Everyone loves a good tax credit, but Pennsylvania tax credits are especially popular among the state’s start-ups, and for good reason. Many of these credits can be sold on a secondary market for cash, including the Keystone Innovation Zone (KIZ) credit and the Research and Development (R&D) credit.
On June 30, 2021, the governor of Pennsylvania signed House Bill 952 into law as 2021 Act 25. Among its provisions were changes to various aspects of many popular state tax credits, such as the filing process and deadlines. The legislative changes took effect immediately and will impact the 2021 credit filings in two significant ways.
1. Compliance Checks and Required Information
The Pennsylvania Department of Revenue (DOR) and related agencies have historically made numerous compliance checks before approving any credits. Act 25 expands those powers, allowing the DOR to request additional information if they determine “that an application is insufficient … to determine whether the applicant is eligible to receive a tax credit.” Among the items the DOR may request or otherwise require include the following:
- For credits equal to or exceeding $100,000, audited financial statements prepared by an independent CPA
- For credits less than $100,000, an agreed-upon procedure report or a certification-of-costs report prepared by an independent CPA
- Bank statements, business records, receipts
- Agree to scheduled or unscheduled site inspections
- “Any other information required”
Over the past few years the state has trended toward requesting more and more items from some tax credit applicants. So, while the DOR will not necessarily request all of this information for every applicant, be aware of and prepared for a request for at least some of the items.
2. Deadline Changes and the Tax Filing Impact
Act 25 also changes the filing deadlines of many credits, including the KIZ and R&D credits.
Previously, these filings were due September 1, based on revenues and expenses from the previous year tax filing. The credits were then awarded December 15 of the same year.
The due date of both the KIZ and R&D tax credits is now December 1, and the credits will be awarded by May 1 of the following year. The new May 1 award date potentially creates a problem for the timing of tax filings. A taxpayer must first file a return for the year of application and apply any credits toward current Pennsylvania tax before selling a credit. See the filing timeline below regarding an R&D credit for a calendar year taxpayer:
- Calendar year 2020: Taxpayer incurs qualified R&D expenses in Pennsylvania
- December 1, 2021: Taxpayer files a Pennsylvania R&D application, using 2020 expense amounts
- May 1, 2022: Taxpayer is awarded the Pennsylvania R&D credit amount based on their December 1, 2021, application
Before the credit awarded May 1, 2022 can be sold, the taxpayer must first file their 2021 Pennsylvania tax return. The taxpayer must then apply the credit to any current Pennsylvania income tax. From a practical standpoint, a company expecting a credit award from this state and that has Pennsylvania taxable income for the 2021 tax year might choose to wait to file their 2021 state tax return until after the May 1, 2022 credit award date at the earliest.
Some companies may have other non-tax reasons to file income tax returns before the May 1 date. In that case, one solution might to be to file before the award date and then amend the Pennsylvania return shortly after the credit is awarded. On the other hand, a company that has a taxable loss may file before the May 1, 2022, award date if it chooses.
Amending a Pennsylvania return might prove cumbersome, but currently it is unknown if the state will issue further guidance on this matter. If this remains the case, taxpayers could choose to file their federal tax returns and all state tax returns, except Pennsylvania, then extend the Pennsylvania tax return and file it after the credit award date. What’s right for each taxpayer will depend on their unique situation.
Contact a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.