Corporation Tax Bulletin 2019-03: Pennsylvania Corporate Net Income Tax Treatment of IRC § 163(j), Pa. Dept. of Rev. (rev. 10/12/23). The Pennsylvania Department of Revenue (Department) issued an updated state corporate net income tax (CNIT) bulletin addressing how the federal income tax limitations imposed by the amendments to Internal Revenue Code (IRC) section 163(j) contained in the federal Tax Cuts and Jobs Act of 2017 are treated for Pennsylvania CNIT purposes – noting that, with some exceptions, it is the general intent that the proposed federal regulations addressing the interest expense limitations contained in IRC section 163(j) will be followed to the extent practicable in preparing the taxpayer’s pro-forma federal interest expense deduction under IRC section 163(j) for purposes of calculating its Pennsylvania taxable income. The bulletin also notes that if the federal consolidated group reports an interest limitation under IRC section 163(j), then each member with a Pennsylvania CNIT filing obligation will need to perform its own set of calculations on a separate company basis in order to determine if the interest expense limitation applies to it; this separate company analysis will include determining whether the individual entity has gross receipts sufficient to meet the requirements of IRC section 163(j)(3), when calculated on a separate entity basis without elimination of related party receipts.
Moreover, according to the bulletin, in most cases where there was a federal consolidated interest expense limitation under IRC section 163(j) for earlier periods and a separate company limitation calculated for Pennsylvania purposes, taxpayers that participate in a current year federal consolidated return with no interest expense limitation under IRC section 163(j) on current year interest expenses can fully deduct on their CNIT return not only current year separate company interest expenses but also prior year interest expense limitation carryforwards. The bulletin provides that exceptions to this policy are not expected to be common, but may arise in cases where the carryforward amount of previously denied interest expenses is limited by other federal income tax code sections, such as the limitations which may be imposed under IRC section 382 [see Corporation Tax Bulletin 2008-03: Net Loss Deduction Limitations Under Internal Revenue Code Section 381 and Section 382, Pa. Dept. of Rev. (rev. 10/11/23) and State Tax Matters, Issue 2023-41, for more details on such situations]. Please contact us with any questions
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