Trial Engrossment of Amendment A04425 to House Bill 1709 P.N. 1937, Regular Session 2021-2022

A04425

THE GENERAL ASSEMBLY OF PENNSYLVANIA

HOUSE BILL

No.

1709

Session of

2021

INTRODUCED BY WHITE, JUNE 28, 2021

REFERRED TO COMMITTEE ON FINANCE, JUNE 28, 2021

AN ACT

Amending the act of March 4, 1971 (P.L.6, No.2), entitled "An

act relating to tax reform and State taxation by codifying

and enumerating certain subjects of taxation and imposing

taxes thereon; providing procedures for the payment,

collection, administration and enforcement thereof; providing

for tax credits in certain cases; conferring powers and

imposing duties upon the Department of Revenue, certain

employers, fiduciaries, individuals, persons, corporations

and other entities; prescribing crimes, offenses and

penalties," in personal income tax, further providing for tax

imposed at partnership level, for income of a Pennsylvania S

corporation, for income taxes imposed by other states and for

general rule; and, in general provisions, further providing

for estimated tax.

Amending the act of March 4, 1971 (P.L.6, No.2), entitled "An

act relating to tax reform and State taxation by codifying

and enumerating certain subjects of taxation and imposing

taxes thereon; providing procedures for the payment,

collection, administration and enforcement thereof; providing

for tax credits in certain cases; conferring powers and

imposing duties upon the Department of Revenue, certain

employers, fiduciaries, individuals, persons, corporations

and other entities; prescribing crimes, offenses and

penalties," in personal income tax, further providing for

definitions, providing for alternate tax imposed at pass-

through entity level and further providing for taxability of

partners, for income of a Pennsylvania S corporation and for

income taxes imposed by other states.

The General Assembly of the Commonwealth of Pennsylvania

hereby enacts as follows:

Section 1. Section 306.2 of the act of March 4, 1971 (P.L.6,

No.2), known as the Tax Reform Code of 1971, is amended by

adding a subsection to read:

Section 306.2. Tax Imposed at Partnership Level.--* * *

(f) A partnership, other than a publicly traded partnership,

may elect to have subsection (a) apply to all of its income

allocable to the resident partners or members and the portion of

its income from sources within this Commonwealth allocable to

the nonresident partners or members, regardless of amount. The

election may be made for any taxable year at any time during the

preceding taxable year or at any time on or before the due date

or extended due date of the partnership's tax return under

section 335, and the election shall be reflected in the

statement to each partner required under section 335(c)(3).

Section 2. Section 307.8(f) of the act is amended by adding

a paragraph to read:

Section 307.8. Income of a Pennsylvania S Corporation.--* *

(f) A Pennsylvania S corporation with underreported income

shall be subject to the following:

* * *

(5) A Pennsylvania S corporation may elect to have paragraph

(1) apply to all of its income allocable to the resident

shareholders and the portion of its income from sources within

this Commonwealth allocable to the nonresident shareholders,

regardless of amount. The election may be made for any taxable

year at any time during the preceding taxable year or at any

time on or before the due date or extended due date of the

Pennsylvania S corporation tax return under section 330.1, and

the election shall be reflected in the statement to each

shareholder required under section 330.1(d).

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Section 3. Section 314(a) of the act is amended and the

section is amended by adding a subsection to read:

Section 314. Income Taxes Imposed by Other States.--(a) A

resident taxpayer before allowance of any credit under section

312 shall be allowed a credit against the tax otherwise due

under this article for the amount of any income tax, wage tax or

tax on or measured by gross or net earned or unearned income

imposed on him or on a Pennsylvania S corporation in which he is

a shareholder, to the extent of his pro rata share thereof

determined in accordance with section 307.9, or on a partnership

in which he is a partner or member, to the extent of his

distributive share thereof determined in accordance with section

306, by another state with respect to income which is also

subject to tax under this article. For purposes of this

subsection, the term "state" shall only include a state of the

United States, the District of Columbia, the Commonwealth of

Puerto Rico and any territory or possession of the United

States.

