerships and S corporations (collectively referred to as pass-through entities) that operate in multiple states.

To mitigate this limitation, several states have updated their tax codes to allow for more state tax deductions to flow through to residents’ federal individual income tax returns. This is commonly done through a “pass-through entity tax.”

Under normal circumstances, pass-through entities do not pay tax themselves. Instead, their income is allocated to their owners and reported on the individual income tax returns of the owners. A pass-through entity tax, if implemented, would be paid by the pass-through entity with a corresponding credit for owners to claim on their respective state individual income tax returns.

The IRS has acknowledged the deductibility of pass-through entity taxes with its release of IRS Notice 2020-75. The benefit of such a deduction could be significant, especially for those in the highest federal income tax brackets.

Pennsylvania is currently considering incorporating a pass-through entity tax into its tax code. House Bill 1709 is currently working its way through the state legislature and is expected to be debated as part of the state budget process.

Schreiber Accounting and Advisory can help you understand your current tax situation and keep up with tax changes on the horizon with tax preparation and planning services. Contact the firm for more information.

Material discussed is for informational purposes only. It is not to be interpreted as investment, tax, or legal advice. Individual situations vary, and this information should only be relied upon when coordinated with individual professional advice.