Planning for Expiring KOZ Tax Exemptions

Posted on Tue, Aug 14, 2018 ©2021 Drucker & Scaccetti

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By: Clare Porreca, CPA, MT

 

Many businesses in Pennsylvania have benefitted from the Keystone Opportunity Zone Program(“KOZ”).  Some are set to expire soon.  They can be extended for an additional 10 years if certain job creation and capital investment requirements have been met.  If they are not extended, however, businesses previously exempt from many taxes will now be subject to them all.  For those businesses, careful planning is in order.

 

The goal of the KOZ Program is to help drive business and investment growth in economically distressed communities.  The KOZ does this by reducing or eliminating taxes for businesses located in these specific geographic zones.  Below is a list of taxes KOZ businesses do not pay:

 

Pennsylvania Taxes:

  • Corporate Net Income Tax
  • Personal Income Tax
  • Sales & Use Tax
  • Bank and Trust Company Shares Tax
  • Mutual Thrift Institutions Tax
  • Insurance Premiums Tax

 

Philadelphia Taxes:

  • Business Income & Receipts Tax
  • Net Profit Tax
  • Real Estate Tax
  • Sales & Use Tax
  • Use & Occupancy Tax

 

If your KOZ designation is expiring in the next 12-18 months and you’re not eligible for an extension, what can you do?  First, identify the taxes your business will now pay; then, reach out to your tax advisor to plan for these changes.  Your tax advisor can prepare a tax projection to give you a general idea of the taxes due well in advance of you having to make those payments.  This will allow you to appropriately plan and budget for those tax payments. 

 

If you’re a business located in an expiring KOZ, become familiar with Philadelphia’s tax system.  It's complicated. All Philadelphia businesses are subject to the Business Income & Receipts Tax (BIRT).  This is a two-part tax comprised of a tax on gross receipts and a tax on net income.  Partnerships, LLCs taxed as partnerships, and sole proprietors located in Philadelphia are also subject to the Net Profits Tax (NPT).  This is a tax on the net income of the business.

 

With the recent federal tax reform, under, the Tax Cuts and Jobs Act (“TCJA”), the federal tax law will impact the deductability of your state and local taxes.  One major area relates to depreciation.  The TCJA has expanded 100% bonus depreciation for assets placed in service after September 27, 2017 and before January 1, 2023.  Neither PA nor Philadelphia follow the federal bonus depreciation rules and disallow bonus depreciation.  Thus, if your business expects to have significant bonus depreciation in a year in which you’ll now be subject to PA & local taxes, prepare a separate state/local projection to determine your taxable income at the state and local level.

 

Like bonus depreciation, there are several other changes from the TCJA that may create additional differences between your Federal and PA & Philadelphia income.  Some of these changes include:

  • Business Interest Expense Limitation
  • Qualified Business Income Deduction
  • Increased Expensing under Section 179
  • Changes to Deductibility of Meals & Entertainment Expenses

 

There is still a lot of uncertainty regarding the application of the Federal tax law changes which means that the impact of these changes at the state level are even more uncertain.  Our best advice: talk to your tax advisor now so that you have ample time to identify opportunities and plan for your new situation as a state and local-tax-paying business.

 

If you do not have an advisor, or would like a second opinion, call on The Tax Warriors® at Drucker & Scaccetti. We have experts in the area of state & local tax and can help you and your business plan for a post-KOZ world.

Topics: BIRT, Depreciation, KOZ, TCJA, Keystone Opportunity Zone Program, NPT, bonus depreciation

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