* * *

shareholders of a Pennsylvania S corporation for a tax described

under this section on its income taxed at the entity level

pursuant to an election under section 307.8(f)(5) or to the

partners or members of a partnership for above-described tax on

its income taxed at the entity level pursuant to an election

under section 306.2(f). Each electing Pennsylvania S corporation

shall be entitled to a credit under this section for the tax,

whether imposed on the Pennsylvania S corporation or on its

shareholders, and the credit shall not reduce the credit allowed

to the shareholders under section 307.8(f)(1.1). Each electing

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partnership shall be entitled to a credit under this subsection

for the tax, whether imposed on the partnership or on its

partners or members, and the credit shall not reduce the credit

allowed to the partners or members under section 306.2(a.1).

Section 4. Section 324 of the act is amended by adding a

subsection to read:

Section 324. General Rule.--* * *

the entity level pursuant to an election under section 306.2(f)

or to any Pennsylvania S corporation taxed at the entity level

pursuant to an election under section 307.8(f)(5).

Section 5. Section 3003.2(a)(1) of the act is amended to

read:

Section 3003.2. Estimated Tax.--(a) The following taxpayers

are required to pay estimated tax:

(1) Every corporation subject to the corporate net income

tax imposed by Article IV of this act, commencing with the

calendar year 1986 and fiscal years beginning during the

calendar year 1986 and each taxable year thereafter, shall make

payments of estimated corporate net income tax. For purposes of

this section and section 3003.3, a partnership taxed at the

entity level pursuant to an election under section 306.2(f) and

a Pennsylvania S corporation taxed at the entity level pursuant

to an election under section 307.8(f)(5) shall be treated as a

corporation, the tax imposed on the entity under sections

306.2(f) and 307.8(f)(5), respectively, shall be deemed to be

the corporate net income tax imposed under Article IV, except

that this provision shall not apply to the first taxable year of

the partnership or Pennsylvania S corporation for which either

is applicable.

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* * *

Section 6. This act shall take effect in 60 days.

Section 1. Section 301(w) of the act of March 4, 1971

(P.L.6, No.2), known as the Tax Reform Code of 1971, is amended

to read:

Section 301. Definitions.--Any reference in this article to

the Internal Revenue Code of 1986 shall mean the Internal

Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. § 1 et seq.),

as amended to January 1, 1997, unless the reference contains the

phrase "as amended" and refers to no other date, in which case

the reference shall be to the Internal Revenue Code of 1986 as

it exists as of the time of application of this article. The

following words, terms and phrases when used in this article

shall have the meaning ascribed to them in this section except

where the context clearly indicates a different meaning:

* * *

(w) "Taxpayer" means any individual, estate or trust subject

to the tax imposed by this article, any partnership having a

partner who is a taxpayer under this act, any Pennsylvania S

corporation having a shareholder who is a taxpayer under this

act [and], any person required to withhold tax under this

article and, unless otherwise provided, a pass-through entity

that elects to pay the tax imposed under section 302.3.

Section 2. The act is amended by adding a section to read:

Section 302.3. Alternate Tax Imposed at Pass-Through Entity

Level.--(a) Notwithstanding any other provision of this act, a

pass-through entity may elect, on an annual basis, to have the

tax imposed under this article applied to the income of the

pass-through entity. The following shall apply:

(1) An electing pass-through entity shall be subject to and

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shall pay a tax imposed at the rate provided in section 302(b)

on:

(i) Each resident taxable owner's share of each class of

income and gain enumerated in section 303 for the taxable year.

(ii) Each nonresident taxable owner's share of each class of

income and gain enumerated in section 303 from sources within

this Commonwealth for the taxable year.

(2) An electing resident Pennsylvania S corporation shall be

subject to and shall pay a tax imposed at the rate provided in

section 302(b) on each resident taxable owner's share of each

class of income and gain enumerated in section 303 for the

taxable year.

(3) An electing standard Pennsylvania S corporation shall be

subject to and shall pay a tax imposed at the rate provided in

section 302(b) on each taxable owner's share of each class of

income and gain enumerated in section 303 from sources within

this Commonwealth for the taxable year.

(4) An entity that is disregarded for tax purposes under

this article shall be disregarded for purposes of determining if

an individual, estate or trust is a taxable owner of an interest

in the income, gain or loss of a pass-through entity that makes

an election under this section.

