Pennsylvania Statutes Title 72 P.S. Taxation and Fiscal Affairs § 7401. Definitions

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:

(1) “Corporation.”  Any of the following:

(i) A corporation.

(ii) A joint-stock association.

(iii) A business trust, limited liability company or other entity which for Federal income tax purposes is classified as a corporation.

The term does not include:

1. A business trust which qualifies as a real estate investment trust under section 856 of the Internal Revenue Code of 1986 ( Public Law 99-514 , 26 U.S.C. § 856 ) or which is a qualified real estate investment trust subsidiary under section 856(i) of the Internal Revenue Code of 1986 ( 26 U.S.C. § 856(i) ).

2. A business trust which qualifies as a regulated investment company under section 851 of the Internal Revenue Code of 1986 ( 26 U.S.C. § 856(i) ) and which is registered with the United States Securities and Exchange Commission under the Investment Company Act of 1940 or a related business trust which confines its activities in this Commonwealth to the maintenance, administration and management of intangible investments and activities of regulated investment companies.

3. A corporation, trust or other entity which is an exempt organization as defined by section 501 of the Internal Revenue Code of 1986 ( 26 U.S.C. § 501 ).

4. A corporation, trust or other entity organized as a not-for-profit under the laws of this Commonwealth or the laws of any other state which:

(i) would qualify as an exempt organization as defined by section 501 of the Internal Revenue Code of 1986 ( 26 U.S.C. § 501 );

(ii) would qualify as a homeowners association as defined by section 528(c) of the Internal Revenue Code of 1986 ( 26 U.S.C. § 528(c) );

(iii) is a membership organization subject to the Federal limitations on deductions from taxable income under section 277 of the Internal Revenue Code of 1986 ( 26 U.S.C. § 277 ) but only if no pecuniary gain or profit inures to any member or related entity from the membership organization;  or

(iv) is a nonstock commodity or nonstock stock exchange.

(2) “Department.”  The Department of Revenue of this Commonwealth.

(3) “Taxable income.”

1. (a) In case the entire business of the corporation is transacted within this Commonwealth, for any taxable year which begins on or after January 1, 1971, taxable income for the calendar year or fiscal year as returned to and ascertained by the Federal Government, or in the case of a corporation participating in the filing of consolidated returns to the Federal Government, the taxable income which would have been returned to and ascertained by the Federal Government if separate returns had been made to the Federal Government for the current and prior taxable years, subject, however, to any correction thereof, for fraud, evasion, or error as finally ascertained by the Federal Government.

(b) Additional deductions shall be allowed from taxable income on account of any dividends received from any other corporation but only to the extent that such dividends are included in taxable income as returned to and ascertained by the Federal Government.  For tax years beginning on or after January 1, 1991, additional deductions shall only be allowed for amounts included, under section 78 of the Internal Revenue Code of 1986 ( Public Law 99-514 , 26 U.S.C. § 78 ), in taxable income returned to and ascertained by the Federal Government and for the amount of any dividends received from a foreign corporation included in taxable income to the extent such dividends would be deductible in arriving at Federal taxable income if received from a domestic corporation.

(b.1) An additional deduction shall be allowed from taxable income in the amount of any interest income from securities issued by the United States or agencies or instrumentalities thereof, to the extent included in Federal taxable income but exempt from the tax imposed by this article under the laws of the United States, but reduced by any interest on indebtedness incurred to carry the securities, any expenses incurred in the production of such interest income and any other expenses deducted on the Federal income tax return that would not have been allowed under section 265 of the Internal Revenue Code of 1986 ( 26 U.S.C. § 265 ) if the interest were exempt from Federal income tax.  As used in the preceding sentence, “interest income” includes any amount received as a distribution or dividend from a regulated investment company, as defined in section 851 of the Internal Revenue Code , to the extent such distribution or dividend is derived from obligations free from State taxation under Article XXIX of this act or securities issued by the United States or agencies or instrumentalities thereof.

(c) Further additional deductions shall be allowed from taxable income in an amount equal to the amount of any reduction in an employer's deduction for wages and salaries as a result of the employer taking a credit for its FICA tax obligation on its employes' tips or “targeted jobs” pursuant to section 45B or section 51 of the Internal Revenue Code .

