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On July 11, 2024, Pennsylvania Governor Josh Shapiro signed into law SB 654. SB 654 gradually increases the net operating loss (NOL) deduction and amends the related-party interest/intangible expenses and cost-addback requirements. It also (1) clarifies the goodwill deduction under the Bank and Trust Company Shares Tax; (2) limits the application of the sales and use tax exemption for data centers; and (3) amends, enhances and creates various tax credits.

This Tax Alert summarizes the major tax law changes in SB 654.¹

Corporate net income tax (CNIT)

Related-party intangible interest/intangible expense or cost addback

For tax years commencing after December 31, 2022, the law amends the annual election for an affiliated entity subject to the CNIT to exclude "intangible expense or cost" and/or related "interest expense or cost" from taxable income to the extent the taxpayer adds back those items in determining taxable income.

If the taxpayer adds back intangible expense or cost (e.g., royalties and license fees) and related interest expense or cost, and an affiliated entity subject to the CNIT otherwise includes those items in taxable income, the affiliated entity may make an annual election to exclude those items with the filing of its original tax return. (The affiliated entity must identify the taxpayer to which the election applies.) The exclusion may not exceed the intangible expense or cost, or the interest expense or cost, paid, accrued or incurred by the taxpayer.

EY observation: Clarification is needed as to whether a corporation that has already filed its 2023 tax report could make an election on an amended tax report.

If an affiliated entity makes an election, the taxpayer may not claim the credit in 72 P.S. Section  7401(3)1.(t)(1)(A) or (B). Therefore, taxpayers and affiliated entities will need to determine each year whether the credit or the exclusion is more advantageous.

NOLs

Under SB 654, the NOL deduction is the sum of two calculations: the allowable deduction for NOLs incurred in tax years beginning before January 1, 2025, plus the allowable deduction for NOLs incurred in tax years beginning after December 31, 2024. The allowable deduction for net losses incurred in tax years beginning before January 1, 2025, remains at 40% of post-apportionment taxable income. This limit applies until all pre-2025 losses are used, with the earliest net loss carryovers applied first against the limitation.

For net losses incurred in tax years beginning after December 31, 2024, the NOL deduction gradually increases from 50% to 80%. Under the statutory formula, deductions for post-2024 NOLs will be reduced until all pre-2025 NOLs are utilized. For details on how to calculate NOL deductions for tax years 2025 onward, see the chart below.

Deduction for medical cannabis businesses

SB 654 allows a "medical cannabis business" to claim an additional deduction for ordinary and necessary business expenses that were paid or incurred during the tax year, if no deduction was taken for federal income tax purposes under IRC Section 162 for the tax year. A "medical cannabis business" is defined as a medical marijuana organization, as defined in the Medical Marijuana Act,² that has an active grower/processor permit during the tax year for which the deduction is sought. This change applies to tax years commencing after December 31, 2023.

Bank and trust company shares tax

SB 654 allows an institution to deduct from share value all goodwill resulting from an acquisition or business combination occurring after June 30, 2001, and recorded in the institution's reports of condition under generally accepted accounting principles. In computing the deduction for US obligations, an institution should include any goodwill deducted from share value. These changes apply to the determination of the taxable portion of shares after December 31, 2024, and to the report and the payment of the tax due after March 14, 2025.

EY observation: Goodwill amendments only apply prospectively and do not affect pending assessment appeals or refund claims. SB 654 expressly states that the General Assembly "finds and declares" the amendments only apply prospectively and "shall not be relied upon to:

• Ascertain the taxable amount of shares for a period prior to January 1, 2025
• Ascertain the amount of tax due prior to March 15, 2025

or

• Authorize a refund of a tax paid for a period for which a report was due prior to March 15, 2025, beyond the extent to which the refund would otherwise been due notwithstanding [these amendments] … "

