Bulletin 2019-03: Application Now Limited to Pre-2025 Tax Years
Effective 2018, the federal government enacted new Section 163(j), which generally limits a taxpayer’s net interest expense deduction to 30% of adjusted taxable income (“ATI”).1 In 2019, the Department took the position that Pennsylvania corporate net income taxpayers must apply the Section 163(j) limitation. But, they provided an important taxpayer-friendly exemption. In Bulletin 2019-03 the Department stated that it would not require a corporate taxpayer that files its federal return as part of a consolidated group to compute a separate-company limitation for Pennsylvania corporate net income tax purposes unless the federal consolidated group itself reported a limitation on its consolidated Form 1120 (the “consolidated group exemption”). For many taxpayers, this meant no Pennsylvania-specific Section 163(j) limitation applied—even where a separate-entity calculation might have yielded a different result.
The Department effectively revoked this position on July 30, 2026, by issuing a “revised” version of Bulletin 2019-03 that limited its effective date to “tax years beginning before January 1, 2025.” Thus, taxpayers cannot rely on the consolidated-group exemption beginning for calendar-year returns due this fall. Taxpayers must apply Section 163(j) on a separate-company basis.
We caution that the Department has not yet issued guidance affirmatively stating that it has abandoned the consolidated-group exemption for tax years beginning on or after January 1, 2025. The Department could issue guidance in the future extending application of the consolidated group exemption to tax years beginning on or after January 1, 2025. However, as it stands today, there is little authority to support a position that the consolidated group exemption applies to the 2025 tax year.
Law Change Decouples from the More Favorable “EBITDA Method”
Effective 2025, Congress revised Section 163(j) to allow taxpayers to calculate the limitation in a more favorable manner.2 The limitation is generally based on 30% of ATI.3 So a higher ATI results in more allowable interest expense to be deducted. The One Big Beautiful Bill Act (“OB3”) amended Section 163(j) to use the colloquially-named “EBITDA method” which calculates ATI by adding back depreciation, amortization, and depletion.4 Adding back these deductions increases ATI, which increases the 30%-of-ATI limitation, and thus the amount of deductible interest expense.
Pennsylvania decoupled from the federal legislation allowing the use of the “EBITDA method” through legislation enacted in 2025 which requires taxpayers to compute Pennsylvania taxable income using Section 163(j) as it was in effect as of December 31, 2024—before the favorable OB3 change. The law requires taxpayers to apply Section 163(j) using the less favorable pre-OB3 method—calculating ATI without adding back depreciation, amortization, and depletion. This generally decreases the 30%-of-ATI limitation.
Next Steps
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 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, 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.
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1. Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, § 13301, 131 Stat. 2054 (2017) (amending I.R.C. § 163(j)).
2. One, Big, Beautiful Bill Act, Pub. L. No. 119-21, § 70303 (2025) (amending I.R.C. § 163(j) effective for tax years beginning after December 31, 2024).
3. I.R.C. § 163(j)(1)(B).
4. I.R.C. § 163(j)(8).
Client Alert 2026-170