(d) Taxable income will include the sum of the following tax preference items as defined in section 57 of the Internal Revenue Code , as amended,   1 (i) excess investment interest;  (ii) accelerated depreciation on real property;  (iii) accelerated depreciation on personal property subject to a net lease;  (iv) amortization of certified pollution control facilities;  (v) amortization of railroad rolling stock;  (vi) stock options;  (vii) reserves for losses on bad debts of financial institutions;  (viii) capital gains;  and (ix) accelerated cost recovery deduction under section 57(a)(12)(B) of the Internal Revenue Code , but only to the extent that such preference items are not included in “taxable income” as returned to and ascertained by the Federal Government.

(e) to (j) Deleted.

(k) A taxpayer reporting on a 52-53 week basis which closes its fiscal year on any of the last seven days in December or the first seven days of January is deemed a calendar year taxpayer with a year ending date of December 31.

(l) Deleted by 2002, June 29, P.L. 559, No. 89, § 13 , effective July 1, 2002.

(m) No deduction shall be allowed for the amount of the net operating loss deduction taken under section 172 of the Internal Revenue Code .   2

(n) In the case of regulated investment companies as defined by the Internal Revenue Code of 1954, as amended, “taxable income” shall be investment company taxable income as defined in the aforesaid Internal Revenue Code of 1954, as amended.

(o) In arriving at “taxable income” for Federal tax purposes for any taxable year beginning on or after January 1, 1981, no deduction shall be allowed for taxes imposed on or measured by net income.

(p) For taxable years beginning on or after January 1, 1998, in the case of a corporation that is a Pennsylvania S corporation, as defined in section 301(n.1),   3 the term “taxable income” shall mean such corporation's net recognized built-in gain to the extent of and as determined for Federal income tax purposes under section 1374(d)(2) of the Internal Revenue Code of 1986 ( Public Law 99-514 , 26 U.S.C. § 1374 ).  For purposes of this article, a Pennsylvania S corporation and each qualified Subchapter S subsidiary, as defined in section 301(o.3), shall be treated as separate corporations.

(q) Notwithstanding paragraph (a), taxable income shall include the amount of the deduction for depreciation of qualified property claimed and allowable under section 168(k) of the Internal Revenue Code of 1986 ( 26 U.S.C. § 168(k) ).

(r) Notwithstanding paragraph (a), if a deduction for depreciation of qualified property was included in taxable income in accordance with paragraph (q), an additional deduction for depreciation of the qualified property shall be allowed from taxable income until the total amount included as taxable income under paragraph (q) has been claimed.  The additional deduction shall be equal to the product of taking three sevenths of the amount of the deduction for depreciation of the qualified property allowable under section 167 of the Internal Revenue Code of 1986 ( 26 U.S.C. § 167 ), not including the amount of the deduction for depreciation of the qualified property claimed and allowable under section 168(k) of the Internal Revenue Code of 1986 ( 26 U.S.C. § 168(k) ), for the tax year.

(s) With respect to qualified property which is sold or otherwise disposed of during a taxable year by a taxpayer and for which depreciation was included as taxable income under paragraph (q), an additional deduction shall be allowed from taxable income to the extent the amount of depreciation claimed under section 168(k) of the Internal Revenue Code of 1986 ( 26 U.S.C. § 168(k) ) on the qualified property has not been recovered through the additional deductions provided by paragraph (r).

(t)(1) Except as provided in paragraph (2), (3) or (4) for taxable years beginning after December 31, 2014, and in addition to any authority the department has on the effective date of this paragraph to deny a deduction related to a fraudulent or sham transaction, no deduction shall be allowed for an intangible expense or cost, or an interest expense or cost, paid, accrued or incurred directly or indirectly in connection with one or more transactions with an affiliated entity.  In calculating taxable income under this paragraph, when the taxpayer is engaged in one or more transactions with an affiliated entity that was subject to tax in this Commonwealth or another state or possession of the United States on a tax base that included the intangible expense or cost, or the interest expense or cost, paid, accrued or incurred by the taxpayer, the taxpayer shall receive a credit against tax due in this Commonwealth in an amount equal to the apportionment factor of the taxpayer in this Commonwealth multiplied by the greater of the following:

(A) the tax liability of the affiliated entity with respect to the portion of its income representing the intangible expense or cost, or the interest expense or cost, paid, accrued or incurred by the taxpayer;  or

(B) the tax liability that would have been paid by the affiliated entity under subparagraph (A) if that tax liability had not been offset by a credit.

