The Pennsylvania Department of Revenue (Department) released Corporation Tax Bulletin 2026-01 on September 10, 2026, providing guidance on the state's corporate net income tax (CNIT) treatment of the IRC Section163(j) business interest expense limitation for tax years beginning on or afterJanuary 1, 2025.

Bulletin 2026-01 operates alongside Corporation Tax Bulletin 2019-03 (as revised July 30, 2026), which addresses the CNIT treatment of IRC Section 163(j) for tax years beginning before January 1, 2025. The two bulletins create a bifurcated set of rules that apply based on when the tax year begins — i.e., either before, or on or after, January 1, 2025.

Notably, Bulletin 2026-01 does not reinstate the federal consolidated group exemption provided by Bulletin 2019-03 and makes several other changes from Bulletin 2019-03.

General CNIT treatment of the IRC Section 163(j) business interest limitation

Bulletin 2026-01 implements Act 45 of 2025 (HB 416, see Tax Alert 2025-2403), which decoupled the CNIT from changes made to IRC Section 163(j) by the One Big Beautiful Bill Act (P.L. 119-21, OBBBA). The OBBBA amended IRC Section 163(j), effective for tax years beginning after December 31, 2024, to compute adjusted taxable income (ATI) under the "EBITDA" (earnings before interest, taxes, depreciation and amortization) method, adding back depreciation, amortization and depletion and raising the 30%-of-ATI ceiling. Pennsylvania decoupled from these changes, instead requiring taxpayers to apply IRC Section 163(j) as in effect on December 31, 2024, retroactively applicable to tax years beginning after December 31, 2024. Due to this change, ATI must be computed on the "EBIT" (earnings before interest and taxes) basis for Pennsylvania CNIT purposes.

Bulletin 2026-01 requires taxpayers to calculate their federal interest expense deduction on a separate-company basis, using the provisions of IRC Section 163(j) in effect in 2024.¹ The Department further stated that because "separate company rather than consolidated concepts apply" for the CNIT computation, each taxpayer must include intercompany and third-party interest in calculating its interest expense under IRC Section 163 and the corresponding limitation under IRC Section 163(j). Thus, each taxpayer on a separate-company basis will determine whether the interest expense limitation applies, regardless of whether its federal consolidated group has a current-year limitation. Such analysis includes "determining whether the individual entity has gross receipts sufficient to meet the requirements of [IRC] Section 163(j)(3), when calculated on a separate entity basis without elimination of related party receipts." The Department also noted that, for purposes of implementing IRC Section 163(j), it will follow federal elections made by a taxpayer or its consolidated group under IRC Sections 163(j)(7)(B) or (C).

While similar provisions apply under Bulletin 2019-03, significantly, Bulletin 2026-01 did not provide for a consolidated group exemption. Bulletin 2019-03required CNIT taxpayers to apply the IRC Section 163(j) limitation but provided that a member of a federal consolidated group need not compute a separate-company limitation unless the group reported an IRC Section 163(j) limitation on its consolidated Form 1120 (referred to herein as the "consolidated group exemption"). For many taxpayers, that has resulted in no applicable Pennsylvania limitation, even when a separate-company computation would have produced a substantial interest expense disallowance. The Department's July 2026 update to Bulletin 2019-03limits the Bulletin's application, including the federal consolidated group exemption, to tax years beginning before January 1, 2025.

Bulletin 2026-01 effectively confirms the repeal of the consolidated group exemption for tax years beginning on or after January 1, 2025, as this exemption is not included in the new bulletin.

EY observation: Members of a federal consolidated group that reported no consolidated federal limitation, and recognized no Pennsylvania interest expense disallowance through 2024, may face a first-time interest expense disallowance for CNIT purposes in 2025. That disallowance would be measured under the EBIT-based ATI standard, which is generally more restrictive than the federal EBITDA-based standard. Accordingly, taxpayers with significant IRC Section 163(j)-limited interest amounts (i.e., taxpayers with lower ATI relative to business interest expense) should consider evaluating both the compliance impact and the available positions before the 2025 filing deadline passes. Taxpayers should also consider the impact of this change on their 2026 estimated tax payments.