(5) For purposes of determining the tax under this

subsection, the residence of a taxable owner shall be determined

as of the last day of the pass-through entity's taxable year.

(6) In determining its tax under this section, a pass-

through entity that owns a direct or indirect ownership interest

in one or more pass-through entities shall include its share of

each class of income enumerated in section 303 received from

those pass-through entities. The pass-through entity that

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generates an item of income, gain or loss shall determine its

classification and whether that item of income, gain or loss

constitutes income or loss from sources within this

Commonwealth.

(7) Guaranteed payments made to a partner in a partnership

shall be treated as additional income allocated to the partner.

With respect to a nonresident taxable owner, only guaranteed

payments that constitute income from sources within this

Commonwealth shall be subject to the tax under this section.

(8) In determining the tax under this section, a pass-

through entity shall not be permitted to use any tax credits

otherwise available to the pass-through entity except a credit

for estimated taxes paid for the current taxable year under this

section or an overpayment of a prior-year tax paid under this

section.

(b) (1) Any election described under subsection (a) shall

be made by an individual with authority to bind the pass-through

entity or sign returns under this article or who is authorized

to make the election and represents to having the authorization

under penalty of perjury on or before the fifteenth day of the

fourth month of the pass-through entity's taxable year in a

manner prescribed by the department.

(2) In instances where a pass-through entity does not have

either a resident individual, estate or trust as a partner,

member, shareholder or beneficiary, or income or loss from

sources within this Commonwealth as of the fifteenth day of the

fourth month of its taxable year, the pass-through entity may

make an election within ninety days of the earlier of meeting

either the ownership or income or loss requirement.

(3) An election under this section shall take effect for the

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taxable year in which the election is submitted to the

department. Only one election may be submitted by an individual

identified under clause (1) on behalf of the pass-through entity

to the department for the taxable year.

(4) An election made under this section shall be irrevocable

for the taxable year.

(5) An election under this section may be made only for tax

years that the limitation on individual deductions applies under

section 164(b)(6) of the Internal Revenue Code of 1986 (Public

Law 99-514, 26 U.S.C. § 164(b)(6)).

entity that elects to pay tax under subsection (a) shall be

allowed a refundable credit against the tax imposed under

section 302 in the amount of the taxable owner's share of the

tax that the pass-through entity actually paid under this

section. A taxable owner's share of the tax shall take into

account guaranteed payments and other special allocations made

to the owner.

(2) A taxable owner shall be entitled to claim the credit

under clause (1) on the taxable owner's tax return that includes

the last day of the taxable year of the pass-through entity.

(3) The credit allowed under this subsection shall be

applied after the application of all other tax credits available

to the owner for the taxable year. If the amount of the credit

allowable under this subsection for any taxable year exceeds the

tax due for the year under this article, the excess amount shall

be treated as an overpayment, to be credited or refunded.

(4) No credit shall be allowed to a taxable owner under

clause (1) unless the electing pass-through entity paid the tax

imposed under this article and provides the department on its

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tax return all the information required in subsection (e)(2) and

(3).

(5) The aggregate amount of credits claimed by all taxable

owners of a pass-through entity under clause (1) may not exceed

the tax that the pass-through entity paid under subsection (a)

for the taxable year.

(d) A pass-through entity that elects to pay tax under

subsection (a) shall be required to make estimated tax payments

in four equal installments on or before the fifteenth day of the

fourth, sixth and ninth month of its taxable year, and the

fifteenth day of the first month of its subsequent taxable year.

(e) (1) On or before the date provided under section

330(a), each pass-through entity that elects to pay tax under

subsection (a) shall file a return for the taxable year

reporting the information required under this article.

(2) The return filed under clause (1) shall include, in a

format as prescribed by the department, a certification by an

individual authorized to act on behalf of the pass-through

entity, which includes the following:

(i) A timely, valid election to be subject to the tax under

this article and whether a Pennsylvania S corporation is

electing to be treated as a resident Pennsylvania S corporation

or standard Pennsylvania S corporation.

(ii) That all statements contained in the certification are

true.

(3) Each pass-through entity that elects to pay tax under

subsection (a) shall report on a return required under this

article the following:

(i) Any tax due under this article. The balance of any tax

shown on the return, not previously paid as installments of

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estimated tax or an overpayment of a prior-year tax, shall be

paid with the return.