The credit issued under this paragraph shall not exceed the taxpayer's liability in this Commonwealth attributable to the net income taxed as a result of the adjustment required by this paragraph.

(2) The adjustment required by paragraph (1) shall not apply to a transaction that did not have as the principal purpose the avoidance of tax due under this article and was done at arm's length rates and terms.

(3) The adjustment required by paragraph (1) shall not apply to a transaction between a taxpayer and an affiliated entity domiciled in a foreign nation which has in force a comprehensive income tax treaty with the United States providing for the allocation of all categories of income subject to taxation, or the withholding of tax, on royalties, licenses, fees and interest for the prevention of double taxation of the respective nations' residents and the sharing of information.

(4) The adjustment required by paragraph (1) shall not apply to a transaction where an affiliated entity directly or indirectly paid, accrued or incurred a payment to a person who is not an affiliated entity, if the payment is paid, accrued or incurred on the intangible expense or cost, or interest expense or cost, and is equal to or less than the taxpayer's proportional share of the transaction.  The taxpayer's proportional share shall be based on relative sales, assets, liabilities or another reasonable method.

2. In case the entire business of any corporation, other than a corporation engaged in doing business as a regulated investment company as defined by the Internal Revenue Code of 1986, is not transacted within this Commonwealth, the tax imposed by this article shall be based upon such portion of the taxable income of such corporation for the fiscal or calendar year, as defined in subclause 1 hereof, and may be determined as follows:

(a) Division of Income.

(1) As used in this definition, unless the context otherwise requires:

(A) “Business income” means income arising from transactions and activity in the regular course of the taxpayer's trade or business and includes income from tangible and intangible property if either the acquisition, the management or the disposition of the property constitutes an integral part of the taxpayer's regular trade or business operations. The term includes all income which is apportionable under the Constitution of the United States.

(B) “Commercial domicile” means the principal place from which the trade or business of the taxpayer is directed or managed.

(C) “Compensation” means wages, salaries, commissions and any other form of remuneration paid to employes for personal services.

(D) “Nonbusiness income” means all income other than business income. The term does not include income which is apportionable under the Constitution of the United States.

(E) “Sales” means all gross receipts of the taxpayer not allocated under this definition other than dividends received, interest on United States, state or political subdivision obligations and gross receipts heretofore or hereafter received from the sale, redemption, maturity or exchange of securities, except those held by the taxpayer primarily for sale to customers in the ordinary course of its trade or business.

(F) “State” means any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, any territory or possession of the United States, and any foreign country or political subdivision thereof.

(G) “This state” means the Commonwealth of Pennsylvania or, in the case of application of this definition to the apportionment and allocation of income for local tax purposes, the subdivision or local taxing district in which the relevant tax return is filed.

(2) Any taxpayer having income from business activity which is taxable both within and without this State other than activity as a corporation whose allocation and apportionment of income is specifically provided for in section 401(3) 2(b), (c) and (d)   4 shall allocate and apportion taxable income as provided in this definition.

(3) For purposes of allocation and apportionment of income under this definition, a taxpayer is taxable in another state if in that state the taxpayer is subject to a net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business, or a corporate stock tax or if that state has jurisdiction to subject the taxpayer to a net income tax regardless of whether, in fact, the state does or does not.

(4) Rents and royalties from real or tangible personal property, gains, interest, patent or copyright royalties, to the extent that they constitute nonbusiness income, shall be allocated as provided in paragraphs (5) through (8).

(5) (A) Net rents and royalties from real property located in this State are allocable to this State.

(B) Net rents and royalties from tangible personal property are allocable to this State if and to the extent that the property is utilized in this State, or in their entirety if the taxpayer's commercial domicile is in this State and the taxpayer is not organized under the laws of or taxable in the state in which the property is utilized.

(C) The extent of utilization of tangible personal property in a state is determined by multiplying the rents and royalties by a fraction, the numerator of which is the number of days of physical location of the property in the state during the rental or royalty period in the taxable year and the denominator of which is the number of days of physical location of the property everywhere during all rental or royalty periods in the taxable year.  If the physical location of the property during the rental or royalty period is unknown or unascertainable by the taxpayer, tangible personal property is utilized in the state in which the property was located at the time the rental or royalty payer obtained possession.

(6) (A) Gains and losses from sales or other disposition of real property located in this State are allocable to this State.

