Since 1844, businesses operating in Pennsylvania have been paying Capital Stock and Foreign Franchise Tax on assets, even if they experienced years of having no profit. The tax is currentlyimposed on corporations with capital stock, joint stock associations, limited liability companies, business trusts, and other companies doing business in Pennsylvania. These entities prepare and file a Form RCT-101, Pennsylvania Corporate Tax Report, to report and pay these taxes, along with Corporate Net Income Tax, which is still in effect.
On January 4, 2016, Governor Tom Wolf announced the elimination of the Capital Stock and Foreign Franchise Tax for tax years beginning on or after January 1, 2016. After many repeated delays, extenders and freezes Governor Wolf stated that “It was well past time for Pennsylvania to finally remove the Capital Stock and Foreign Franchise Tax from the books.”
TAX YEARS THROUGH 2015
Pennsylvania domestic corporations are subject to the Capital Stock Tax which is a property tax imposed on joint stock associations, limited liability companies, business trusts, and entities organized as corporations doing business in Pennsylvania. Foreign corporations are subject to Foreign Franchise Tax which is a tax on non-Pennsylvania joint stock associations, limited liability companies, business trusts, and entities organized as corporations doing business in Pennsylvania. Entities such as nonprofit organizations, homeowners’ associations, membership organizations and family farm corporations are exempt from these taxes.
Both taxes are based on a corporation’s capital stock as derived by the application of a formula and are imposed on capital stock value attributable to Pennsylvania. The 2015 formula starts with the average of five years of 9.5% of net income and 75% of net worth or average owners’ equity at the close of the tax year less a valuation deduction of $160,000. The result is subject to the applicable Pennsylvania apportionment percentage and taxed at a 2015 tax rate of .45 mills (.00045).
Form RCT-101 is due on or before April 15th for calendar year filers or, for fiscal year filers, 30 days after the due date of the taxpayer’s corporate Federal tax return. Taxpayers granted an extension of time to file a Federal income tax return will automatically be granted an extension of time to file a Form RCT-101.
TAX YEARS 2016 AND AFTER
The elimination of these taxes will provide relief for corporations and may be a step in the right direction towards encouraging job creation in the Commonwealth of Pennsylvania. This also means that businesses who filed Form RCT-101 to report only Capital Stock and Foreign Franchise Tax, such as S corporations, limited liability companies taxed as pass-through entities, and business trusts that are not taxed as C Corporations will generally file a final Form RCT-101 for 2015. Taxpayers subject to the Corporate Net Income Tax should continue to file Form RCT-101.
The 2015 final Forms RCT-101 should be marked as such by checking the indicator box on page five of the tax return under Section E, Corporate Status Changes. In addition, the Bureau of Corporate Taxes is requesting taxpayers to attach a statement stating that they are no longer subject to the Capital Stock and Foreign Franchise Tax. Fiscal year filers should file a final Form RCT-101 with their tax year beginning in 2016. In addition, if there is an overpayment that needs to be refunded or transferred to another tax, taxpayers should complete Step F on page one of the Form RCT-101. The elimination of this tax must also be considered in calculating estimated Pennsylvania corporate taxes for 2016.
Lastly, if taxpayers intend to close their corporate charter in Pennsylvania, in addition to not being subject to the Capital Stock and Foreign Franchise Tax, they should file a Form REV-181, Application for Tax Clearance Certificate. This filing is required to close the taxpayer account with the Department of State as only checking the final box on the final Form RCT-101 will not suffice.
CONCLUSION
According to Pennsylvania Chamber of Business and Industry President and CEO Gene Barr, these taxes have “negatively impacted job creation and created barriers to growth.” This tax drove entrepreneurs and potential investors to states with friendlier taxes. Governor Tom Wolf regarded the tax as an “unfair tax on business” that “hobbled” the state’s economic prosperity, and failed to “incentivize job growth.” After fifteen years of proposals to phase out this tax, Pennsylvania has finally succeeded to eliminate this tax effective January 1, 2016.
The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your individual facts and circumstances.
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