(ii) Identifying information of each taxable owner eligible

to receive a credit under subsection (c), including a Social

Security number or tax identification number and status as a

resident or nonresident. The pass-through entity must provide

information sufficient to identify a disregarded entity and its

taxable owners.

(iii) For each taxable owner who will be entitled to claim a

credit on a tax return, the taxable owner's share of the tax

imposed on the pass-through entity under this section.

(iv) Each resident taxable owner's share of the pass-through

entity's income and each nonresident taxable owner's share of

income from sources from within this Commonwealth included in

the tax base under this section.

(v) The classification of each owner as a taxable resident

or nonresident for purposes of calculating the pass-through

entity's tax liability under this section.

(vi) Any other information as required by the department.

(4) A pass-through entity that elects to pay tax under

subsection (a) shall not be required to withhold tax from a

nonresident taxable owner under section 324.

(5) To meet the requirements of this section, if a taxable

owner holds an interest in the pass-through entity through an

entity that is a disregarded entity for purposes of this

article, the pass-through entity must provide information

sufficient to identify both the disregarded entity that holds an

interest in the pass-through entity and the taxable owner that

owns the disregarded entity and is eligible for a credit under

subsection (c).

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(6) Each pass-through entity paying tax under this section

shall report to each taxable owner required to file a return

under this article a statement that contains the following

information:

(i) Classification as a resident taxable owner or a

nonresident taxable owner for purposes of calculating the pass-

through entity's tax under subsection (a).

(ii) The taxable owner's allocable share of the pass-through

entity's income included in the tax base for purposes of

computing the tax under subsection (a).

(iii) The owner's allocable share of the tax paid under

subsection (a).

(iv) Any other information, as required by the department.

(f) (1) Any assessment of tax imposed under this section,

including interest, penalties and additions, shall be assessed

against the pass-through entity at the tax rate applicable to

the tax year. The department may not assess any additional tax,

including interest, penalties and additions, against the taxable

owners.

(2) Any determination of an overpayment or refund of tax

imposed under this section made subsequent to the filing of the

return under subsection (e) shall be made at the pass-through

entity level at the tax rate applicable to the tax year.

(3) The pass-through entity shall be required to provide

each owner a statement of any adjustment of the taxable owner's

credit within ninety days of an assessment, overpayment or

refund becoming final.

(4) The taxable owner shall report the adjustment of the

credit on an amended return for the taxable owner's taxable year

that includes the pass-through entity's taxable year for which

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the tax was assessed.

(5) Only the pass-through entity may appeal or settle an

assessment or overpayment of tax issued under this section or

petition for a refund of tax imposed under this section.

(g) The basis of both a resident taxable owner and

nonresident taxable owner of a pass-through entity that elects

to pay tax under subsection (a) shall be determined as if the

election under subsection (b) had not been made and each of the

taxable owners of the taxed pass-through entity had properly

taken into account each taxable owner's pro rata share of the

taxed pass-through entity's items of income, gain, loss and

deduction in the manner required with respect to a pass-through

entity for which no such election is in effect.

(h) (1) Unless otherwise provided in this section, the

provisions of this article shall apply to this section.

(2) The department may issue guidelines and promulgate

regulations necessary for the implementation of this section.

(i) (1) In the case of any taxable year that includes the

effective date of this section, a pass-through entity may file

an election under subsection (b)(1) at any time within ninety

days of the effective date of this section provided that if the

election is made, the pass-through entity must, on or before the

date the next estimated tax payment is due after the election,

make an estimated tax payment equal to the total estimated tax

that would have been due for the tax year had the election been

made for the full tax year, and any nonresident withholding made

under section 324 by the pass-through entity for the current tax

year may be applied by the pass-through entity against its

estimated tax liability.

(2) In the case of any taxable year that includes the

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effective date of this section, any nonresident withholding made

under section 324 by the pass-through entity for the current tax

year for an owner shall be applied by the pass-through entity

against its estimated tax liability.

(3) In the case of any taxable year that includes the

effective date of this section, the department may not assess

interest and penalties against an eligible pass-through entity

for any underpayment of estimated tax due under subsection (d),

so long as the eligible pass-through entity acted in good faith

with no intent to defraud the Commonwealth.