(B) Gains and losses from sales or other disposition of tangible personal property are allocable to this State if the property had a situs in this State at the time of the sale, or the taxpayer's commercial domicile is in this State and the taxpayer is not taxable in the state in which the property had a situs.

(C) Gains and losses from sales or other disposition of intangible personal property are allocable to this State if the taxpayer's commercial domicile is in this State.

(7) Interest is allocable to this State if the taxpayer's commercial domicile is in this State.

(8) (A) Patent and copyright royalties are allocable to this State if and to the extent that the patent or copyright is utilized by the payer in this State, or if and to the extent that the patent copyright is utilized by the payer in a state in which the taxpayer is not taxable and the taxpayer's commercial domicile is in this State.

(B) A patent is utilized in a state to the extent that it is employed in production, fabrication, manufacturing, or other processing in the state or to the extent that a patented product is produced in the state.  If the basis of receipts from patent royalties does not permit allocation to states or if the accounting procedures do not reflect states of utilization, the patent is utilized in the state in which the taxpayer's commercial domicile is located.

(C) A copyright is utilized in a state to the extent that printing or other publication originates in the state.  If the basis of receipts from copyright royalties does not permit allocation to states or if the accounting procedures do not reflect states of utilization, the copyright is utilized in the state in which the taxpayer's commercial domicile is located.

(9) (A) Except as provided in subparagraph (B):

(i) For taxable years beginning before January 1, 2007, all business income shall be apportioned to this State by multiplying the income by a fraction, the numerator of which is the property factor plus the payroll factor plus three times the sales factor and the denominator of which is five.

(ii) For taxable years beginning after December 31, 2006, all business income shall be apportioned to this State by multiplying the income by a fraction, the numerator of which is the sum of fifteen times the property factor, fifteen times the payroll factor and seventy times the sales factor and the denominator of which is one hundred.

(iii) For taxable years beginning after December 31, 2008, all business income shall be apportioned to this State by multiplying the income by a fraction, the numerator of which is the sum of eight and a half times the property factor, eight and a half times the payroll factor and eighty-three times the sales factor and the denominator of which is one hundred.

(iv) For taxable years beginning after December 31, 2009, all business income shall be apportioned to this State by multiplying the income by a fraction, the numerator of which is the sum of five times the property factor, five times the payroll factor and ninety times the sales factor and the denominator of which is one hundred.

(v) For taxable years beginning after December 31, 2012, all business income shall be apportioned to this State by multiplying the income by the sales factor.

(B) For purposes of apportionment of the capital stock - franchise tax as provided in section 602   5 of Article VI of this act, the apportionment fraction shall be the property factor plus the payroll factor plus the sales factor as the numerator, and the denominator shall be three.

(10) The property factor is a fraction, the numerator of which is the average value of the taxpayer's real and tangible personal property owned or rented and used in this State during the tax period and the denominator of which is the average value of all the taxpayer's real and tangible personal property owned or rented and used during the tax period but shall not include the security interest of any corporation as seller or lessor in personal property sold or leased under a conditional sale, bailment lease, chattel mortgage or other contract providing for the retention of a lien or title as security for the sales price of the property.

(11) Property owned by the taxpayer is valued at its original cost.  Property rented by the taxpayer is valued at eight times the net annual rental rate.  Net annual rental rate is the annual rental rate paid by the taxpayer less any annual rental rate received by the taxpayer from subrentals.

(12) The average value of property shall be determined by averaging the values at the beginning and ending of the tax period but the tax administrator may require the averaging of monthly values during the tax period if reasonably required to reflect properly the average value of the taxpayer's property.

(13) The payroll factor is a fraction, the numerator of which is the total amount paid in this State during the tax period by the taxpayer for compensation and the denominator of which is the total compensation paid everywhere during the tax period.

(14) Compensation is paid in this State if:

(A) The individual's service is performed entirely within the State;

(B) The individual's service is performed both within and without this State, but the service performed without the State is incidental to the individual's service within this State;  or

(C) Some of the service is performed in this State and the base of operations or if there is no base of operations, the place from which the service is directed or controlled is in this State, or the base of operations or the place from which the service is directed or controlled is not in any state in which some part of the service is performed, but the individual's residence is in this State.

(15) The sales factor is a fraction, the numerator of which is the total sales of the taxpayer in this State during the tax period, and the denominator of which is the total sales of the taxpayer everywhere during the tax period.

