On September 10, 2026, the Pennsylvania Department of Revenue issued Corporation Tax Bulletin 2026-01, providing comprehensive guidance on the application of IRC § 163(j) for Pennsylvania corporate net income tax purposes. As discussed in our prior alert, the Department earlier this summer effectively revoked its longstanding consolidated-group exemption — which had allowed members of a federal consolidated group without a group-level Section 163(j) limitation to avoid a separate-company calculation for Pennsylvania purposes — by limiting that guidance to tax years beginning before January 1, 2025. The new Bulletin confirms that, beginning with tax year 2025, taxpayers must calculate their federal interest expense deduction on a true separate-company basis for Pennsylvania CNIT purposes. Consequently, both intercompany and third-party interest are included in the calculation of each corporation’s interest expense deduction and in the determination of the corporation’s Section 163(j) limitation. The Bulletin also confirms that Pennsylvania has decoupled from the more favorable “EBITDA” method of calculating the Section 163(j) limitation that was adopted for federal income tax purposes by the One Big Beautiful Bill Act.
The Bulletin also addresses a number of important implementation details, including the interaction between the Section 163(j) limitation and Pennsylvania's related-party interest expense addback under 72 P.S. § 7401(3)1.(t), the treatment of interest expense associated with nonbusiness income, the impact of Section 382 on disallowed interest carryforwards, and the flow-through of interest limitation amounts from partnerships to corporate partners.
Taxpayers should re-evaluate the impact of Section 163(j) for their Pennsylvania corporate net income tax returns for tax years beginning on or after January 1, 2025. This includes the 2025 calendar tax-year returns due this fall.
Taxpayers may have options to limit the impact of Section 163(j) on their Pennsylvania corporate net income tax returns.
- First, taxpayers may have a basis to challenge Pennsylvania’s ability to apply Section 163(j) at all under Pennsylvania’s Constitution, thus allowing them to compute their taxable income as if Section 163(j) had not been enacted. (See our prior webinar on this position).
- Second, even if the Department is correct that Section 163(j) applies in determining Pennsylvania taxable income, taxpayers may be able to take the position that Pennsylvania’s legislation decoupling from the more favorable “EBITDA” method of calculating the limitation is invalid and, therefore, the more favorable method may still be used.
Impacted taxpayers should contact one of the authors of this alert, or the Reed Smith lawyer with whom they regularly work.
Client Alert 2026-186