SALT Blawg – State and Local Tax Blog
State and Local Tax ("SALT") blog issues require state and local tax knowledge. Chamberlain Hrdlicka's SALT Blawg (SALT Blog) provides exactly that knowledge with news updates and commentary about state and local tax issues.
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The Philadelphia Department of Revenue (“DOR”) has issued two new forms of guidance addressing issues raised by the federal Tax Cuts and Jobs Act of 2017 (“TCJA”). First, on January 16, the DOR issued an Advisory Notice regarding the deductibility of employee business expenses in light of the TCJA. For tax years 2018 through 2025, the TCJA eliminates most miscellaneous itemized deductions for individuals, including deductions for employee business expenses. Further, moving expenses are no longer deductible for federal income tax purposes for those tax years. In calculating the amount of employee compensation subject to the Philadelphia Wage Tax, Philadelphia allows a deduction for expenses directly connected with and incurred in the actual performance of an employee’s services. Philadelphia announced in the Advisory Notice that it will not conform to the federal changes and will continue to allow for a deduction for business expenses that are ordinary, necessary, and reasonable. Additionally, Philadelphia stated that it will not conform to the TCJA for purposes of moving expenses. Unreimbursed moving expenses to a new home which are incurred to retain employment will continue to be deductible.
Second, on January 17, the Philadelphia Department of Revenue issued guidance on IRC § 199A in the form of Frequently Asked Questions. Pursuant to the TCJA, IRC § 199A, for tax years beginning in 2018, owners of sole proprietorships, S Corporations, or partnerships are permitted to deduct 20% of the income earned by a pass-through business. C Corporations are not entitled to the deduction. The FAQ instruct that for Philadelphia Business Income and Receipts Tax (“BIRT”) purposes, taxpayers cannot take the federal deduction on pass-through income to reduce the income reported to Philadelphia. Individuals report taxable income for BIRT purposes based on Net Profit or Loss from Federal Form 1040, Schedule C. The Section 199A deduction is reported after AGI on the Form 1040, so it is not reflected as a reduction for BIRT net income purposes. Further, Net Profits Tax filers cannot take the Section 199A deduction and must pay NPT based on the partnership income, without consideration of the Section 199A deduction.
If you have any questions about the DOR’s guidance or Philadelphia taxes, please reach out.