(16) Sales of tangible personal property are in this State if the property is delivered or shipped to a purchaser, within this State regardless of the f. o. b. point or other conditions of the sale.

(16.1)(A) Sales from the sale, lease, rental or other use of real property, if the real property is located in this State.  If a single parcel of real property is located both in and outside this State, the sale is in this State based upon the percentage of original cost of the real property located in this State.

(B)(I) Sales from the rental, lease or licensing of tangible personal property, if the customer first obtained possession of the tangible personal property in this State.

(II) If the tangible personal property is subsequently taken out of this State, the taxpayer may use a reasonably determined estimate of usage in this State to determine the extent of sale in this State.

(C)(I) Sales from the sale of service, if the service is delivered to a location in this State.  If the service is delivered both to a location in and outside this State, the sale is in this State based upon the percentage of total value of the service delivered to a location in this State.

(II) If the state or states of assignment under unit (I) cannot be determined for a customer who is an individual that is not a sole proprietor, a service is deemed to be delivered at the customer's billing address.

(III) If the state or states of assignment under unit (I) cannot be determined for a customer, except for a customer under unit (II), a service is deemed to be delivered at the location from which the services were ordered in the customer's regular course of operations.  If the location from which the services were ordered in the customer's regular course of operations cannot be determined, a service is deemed to be delivered at the customer's billing address.

(17) Sales, other than sales under paragraphs (16) and (16.1), are in this State if:

(A) The income-producing activity is performed in this State;  or

(B) The income-producing activity is performed both in and outside this State and a greater proportion of the income-producing activity is performed in this State than in any other state, based on costs of performance.

(18) If the allocation and apportionment provisions of this definition do not fairly represent the extent of the taxpayer's business activity in this State, the taxpayer may petition the Secretary of Revenue or the Secretary of Revenue may require, in respect to all or any part of the taxpayer's business activity:

(A) Separate accounting;

(B) The exclusion of any one or more of the factors;

(C) The inclusion of one or more additional factors which will fairly represent the taxpayer's business activity in this State;  or

(D) The employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's income. In determining the fairness of any allocation or apportionment, the Secretary of Revenue may give consideration to the taxpayer's previous reporting and its consistency with the requested relief.

(b) Railroad, Truck, Bus or Airline Companies.

(1) All business income of railroad, truck, bus or airline companies shall be apportioned to this Commonwealth by multiplying the income by a fraction, the numerator of which is the taxpayer's total revenue miles within this Commonwealth during the tax period and the denominator of which is the total revenue miles of the taxpayer everywhere during the tax period.  For purposes of this paragraph revenue mile shall mean the average receipts derived from the transportation by the taxpayer of persons or property one mile.  Where revenue miles are derived from the transportation of both persons and property, the revenue mile fractions attributable to each such class of transportation shall be computed separately, and the average of the two fractions, weighted in accordance with the ratio of total receipts from each such class of transportation everywhere to total receipts from both such classes of transportation everywhere, shall be used in apportioning income to this Commonwealth.

(2) Nonbusiness income of railroad, truck, bus or airline companies shall be allocated as provided in paragraphs (5) through (8) of phrase (a) of subclause 2 of the definition of taxable income.

(c) Pipeline or Natural Gas Companies.

(1) All business income of pipeline companies shall be apportioned to this Commonwealth by multiplying the income by a fraction, the numerator of which is the revenue ton miles, revenue barrel miles or revenue cubic feet miles within this Commonwealth during the tax period and the denominator of which is the total revenue ton miles, revenue barrel miles or the revenue cubic feet miles of the taxpayer everywhere during the tax period.  For purposes of this paragraph a revenue ton mile, revenue barrel mile or a revenue cubic foot mile shall mean respectively the receipts derived from the transportation by the taxpayer of one ton of solid property, one barrel of liquid property or one cubic foot of gaseous property transported one mile.

(2) All business income of natural gas companies subject to regulation by the Federal Power Commission or by the Pennsylvania Public Utility Commission shall be apportioned to this Commonwealth by multiplying the income by a fraction, the numerator of which shall be the cubic foot capacity of the taxpayer's pipelines in this Commonwealth, and the denominator of which shall be the cubic foot capacity of the taxpayer's pipelines everywhere, at the end of the tax period.  For the purpose of this paragraph, the cubic foot capacity of a pipeline shall be determined by multiplying the square of its radius (in feet) by its length (in feet).

