PA Corporate Net Income Tax: Everything You Need to Know
PA Corporate Net Income Tax is the money corporate entities pay to the government of Pennsylvania as Net Income Tax for conducting business in its jurisdiction.4 min read
2. Commonwealth Exceptions
3. Personal Income Tax vs. Corporate Income Tax
4. Calculating the Pennsylvania Taxable Income
5. Pennsylvania Capital Stock Franchise Tax
PA Corporate Net Income Tax is the amount of money corporate entities pay to the government of Pennsylvania as Net Income Tax for conducting business in its jurisdiction.
The Pennsylvania Corporate Net Income Tax is charged on income that is taxable by the federal government without deducting the federal net operating loss. Pennsylvania permits entities to carry forward their net operating loss of up to $2 million per year for 20 years.
Corporate Tax Return
The corporations that are subject to the Pennsylvania Corporate Net Income Tax are entities with the following features:
- Haven't elected S corporation treatment
- Do business in Pennsylvania
- Have capital used in Pennsylvania
- Own property in Pennsylvania
The rate of the tax is 9.99 percent of every income that is taxable by Pennsylvania, which is essentially every income that is taxable by the federal government before deductions. Form RCT-101, PA Corporate Tax Report, is the form to be submitted. A complete duplicate of the Federal Income Tax return must accompany the return of the state. This should be done on a company-by-company basis without combinations. Several other documents such as forms, schedules, and sub-schedules can also be required.
Pennsylvania requires a corporate tax return for all corporations operating within its jurisdiction even if there were no business activities in the tax year. For firms that owned no assets and were inactive, Form RCT-101 may be turned in instead of Form RCT-101. The due date to submit Form RCT-101 is usually the 15th day of April for calendar year reporters, and 30 days after the federal return due date for non-calendar year reporters. There's a six-month extension availability. However, you should know that a federal extension doesn't pass for a state extension.
An entity categorized as corporate for reasons of federal income taxation is also treated as a corporation for the tax purposes of Pennsylvania. However, the Commonwealth makes some exceptions. The list of exceptions includes the following:
- Organizations that filed to be formed as not-for-profit entities
- Membership organizations
- Homeowners' associations
- Agricultural cooperatives
- Business trusts
- Foreign, non-PA companies bidding for physical, personal property in Pennsylvania
Additionally, the Commonwealth exempts corporations that are liable to the following taxes:
- Gross Premiums Tax
- Bank and Trust Companies Shares Tax
- Mutual Thrift Tax
- Title Insurance Company Shares Tax
Personal Income Tax vs. Corporate Income Tax
All S corporations can file to be considered partnerships for purposes of Pennsylvania taxation and pay the required Personal Income Tax of 3.07 percent, instead of the Corporate Income Tax of 9.99 percent.
The limited liability companies that are partnerships for reasons of federal taxation are also considered partnerships for purposes of Pennsylvania taxation. Therefore, they also pay the Government of Pennsylvania 3.07 percent Personal Income Tax, instead of the 9.99 percent Corporate Net Income Tax.
Professional companies that are restricted, which are limited liability companies that render restricted professional services, are taxed as limited partnerships. Therefore, they don't pay the 9.99 percent Corporate Net Income Tax. Instead, they pay 3.07 percent Personal Income Tax.
Calculating the Pennsylvania Taxable Income
To calculate the Pennsylvania taxable income, every tax required on net income or quantified by net income which is spent on the federal corporate income tax return is added back. Then, the net interest income and gains on the U.S. Government Securities along with foreign dividend gross-up are subtracted.
For corporations that partially transact business in Pennsylvania, their taxable income for Pennsylvania is calculated according to where the transactions that generated the profit took place. Only revenue generated by transactions in Pennsylvania is subject to Pennsylvania income tax.
Pennsylvania Capital Stock Franchise Tax
Before it became invalid at the end of 2015, the Pennsylvania Capital Stock Franchise Tax (CSFT) was enforced on every limited liability company (LLC), joint-stock association, corporation, and business trust that owned property in Pennsylvania or operated in it. That included limited liability companies that were considered disregarded entities or partnerships for reasons of federal income tax.
Several taxpayers formed state law limited partnerships (LPs) rather than limited liability companies to conduct business in Pennsylvania because the Capital Stock Franchise Tax wasn't enforced on entities that operated as state law partnerships.
Now that the Capital Stock Franchise Tax is no longer required, there is no need to use a state law partnership to do business or own property in Pennsylvania. Currently, an LLC is typically the favored option for pass-through entities in Pennsylvania and other states. The CSFT was invalidated effective on or after the 1st of January, 2016. However, there's no reasonable proof that the invalidation is permanent.
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