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Pennsylvania provides NOL limitation relief, amends related party “addback”
July 2024
In brief
What happened?
Budget-related tax legislation enacted in Pennsylvania on July 11 increases the net operating loss (NOL) deduction limitation (from 40% to 80% of taxable income by 2029), provides an election concerning the related party expense addback “subject to tax” exception, and amends provisions regarding the deduction of goodwill for bank shares tax purposes, among other changes.
[S.B. 654, enacted 7/11/24]
Why is it relevant?
The legislation marks the latest chapter in Pennsylvania’s limitations on NOL utilization, which has been subject to litigation and amended multiple times over the years. This legislation increases the current percentage limitation in 10% annual increments but continues the 40% limitation for NOL carryforwards from loss years prior to 2025.
Actions to consider
Taxpayers should consider the need to track NOLs by year and the potential impact of this legislation on their ASC 740 tax provision.
In detail
NOL deduction limitation relief
For tax years beginning after December 31, 2018, the limitation on the total NOL deduction allowed in any tax year has been 40% of taxable income. Under the legislation, this percentage limitation is increased by 10% each year until it reaches 80%, as follows:
- 40% for tax years beginning in 2025,
- 50% for tax years beginning in 2026,
- 60% for tax years beginning in 2027,
- 70% for tax years beginning in 2028, and
- 80% for tax years beginning in 2029 and thereafter.
To account for losses carried forward from prior limitation years, the legislation computes the allowable NOL deduction in each year according to the following method:
1. For a net loss incurred in a tax year beginning prior to January 1, 2025, deduct 40% of taxable income; and
2. For a net loss incurred in a tax year beginning on or after January 1, 2025, deduct
- the applicable percentage for the tax year specified above minus “the actual percentage of taxable income deducted” under (1) above, multiplied by
- taxable income for the tax year.
Related party addback election
The legislation provides an annual election to exclude intangible expenses or costs or interest expenses or costs paid to an affiliate when determining the affiliate’s Pennsylvania taxable income. In such a case, the payor “shall not be entitled to receive any credit” under the “subject to tax” exception to the state’s related party addback rule.
The election must be made by the affiliated entity with the filing of its original return. The legislation provides that this election does not “otherwise impact nexus or apportionment of the taxpayer or the affiliated entity.”
Observation: While the election could result in a significant reduction of intangible or interest income for the affiliate, it will not impact that affiliate’s Pennsylvania apportionment or nexus determination under the state’s bright-line test.
These changes are effective for tax years beginning on or after January 1, 2023.
Bank shares tax amendments
The legislation also makes various changes to the bank shares tax. Among other changes, the legislation amends the deduction for goodwill to provide that this deduction from the taxable amount of shares is equal to the value of any goodwill recorded “in the reports of condition of the institution pursuant to generally accepted accounting principles because of an acquisition or business combination” occurring after June 30, 2001.
This change applies “to the ascertainment of the taxable amount of shares after December 31, 2024, and to the report and the payment of the bank and trust company shares tax due after March 14, 2025.” The legislation provides that the amendments may not be relied upon to ascertain the tax or seek a refund for prior periods.
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