Legislation that shifts federal tax liability for pass-through businesses from the taxpayer to the business would provide financial relief to owners and shareholders.

Without this support, experts say, the government will continue to play an outsider role compared to the small and medium-sized businesses that drive the economy.

Senate Bill 659, currently in the Senate Budget Committee, and a companion bill, Senate Bill 660, currently in the Finance Committee, would amend the 1971 tax reform code and provide a workaround to the federal Tax Cuts and Jobs Act of 2017 (known as the SALT tax), which capped individual tax deductions at $10,000.

The legislation would affect pass-through entities such as sole proprietorships, partnerships, LLCs and S corporations, said Peter Calcara, vice president of public affairs for the Pennsylvania Institute of Certified Public Accountants.

Calcara said that currently small and medium-sized business owners pay income tax on their business profits, with deductions capped at $10,000. With the proposed law, the tax would be paid by the companies, reducing the tax burden on owners and shareholders, he said.

“This has been approved by the IRS, but Pennsylvania has been slow to get started,” Calcara said, adding that 36 of 41 states with income taxes have passed this law. “This is not a democratization issue and it is revenue neutral.”

Senate Bill 660 would allow state taxpayers to receive a tax credit for taxes they pay to other states, said Eric Wenger, managing partner of RKL's Lancaster office.

“Companies that pay taxes in other states can't deduct them here,” he said. “The business environment is not as friendly as it could be. We're an outlier in a negative sense.”

Calcara explained that resident partners are now subject to Pennsylvania personal income taxes on all of their income, including income from partnerships that may do business in other states and be taxed there.

“Currently, the tax law allows a residency credit when the tax in the other state is paid directly by the partner, but does not allow a similar credit when the partnership elects to pay corporate tax in one or more of the 36 states with a pass-through corporate tax,” he said. “This means that without SB 660, the partner would pay tax on some of the income in other states and then pay tax on all of the income in Pennsylvania without benefiting from the credit, resulting in double taxation.”

The federal bypass rule expires in 2025, but Calcara said the American Institute of Certified Public Accountants believes it will likely be reauthorized because it raises revenue.

HB 1584 addresses both problems.

Calcara said a small business with annual sales of $200,000 could save between $6,000 and $30,000 in federal taxes annually if the law is passed.

Larger companies with revenues of $1 million could save an estimated $30,000 to $150,000 a year, he said.

“Ensuring that small businesses in Pennsylvania are not at a competitive disadvantage compared to those in other states will help our Commonwealth

innovative entrepreneurs who keep our small-town main streets vibrant and our local economies strong,” said Sen. Ryan Aument, R-Lancaster, co-sponsor of the Senate legislation. “I am confident that my colleagues in the House will continue to work with me to pass this simple but powerful change.

this session is terminated.”

“The real taxpayers are affected,” Wenger said. “These companies pay taxes on their personal income. The company pays no taxes, but reports profits and losses. These are passed on to the owner, who in turn pays the taxes.”

Wenger said the legislation would eliminate the need to follow the old rules and instead require the company to pay the taxes, which would allow for deductions at the federal level.

“The federal government has given its blessing to this. The Pennsylvania legislature has not,” he said.

“Two years ago, the state had problems with the IRS's My Path computer system, and the Wolf administration felt it was causing too much disruption to make changes,” Calcara said. “Now, any restraint will only benefit a small number of wealthy taxpayers.”

Every taxpayer who owns a home and a business will exceed the $10,000 cap, Wenger said.

Wenger described Pennsylvania as a disadvantage for businesses, saying, “This is further evidence that Pennsylvania is not business-friendly. I think this hurdle is easy to overcome because it only affects federal taxes.”