The Pennsylvania Senate Finance Committee on April 1 approved two bipartisan bills led by State Sen. Doug Mastriano (R-33) that would benefit small businesses across the commonwealth, advancing both measures to the full Senate chamber for consideration.
“Small businesses are the lifeblood of our communities and local economies,” Mastriano said April 3. “They deserve to be on a level playing field, especially because it would also benefit our economy. It’s good for business and it’s good for our people.”
The tax reform bill Resident Tax Credit for Small Businesses, Senate Bill (SB) 253, which Mastriano sponsored on Feb. 13, would abolish double taxation on small business partners. The committee voted 9-2 to pass the bill.
Currently, state resident business partners subject to pass-through entity taxes in other jurisdictions incur a double tax. Pass-through entities are businesses in which the profits pass through to the owners of the business and are taxed at the individual tax rate, according to a bill summary provided by the senator’s staff.
Pass-through entities in Pennsylvania are required to pay the tax twice, once to the commonwealth and a second time to the other state associated with the business, the summary says, noting that pass-through entities are denied a credit, relieving them of the double taxation requirement, even though a similar credit is available to resident S corporation shareholders.
If enacted, SB 253 would provide small business partners with the same protection from double taxation enjoyed by S corporations, ending this form of double taxation, said the senator.
Mastriano’s second committee-approved bill, the Optional Entity-Level SALT Cap Workaround, SB 396, would support the state’s small businesses and pass-through businesses by affording them the benefit of federal deductibility as an expense of the electing business. It would not change the amount of taxes paid, according to the senator’s bill summary.
“My bill would provide federal tax income benefits and put federal tax dollars back into the pockets of Pennsylvania’s small business owners that could be used for reinvestment and growth — creating more jobs for commonwealth residents,” he said.
Specifically, SB 396 would provide an elective pass-through entity tax filing option that would put federal tax dollars back in the pockets of Pennsylvania small business owners and help facilitate the federal deductibility of state income taxes, according to cosponsorship memo released Jan. 14 by Mastriano.
In doing so, Pennsylvania would better align with the vast majority of states which have already enacted similar legislation to provide their constituents with a path to increased federal tax deductions, the memo states, adding that the pass-through entity tax (PTE) allows businesses formed as partnerships, LLCs, and S corporations to elect to be taxed at the entity level for state income tax purposes.
If the entity makes this election, the partner or shareholder is usually allowed to claim a credit on their state individual income tax return for the amount of their distributive share of the pass-through entity tax paid by the LLC, partnership, or S corporation, and allows the partner or shareholder to not have to report their distributive share of income on their personal state income tax return, the memo says.
As of 2023, 34 states allow the work-around proposed in Mastriano’s bill, including all of Pennsylvania’s neighboring states.
The Senate Finance Committee voted 10-1 to approve SB 396.