(3) Nonbusiness income of pipeline companies or natural gas companies subject to regulation by the Federal Power Commission or by the Pennsylvania Public Utility Commission shall be allocated as provided in paragraphs (5) through (8) of phrase (a) of subclause 2 of the definition of taxable income.

(d) Water Transportation Companies.

(1) Water Transportation Companies Operating on High Seas.  All business income of water transportation companies operating on high seas shall be apportioned to this Commonwealth by multiplying the business income by a fraction, the numerator of which is the number of port days spent inside the Commonwealth and the denominator of which is the total number of port days spent inside and outside of the Commonwealth.  The term “port days” does not include periods when the ships are not in use because of strikes or withheld from service for repair or because of seasonal reduction of services.  Days in port are computed by dividing the aggregate number of hours in all ports by twenty-four.

(2) Water Transportation Companies Operating in Inland Waters.  All business income of water transportation companies operating on inland waters shall be apportioned to this Commonwealth by multiplying the business income by a fraction, the numerator of which is the taxpayer's total revenue miles within this Commonwealth during the tax period and the denominator of which is the total revenue miles of the taxpayer everywhere during the tax period.  In the determination of revenue miles, one-half of the mileage of all navigable waterways bordering between the Commonwealth and another state shall be considered Commonwealth miles.  For purposes of this paragraph, revenue miles shall mean the revenue receipts derived from the transportation by the taxpayer of persons or property one mile.

(3) Nonbusiness income of water transportation companies shall be allocated as provided in paragraphs (5) through (8) of phrase (a) of subclause 2 of the definition of taxable income.

(e) Satellite Television Services Providers.

(1) All business income of providers of satellite television services shall be apportioned to this Commonwealth by multiplying the income by a fraction, the numerator of which is the value of equipment located in this Commonwealth that is owned or rented by the taxpayer or owned by an entity that is included with the taxpayer in a controlled group, as defined in section 267(f) of the Internal Revenue Code of 1986 ( Public Law 99-514 , 26 U. S.C. § 166 ), and used by the taxpayer in generating, processing or transmitting satellite television services, whether or not such equipment is affixed to real estate, and the denominator of which is the value of all such equipment located everywhere.  The value of property owned by the taxpayer or owned by an entity included with the taxpayer in a controlled group and used by the taxpayer shall be its cost less depreciation per the books and records of the owner.  The value of rented equipment shall be determined in accordance with paragraph (11) of phrase (a) of subclause 2 of this definition.

(2) Nonbusiness income of providers of satellite television services shall be allocated as provided in paragraphs (5), (6), (7) and (8) of subclause 2 of this definition.

3. In case the entire business of a corporation which has filed a timely election and has qualified to be taxed as a regulated investment company under the provisions of the Internal Revenue Code of 1954, as amended, is not transacted within this Commonwealth, the tax imposed by this article shall be based upon such portion of the taxable income of such corporation for the fiscal or calendar year as defined in subclause 1 hereof, as shall be attributable to business transacted within this Commonwealth by multiplying such taxable income by a fraction, the numerator of which is the sum of the corporation's gross receipts from (i) sales of its own shares to Pennsylvania investors and (ii) sales of its portfolio securities, where the orders for such sales are placed with or credited to Pennsylvania offices of registered securities dealers and the denominator of which fraction is the corporation's total gross receipts from (i) sales of its own shares and (ii) sales of its portfolio securities.  Pennsylvania investors shall mean individuals residing in Pennsylvania at the time of the sale or corporations or other entities having their principal place of business located in Pennsylvania at such time.

4. (a) For taxable years beginning in 1982 through taxable years beginning in 1990 and for the taxable year beginning in 1995 and each taxable year thereafter, a net loss deduction shall be allowed from taxable income as arrived at under subclause 1 or, if applicable, subclause 2.  For taxable years beginning in 1991, 1992, 1993 and 1994, the net loss deduction allowed for years prior to 1991 shall be suspended, and no carryover of net losses from taxable years 1988, 1989, 1990, 1991, 1992 and 1993 shall be utilized in calculating net income for the 1991, 1992, 1993 and 1994 taxable years, but such net losses may be used as provided in paragraph (c) in calculating net income for the 1995 taxable year and for two taxable years thereafter.

(b) A net loss for a taxable year is the negative amount for said taxable year determined under subclause 1 or, if applicable, subclause 2.  Negative amounts under subclause 1 shall be allocated and apportioned in the same manner as positive amounts.