In ascertaining the taxable portion of shares for a period before January 1, 2025, the goodwill deducted and the goodwill disregarded in calculating the deduction for US obligations is determined based on the law in effect before the effective date of these changes, "without any inference that the amendments … expanded, or confirmed any administrative determination that limited or restricted, the extent to which goodwill could be subtracted and disregarded under [those] sections … "

Sales and use tax

Computer-data-center-equipment-incentive program

Purchases or use of computer data center equipment for installation in a certified data center will no longer qualify for the data center exemption if the equipment is used for "proof of work crypto-asset mining." The law defines "proof of work crypto-asset mining" as "the process of performing computations to add a valid block of data to a blockchain, excluding computations required to validate individual transactions, typically in exchange for a reward or fee."³ This change applies to tax years commencing after December 31, 2025.

Waste grease removal

The law excludes from the sales and use tax retail sales and the use of services related to the cleaning or maintenance of a storage trap used by a restaurant to collect grease waste. This provision applies to transactions occurring after September 30, 2024.

Tax credits and incentives

Modified tax credits and incentives

SB 654 modifies various tax credits and incentives as follows:

• Increases the aggregate of historic preservation tax credit certificates that may be awarded from $5 million to $20 million
• Increases the amount of coal refuse energy and reclamation tax credit
• Defines terms for purposes of the city revitalization and improvement zones and allows for the designation of additional zones
• Sets aside, for purposes of the rural jobs and investment tax credit, another $50 million in investor investment in rural growth funds for a newly created "Program Two Tax Credit Authority"
• Increases the total neighborhood assistance tax credits that may be issued in a fiscal year from $36 million to $72 million and increases the maximum tax credit that a "business firm" may apply against an enumerated tax from 55% to 65% of the total amount contributed to approved programs during the tax year

These changes apply to fiscal years beginning after June 30, 2024, unless otherwise provided.

New — Tax credit for matching contributions to 529 savings accounts

SB 654 establishes a new tax credit for matching contributions to 529 savings accounts. For tax years beginning after December 31, 2024, and ending before January 1, 2030, an employer that makes a "matching contribution" to a tuition savings account owned by an employee, or an ABLE account, may claim a tax credit against the employer's state tax liability. The tax credit equals 25% of the employer's aggregate "matching contributions" made to employee accounts during the tax year. The aggregate contribution only includes the first $500 in contributions per employee. The taxes to which the tax credit may be applied are: personal income tax (PIT), CNIT, bank and trust company shares tax, title insurance companies shares tax, insurance premiums tax, or mutual thrift institutions tax. The tax credit cannot be applied against any PIT withheld by an employer from an employee. Excess credit may be carried over for three years but cannot be carried back or refunded.

Matching contributions are excluded from the employee's income for Personal Income Tax (PIT) purposes.

New — Tax credit for employer childcare contributions

SB 654 establishes a new tax credit for employer childcare contributions. For tax years beginning after December 31, 2024, a "qualified taxpayer" may claim a credit for a "contribution" made during the tax year toward an employee's "eligible child-care costs" and may apply the tax credit against its "qualified tax liability." The tax credit equals 30% of the "aggregate contribution" made to employees during the tax year. The aggregate contribution only includes the first $500 in contributions per employee. Excess credit cannot be carried forward, carried back, refunded, sold or assigned. Contributions are excluded from the employee's income for PIT purposes.

A pass-through entity (PTE) may elect in writing to transfer all or a portion of this credit to shareholders, members or partners (1) in proportion to the share of the qualified taxpayers' distributive income to which they are entitled or (2) in any other manner designated by the qualified taxpayers in accordance with the PTE's governance documents, regardless of how distributive income, losses or credits are allocated for other tax purposes. A PTE is a partnership or S corporation for PIT purposes, or an unincorporated entity with a single owner classified as a disregarded entity for federal income tax and PIT purposes. An unused tax credit that has been transferred may not be claimed by (1) the PTE, or (2) a shareholder, member or partner of the PTE. A transferred credit may only be used during the tax year for which the use of the credit is authorized. A transferred credit may not be carried forward, carried back, refunded, sold or assigned.