PENNYLVANIA 2002-2003 TAX CHANGES

Corporate Net Income Tax Changes

Net Operating Loss Carry Forward Extension

The Net Operating Loss (NOL) carry forward is extended from a time period of ten years (10 years) to twenty years (20 years) for losses incurred in the 1998 taxable year and thereafter. Effective July 1, 2002.

Capital Stock and Franchise Tax Changes

Continued Phase-out
Act 23 of 2000 provided for the phase-out of the Capital Stock and Franchise Tax (CSFT) through a series of rate reductions. As of January 1, 2002, pursuant to Act 89 of 2002, the CSFT rate is now 7.24 mills. The CSFT will continue to be phased-out through a series of rate reductions through 2009. The new rates will be 6.99 mills in 2003, 5.99 mills in 2004, 4.99 mills in 2005, 3.99 mills in 2006, 2.99 mills in 2007, 1.99 mills in 2008, and 0.99 mills in 2009. The CSFT will expire with regard to taxable years beginning after 12/31/09. Applies to tax years beginning after December 31, 2001.

Personal Income Tax Changes

Korea/Vietnam Memorial Check-off
Extends the option on the Personal Income Tax form for the purpose of making contributions to the Korea/Vietnam Memorial National Education Center (Korea/Vietnam Memorial, Inc.) through 2004 (applies to taxable years beginning after December 31, 2000). Expires December 31, 2005.

Bulk Sales Clearance
The bulk sale clearance provisions in the Tax Reform Code are now consolidated. When businesses sell or transfer in bulk 51% or more of their inventory of goods, machinery, equipment, or other property, they must notify the Department of Revenue at least ten days prior to the sale or transfer to obtain a bulk sale clearance. The selling/transferring business must file all tax reports and pay all owed taxes before any clearance is granted. Failure to obtain clearance makes the purchaser as well as the seller jointly liable for all the taxes up to and including the date of sale or transfer.

SP Expansion
Expands the dependent allowance for Personal Income Tax forgiveness from $8,500 to $9,000. A two-parent family of four will owe no tax on eligible income up to $31,000. Applies to tax years beginning after December 31, 2001. Effective January 1, 2002.

Sales and Use Tax Changes

Clarification of Act 45 of 1998 Construction Contract Provisions
Recent amendments clarify that the definitions as well as the exclusionary language relating to construction contracts contained in Act 45 of 1998 apply only to construction contracts entered into with an organization that qualifies for a Sales and Use Tax exemption as a purely public charity or as a governmental entity.

Decoupling From Federal Bonus Depreciation
Pennsylvania has decoupled from the federal Job Creation and Worker Assistance Act of 2002, which authorizes taxpayers to deduct a 30 percent "bonus depreciation" on their federal tax returns for certain qualifying assets acquired after September 10, 2001, and before September 11, 2004. The federal Act allows for 30 percent of the adjusted basis of qualified property to be depreciated in the first year, while the remaining 70 percent is then depreciated under normal rules over the life of the asset.

PIT

For Personal Income Tax purposes, Individuals, Business Owners, Partnerships, Limited Liability Companies, Pennsylvania S Corporations, Estates, and Trusts cannot take this additional depreciation, but may continue to calculate depreciation on the same basis they would have calculated it under the Internal Revenue Code in effect at the time the property or asset was placed in service, or the Internal Revenue Code of 1986, as amended to January 1, 1997, whichever is earlier. If a taxpayer took the bonus depreciation for the 2001 year, they must file an amended Personal Income Tax return.

If taking the bonus depreciation for federal purposes, and starting with federal income for Personal Income Tax purposes, taxpayers must make an adjustment. If using Federal Schedule C or Federal Schedule F, taxpayers must reduce the depreciation expense on that schedule, or use the PA Schedule C-F Reconciliation. If using Federal Form 1065 or Federal Form 1120S, taxpayers must reduce the depreciation expense on the PA Schedule M that is provided with the PA-20S/PA-65 Information Return. Applies to taxable years beginning after December 31, 2000.

CNIT

For Corporate Net Income Tax purposes, corporations cannot take the additional depreciation. Applies to taxable years beginning after September 11, 2000.

Philadelphia Business Privilege Tax

For Philadelphia Business Privilege tax purposes the bonus depreciation deduction is disallowed for taxable years beginning after September 11, 2000.

Research and Development Tax Credit

The Research and Development Tax Credit for businesses is extended until 2006 from the original sunset date of 2004. This credit continues to be capped at $15 million annually. Effective July 1, 2002.