(c) (1) The net loss deduction shall be the lesser of:

(A) (I) For taxable years beginning before January 1, 2007, two million dollars ($2,000,000);

(II) For taxable years beginning after December 31, 2006, the greater of twelve and one-half per cent of taxable income as determined under subclause 1 or, if applicable, subclause 2 or three million dollars ($3,000,000);

(III) For taxable years beginning after December 31, 2008, the greater of fifteen per cent of taxable income as determined under subclause 1 or, if applicable, subclause 2 or three million dollars ($3,000,000);

(IV) For taxable years beginning after December 31, 2009, the greater of twenty per cent of taxable income as determined under subclause 1 or, if applicable, subclause 2 or three million dollars ($3,000,000);

(V) For taxable years beginning after December 31, 2013, the greater of twenty-five per cent of taxable income as determined under subclause 1 or, if applicable, subclause 2 or four million dollars ($4,000,000);

(VI) For taxable years beginning after December 31, 2014, the greater of thirty per cent of taxable income as determined under subclause 1 or, if applicable, subclause 2 or five million dollars ($5,000,000);

(VII) For taxable years beginning after December 31, 2017, thirty-five per cent of taxable income as determined under subclause 1 or, if applicable, subclause 2;

(VIII) For taxable years beginning after December 31, 2018, forty per cent of taxable income as determined under subclause 1 or, if applicable, subclause 2;  or

(B) The amount of the net loss or losses which may be carried over to the taxable year or taxable income as determined under subclause 1 or, if applicable, subclause 2.

(1.1) In no event shall the net loss deduction include more than five hundred thousand dollars ($500,000), in the aggregate, of net losses from taxable years 1988 through 1994.

(2) (A) A net loss for a taxable year may only be carried over pursuant to the following schedule:

Taxable Year

Carryover

  1981

1 taxable year

  1982

2 taxable years

  1983-1987

3 taxable years

  1988

2 taxable years plus

1 taxable year

starting with the

1995 taxable year

  1989

1 taxable year plus

2 taxable years

starting with the

1995 taxable year

  1990-1993

3 taxable years

starting with the

1995 taxable year

  1994

1 taxable year

  1995-1997

10 taxable years

  1998 and thereafter

20 taxable years

(B) The earliest net loss shall be carried over to the earliest taxable year to which it may be carried under this schedule.  The total net loss deduction allowed in any taxable year shall not exceed:

(I) Two million dollars ($2,000,000) for taxable years beginning before January 1, 2007.

(II) The greater of twelve and one-half per cent of the taxable income as determined under subclause 1 or, if applicable, subclause 2 or three million dollars ($3,000,000) for taxable years beginning after December 31, 2006.

(III) The greater of fifteen per cent of the taxable income as determined under subclause 1 or, if applicable, subclause 2 or three million dollars ($3,000,000) for taxable years beginning after December 31, 2008.

(IV) The greater of twenty per cent of the taxable income as determined under subclause 1 or, if applicable, subclause 2 or three million dollars ($3,000,000) for taxable years beginning after December 31, 2009.

(V) The greater of twenty-five per cent of taxable income as determined under subclause 1 or, if applicable, subclause 2 or four million dollars ($4,000,000) for taxable years beginning after December 31, 2013.

(VI) The greater of thirty per cent of taxable income as determined under subclause 1 or, if applicable, subclause 2 or five million dollars ($5,000,000) for taxable years beginning after December 31, 2014.

(VII) Thirty-five per cent of taxable income as determined under subclause 1 or, if applicable, subclause 2 for taxable years beginning after December 31, 2017.

(VIII) Forty per cent of taxable income as determined under subclause 1 or, if applicable, subclause 2 for taxable years beginning after December 31, 2018.

(c.1) A deduction under Part IV-A   6 shall be allowed from taxable income as prescribed in a satisfaction commitment letter executed between the Department of Community and Economic Development and a taxpayer under section 407.7(c).   7

(d) No loss shall be a carryover from a taxable year when the corporation elects to be treated as a Pennsylvania S corporation pursuant to section 307 of Article III of this act to a taxable year when the corporation is subject to the tax imposed under this article.

(e) Paragraph (d) shall not prevent a taxable year when a corporation is a Pennsylvania S corporation from being considered a taxable year for determining the number of taxable years to which a net loss may be a carryover.