(j) As used in this section, the following words and phrases

shall have the meanings given to them in this subsection unless

the context clearly indicates otherwise:

"Electing pass-through entity." A pass-through entity that

elects at the time it makes its election to be subject to the

tax under this section to determine its tax in accordance with

subsection (a)(1), (4), (5), (6), (7) and (8).

"Electing resident Pennsylvania S corporation." A

Pennsylvania S corporation that is a pass-through entity whose

shareholders only include resident individuals, estates or

trusts, and disregarded entities whose owners only include

resident individuals, estates or trusts that elects at the time

it makes its election to be subject to the tax under this

section to determine its tax in accordance with subsection (a)

(2), (4), (5), (6), (7) and (8).

"Electing standard Pennsylvania S corporation." A

Pennsylvania S corporation that is a pass-through entity whose

shareholders only include resident and nonresident individuals,

estates or trusts, and disregarded entities whose owners only

include resident and nonresident individuals, estates or trusts

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that elects at the time it makes its election to be subject to

the tax under this section to determine its tax in accordance

with subsection (a)(3), (4), (5), (6), (7) and (8).

"Nonresident taxable owner." An individual, estate or trust

subject to the tax imposed under this article, other than a

resident taxable owner, that is a partner, shareholder, member

or other owner of an interest in a pass-through entity that has

income from sources within this Commonwealth.

"Partnership." A domestic or foreign general partnership,

joint venture, limited partnership, limited liability company,

business trust or other unincorporated entity that for Federal

income tax purposes is classified as a partnership. The term

does not include a publicly traded partnership.

"Pass-through entity." A partnership or Pennsylvania S

corporation.

"Resident taxable owner." A resident individual, resident

trust or resident estate that is a partner, shareholder, member

or other owner of an interest in a pass-through entity.

"Taxable owner." A resident taxable owner or nonresident

taxable owner.

Section 3. Sections 306, 307.8(a) and 314 of the act are

amended to read:

Section 306. Taxability of Partners.--Except as provided

under [section] sections 302.3 and 306.2, a partnership as an

entity shall not be subject to the tax imposed by this article,

but the income or gain of a member of a partnership in respect

of said partnership shall be subject to the tax and the tax

shall be imposed on his share, whether or not distributed, of

the income or gain received by the partnership for its taxable

year ending within or with the member's taxable year.

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Section 307.8. Income of a Pennsylvania S Corporation.--(a)

A Pennsylvania S corporation shall not be subject to the tax

imposed by this article, except as provided under subsection (f)

and section 302.3, but the shareholders of the Pennsylvania S

corporation shall be subject to the tax imposed under this

article as provided in this article.

* * *

Section 314. Income Taxes Imposed by Other States.--(a) A

resident taxpayer before allowance of any credit under section

302.3 or 312 shall be allowed a credit against the tax otherwise

due under this article for the amount of any income tax, wage

tax or tax on or measured by gross or net earned or unearned

income imposed on him or on a Pennsylvania S corporation or

partnership in which he is a direct or indirect shareholder or

partner, to the extent [of his pro rata share thereof determined

in accordance with section 307.9,] that the tax was imposed on

the taxpayer's distributive share or other share thereof by

another state with respect to income which is also subject to

tax under this article. For purposes of this subsection, the

term "state" shall only include a state of the United States,

the District of Columbia, the Commonwealth of Puerto Rico and

any territory or possession of the United States.

(b) The credit provided under this section shall not exceed

the proportion of the tax otherwise due under this article that

the amount of the taxpayer's income subject to tax by the other

jurisdiction bears to his entire taxable income.

which a tax liability is reported and tax is paid, a partner,

shareholder, partnership or Pennsylvania S corporation may

provide a certified statement that reflects each partner's or

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shareholder's share of taxable income, amount of State income

tax paid and other information that the department requires.

Section 4. This act shall apply as follows:

(1) The amendment or addition of sections 301(w), 302.3,

306 and 307.8(a) of the act shall apply to taxable years

beginning after December 31, 2021.

(2) The amendment of section 314(a) shall apply to

taxable years beginning after December 31, 2020.

Section 5. This act shall take effect immediately.

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