Reed Smith Client Alerts

As the deadline approaches to file a Pennsylvania corporate net income tax refund claim for the 2018 tax year, taxpayers should consider preserving their right to a refund based on: (1) reducing their federal-taxable-income starting point for computing their Pennsylvania tax base, and (2) reducing their apportionment by including a property factor or a payroll factor, or both.  For calendar-year taxpayers, the last day to file a 2018 refund claim is May 16, 2022. Use our model refund claim and file online to preserve your refund by the May 16 deadline (an amended return is not required).

Tax Base

Most provisions of the 2017 federal tax reform legislation (the Tax Cuts and Jobs Act, or “TCJA”) were effective beginning for calendar tax year 2018.1 Here, we are highlighting two TCJA-related items that may have increased your company’s 2018 Pennsylvania tax base, if you followed the incorrect guidance issued by the Pennsylvania Department of Revenue (the “Department”).

  • FDII deduction allowed in Pennsylvania: Under Pennsylvania law, federal taxable income is the starting point for computing the corporate net income tax, and there is no add-back or disallowance for the deduction for foreign-derived intangible income (“FDII”).2 Therefore, if a taxpayer claimed a FDII deduction for federal income tax purposes, that deduction should be incorporated into its Pennsylvania corporate net income tax base. However, taxpayers that followed the Department’s tax return instructions likely didn’t get the benefit of the FDII deduction for Pennsylvania purposes. The Department’s position is that the FDII deduction is not allowed for Pennsylvania purposes, but that position is inconsistent with Pennsylvania statute, which makes federal taxable income the starting point for computing the tax base. The Department’s position is based, instead, on the fact that the FDII deduction is a “special deduction” claimed after Line 28 on the federal income tax return.3 Any taxpayer that claimed the FDII deduction on their federal, but not their Pennsylvania, tax return should file a refund claim.4
  • IRC § 163(j) interest expense limitation does not apply in Pennsylvania: No taxpayer should apply the IRC § 163(j) interest expense limitation in computing its Pennsylvania tax base because Pennsylvania’s legislature has not considered and adopted the limitation. In Pennsylvania, the legislature “must make all of the necessary policy decisions, as is their mandate per the electorate.”5 The legislature may not delegate to any other body “de facto control over matters of policy.”6 Thus, the IRC § 163(j) limitation on the interest deduction for federal purposes cannot apply in Pennsylvania unless the legislature takes action to adopt the limitation.