Interest expense associated with addback provisions

Both Bulletins 2019-03 and 2026-01 require taxpayers with an interest expense or costs that would be subject to the state's related-party expense disallowance rule to allocate their federal IRC Section 163(j) limitation on a pro-rata basis to the relevant related and unrelated party amounts. Taxpayers must use a fraction consisting of the post-limitation federal interest expense over total interest expense without regard to the limitation, multiplied by the taxpayer's Pennsylvania "interest expense or cost" to determine the amount of current year related-party interest potentially subject to addback. Taxpayers also must track the breakout of their federal interest deduction carryforward between third-party interest expense and interest expense falling within the related-party addback definition.²

Under Bulletin 2019-03, previously disallowed related-party interest expense is evaluated for a Pennsylvania addback when it "becomes fully deductible on a Federal separate company basis or becomes fully deductible per Pennsylvania policy" (referred to herein as the "Pennsylvania deductibility prong" of the addback-timing analysis). Taxpayers then determine the amount or related-party interest, if any, that must be added back for CNIT purposes. Bulletin 2026-01 modifies the trigger for determining when previously disallowed related-party interest must be added back for Pennsylvania CNIT purposes by eliminating the Pennsylvania deductibility prong. Thus, for tax years beginning on or afterJanuary 1, 2025, the addback-timing analysis is triggered only when the interest "becomes fully deductible on a federal separate company basis."

EY observation: This appears related to removal of the federal consolidated group exemption, though Bulletin 2026-01 does not expressly draw that connection.

Revised guidance on interest expense associated with nonbusiness income

Both Bulletin 2019-03 and 2026-01 require taxpayers with an IRC Section 163(j) interest expense limitation and nonbusiness income to determine the overall interest expense associated with the nonbusiness income and allocate the interest limitation to that amount on a pro rata basis. Bulletin 2019-03 provides that interest expense carryforward amounts linked to the nonbusiness income "can only be used to offset nonbusiness income amounts in future periods."

Bulletin 2026-01 revises this provision, stating that future-year deduction capacity for carryforward interest expense amounts "should be pro-rated between" the business and nonbusiness carryforward amounts.

EY observation: Bulletin 2026-01 does not state whether this permits business and nonbusiness balances to offset or whether the rule only governs how much of each balance is treated as used.

IRC Section 382 additional limitation on interest expense

Taxpayers with an existing interest expense carryforward that had been limited by IRC Section 163(j) may be subject to an additional limitation on the use of IRC Section 163(j) carryover amounts if they subsequently enter into a transaction resulting in the application of IRC Section 382, as outlined in Corporation Tax Bulletin 2008-03. Bulletin 2026-01 provides that, in this instance, taxpayers should check the applicable IRC Section 381/382/Merger NOLs box on Form RCT-101 and attach a supporting statement detailing the applicable IRC Section 382 limitation.

New expectation for partnership reporting to corporate partners

Both Bulletins 2019-03 and 2026-01 require corporate partners to track partnership-level IRC Section 163(j) amounts on a partnership-by-partnership basis and report the resulting addback and carryforward items. Bulletin 2026-01 incorporates guidance similar to Bulletin 2019-03, with notable differences. Bulletin 2026-01 specifies that a partnership calculates its own federal interest limitation amount under IRC Section 163(j) in effect as of December 31, 2024. Further, in determining whether interest is properly classifiable as "business interest," a partnership must rely on federal guidance applicable as of December 31, 2024.

Bulletin 2026-01 also provides that, even if a partnership does not provide its corporate partners with a supplement to the partner's Schedule K-1 containing distributive share and other information needed to comply with Pennsylvania's conformity to the IRC, the corporate partner remains responsible for accurately calculating its CNIT liability, including recomputing the IRC Section 163(j) limitation under the pre-2025 federal rules.

Open items and transition considerations

Neither Bulletin 2019-03 nor 2026-01 address how carryforward or addback balances generated in tax years governed by Bulletin 2019-03 (i.e., beginning before January 1, 2025) are treated once a taxpayer moves into a tax year governed by Bulletin 2026-01 (2025-or-later). In particular, the Department has not stated:

• Whether pre-2025 Pennsylvania separate-company IRC Section 163(j) interest carryforward balances, including any computed while the federal consolidated group exemption was in effect, continue unchanged into 2025-and-later tax years, or must be retested once the safe harbor no longer applies
• Whether utilization of pre-2025 carryforwards in a 2025-or-later tax year is governed solely by separate-company federal deductibility (Bulletin 2026-01's rule), with no safe-harbor-driven acceleration of use, even though the carryforward originated in a period when the safe harbor applied
• How any Pennsylvania related-party addback carryforward from pre-2025 years is timed once it becomes deductible in a 2025-or-later year, given that Bulletin 2026-01 no longer includes the Pennsylvania deductibility prong available under Bulletin 2019-03
• Whether business and nonbusiness federal interest carryforward balances accumulated separately under Bulletin 2019-03's rule may now offset against each other's future capacity under Bulletin 2026-01's proration language, or whether each category of interest expense remains limited to offsetting only its own corresponding type of income

Because it is unknown whether the Department will issue transition guidance addressing some or all of these issues, affected taxpayers should preserve detailed support for all IRC Section 163(j)-related carryforward and addback balances.