What Happens When KOZ Tax Breaks Are Not Extended?

Posted on Fri, May 12, 2017 ©2021 Drucker & Scaccetti

 

By: Nashwat Hussein-Sagaff, CPA

 

Since 1999, many businesses have benefited from the Keystone Opportunity Zone (KOZ) Program.  KOZ reduces or eliminates taxes to drive investment and economic development where little or none has taken place.  In 2018, many KOZ designated properties are due to expire, along with their zero-tax status.  Without an extension, these companies must prepare for normal business taxation. Here’s what they need to know…

 

Last December, Gov. Wolf rejected new applications for KOZ from certain municipalities—Philadelphia among them—citing a cash-strapped Commonwealth can’t sustain new tax breaks. With the well-publicized troubles of his first two budgets, it is uncertain what the Governor will do next to close gaps in the Commonwealth’s revenue coffers.

 

A lot is at stake for companies participating in the KOZ program. The benefits are abundant as these taxes are waived or reduced:

 

Pennsylvania Tax:

  • Corporate Net Income
  • Capital Stock & Foreign Franchise Tax
  • Personal Income Tax (Partnerships & Sole Proprietors)
  • Sales & Use Tax
  • Bank and Trust Company Shares Tax
  • Mutual Thrift Institutions Tax
  • Insurance Premiums Tax

Philadelphia Tax:

  • Business Income & Receipts Tax (formerly Business Privilege Tax)
  • Net Profit Tax
  • Real Estate Tax
  • Sales & Use Tax

On July 13, 2016, Governor Tom Wolf signed Act 84 of 2016.  Under this Act, the KOZ program was expanded to include 12 new zones comprising 375 acres each for a period of up to 10 years effective January 1, 2017, to December 31, 2026.  Also, existing parcels can be extended up to 10 years if the applicant meets the job creation and capital investment requirements.  The requirements are:

  • Application must be filed three months before expiration date of the existing zone of subzone.
  • Have a cumulative minimum of 2,500 employees within the Commonwealth at the time of the application.
  • Demonstrate a total prior minimum capital investment within the Commonwealth of at least $300 million.
  • Conduct active business operations from one or more facilities on the parcel or parcels which are the subject of the application.
  • Comply with the provisions of the KOZ Act.

If your existing zone is set to expire, first check if you qualify for the 10-year extension.  If not, welcome back, there have been a few changes since your tax vacation.  Below are some changes to PA tax law you may have missed:

  • Single-member LLCs, multi-member LLCs taxed as a partnership or S Corporation, business trusts, and PA S Corporations are no longer subject to Capital Stock Tax for tax years beginning on or after January 1, 2016. A final RCT-101 should have been filed for the 2015 tax. 
  • PA now uses market-based sourcing of services for Corporate Net Income Tax
  • PA capital stock/foreign franchise tax has been phased out for tax years beginning on or after January 1, 2016. Due to the new federal deadline for corporations of April 15th, PA RCT-101 is now due May 15th (30 days after the federal report).   
  • The bank share tax rate changed from .89% to .95% as of January 1, 2017.
  • For sales tax returns for periods ending after August 1, 2016, the sales tax vendor discount is capped at the lesser of one percent of the sales tax collected or $25 on a monthly return, $75 on a quarterly return or $150 on a semi-annual return.

The Tax Warriors® at Drucker & Scaccetti are always looking out for your best interests.  If you have questions about Act 84 of 2016 and/or the expanded KOZ Programcall on us. We’d be glad to help.

Topics: Business Income and Receipts Tax, sales and use tax, Real Estate Taxes, State Taxes, Philadelphia, Pennsylvania, Keystone Opportunity Zones, KOZ, Gov. Tom Wolf, Abatement, Cira Centre, Business Privilege tax

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