(f) For purposes of the net loss deduction, the short taxable year of a corporation, after the revocation or termination of an election to be treated as a Pennsylvania S corporation pursuant to sections 307.3 and 307.4 of Article III of this act, shall be treated as a taxable year.

(g) In the case of a change in ownership by purchase, liquidation, acquisition of stock or reorganization of a corporation in the manner described in section 381 or 382 of the Internal Revenue Code of 1954 , as amended, the limitations provided in the Internal Revenue Code with respect to net operating losses shall apply for the purpose of computing the portion of a net loss carryover recognized under paragraph (3)4(c) of this section.  When any acquiring corporation or a transferor corporation participated in the filing of consolidated returns to the Federal Government, the entitlement of the acquiring corporation to the Pennsylvania net loss carryover of the acquiring corporation or the transferor corporation will be determined as if separate returns to the Federal Government had been filed prior to the change in ownership by purchase, liquidation, acquisition of stock or reorganization.

(4) “Person.”  Every natural person, association or corporation.  Whenever used in any clause prescribing and imposing a fine or imprisonment, or both, the term “person,” as applied to associations, shall mean the partners or members thereof, and as applied to corporations the officers thereof.

(5) “Taxable year.”  The taxable year which the corporation, or any consolidated group with which the corporation participates in the filing of consolidated returns, actually uses in reporting taxable income to the Federal Government.  With regard to the tax imposed by Article IV of this act (relating to the Corporate Net Income Tax),   8 the terms “annual year,” “fiscal year,” “annual or fiscal year,” “tax year” and “tax period” shall be the same as the corporation's taxable year, as defined in this paragraph.

(6) “Regulated financial institution.”  An entity subject to tax under articles VII or XV   9 and regulated by the Pennsylvania Department of Banking, the Federal Reserve Board, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the National Credit Union Administration or the Federal Deposit Insurance Corporation.

(7) “Determination.”  The ascertainment of tax liability.  The term includes a redetermination.

(8) “Intangible expense or cost.”  Royalties, licenses or fees paid for the acquisition, use, maintenance, management, ownership, sale, exchange or other disposition of patents, patent applications, trade names, trademarks, service marks, copyrights, mask works or other similar expenses or costs.

(9) “Interest expense or cost.”  A deduction allowed under section 163 of the Internal Revenue Code of 1986 ( 26 U.S.C. § 163 ) to the extent that such deduction is directly related to an intangible expense or cost.

(10) “Affiliated entity.”  A person with a relationship to the taxpayer during all or any portion of the taxable year that is any of the following:

(i) a stockholder who is an individual, or a member of the stockholder's family as set forth in section 318 of the Internal Revenue Code of 1986 ( 26 U.S.C. § 318 ), if the stockholder and the members of the stockholder's family own, directly, indirectly, beneficially or constructively, in the aggregate, more than fifty per cent of the value of the taxpayer's outstanding stock;

(ii) a stockholder, or a stockholder's partnership, limited liability company, estate, trust or corporation, if the stockholder and the stockholder's partnerships, limited liability companies, estates, trusts and corporations own directly, indirectly, beneficially or constructively, in the aggregate, more than fifty per cent of the value of the taxpayer's outstanding stock;

(iii) a corporation, or a party related to the corporation in a manner that would require an attribution of stock from the corporation to the party or from the party to the corporation under the attribution rules of the Internal Revenue Code of 1986, if the taxpayer owns, directly, indirectly, beneficially or constructively, more than fifty per cent of the value of the corporation's outstanding stock.  The attribution rules of section 318 of the Internal Revenue Code of 1986 shall apply for purposes of determining whether the ownership requirements of this definition have been met;

(iv) a component member as defined in section 1563(b) of the Internal Revenue Code of 1986 ( 26 U.S.C. § 1563(b) );  or

(v) a person to or from whom there is attribution of stock ownership in accordance with section 1563(e) of the Internal Revenue Code of 1986 .

1 26 U.S.C.A. § 57.
2 26 U.S.C.A. § 172.
3 72 P.S. § 7301(n.1).
4 This section.
5 72 P.S. § 7602.
6 72 P.S. § 7407.6 et seq.
7 72 P.S. § 7407.7.
8 72 P.S. § 7401 et seq.
9 72 P.S. §§ 7701 et seq., 8501 et seq.

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