SB 396 — An Act amending the act of March 4, 1971 (P.L.6, No.2), known as the Tax Reform Code of 1971, in personal income tax, further providing for definitions, providing for elective tax imposed at pass-through entity level and further providing for taxability of partners and for income of a Pennsylvania S corporation.

PRIOR PRINTER'S NO.

343 THEPRINTER'S GENERALNO. ASSEMBLY OF PENNSYLVANIA SENATE BILL Session of No.

396508 2025THE INTRODUCEDGENERAL BYASSEMBLY MASTRIANO,OF CULVER,PENNSYLVANIA PISCIOTTANOSENATE ANDBILL STEFANO,Session MARCH 6, 2025 REFERRED TO FINANCE, MARCH 6, 2025 AN ACT Amending the act of MarchNo. 4, 1971 (P.L.6, No.2), entitled "An act relating to tax reform and State taxation by codifying and enumerating certain subjects of taxation and imposing taxes thereon;

396 2025 INTRODUCED BY MASTRIANO, CULVER, PISCIOTTANO AND STEFANO, MARCH 6, 2025 SENATOR HUTCHINSON, FINANCE, AS AMENDED, APRIL 1, 2025 AN ACT Amending the act of March 4, 1971 (P.L.6, No.2), entitled "An act relating to tax reform and State taxation by codifying and enumerating certain subjects of taxation and imposing taxes thereon;

(2) An electing Pennsylvania S corporation with all resident shareholders shall be subject to and shall pay a tax imposed at the rate provided in section 302(b) on each resident taxable owner's share of each class of income and gain enumerated in 20250SB0396PN034320250SB0396PN0508 - 2 - section 303 from sources within this Commonwealth for the taxable year.

(7) In determining the tax due under this section, a pass- through entity shall not be permitted to use any tax credits otherwise available to the pass-through entity except a credit for estimated taxes paid for the current taxable year under this 20250SB0396PN034320250SB0396PN0508 - 3 - section or an overpayment of a prior-year tax paid under this section.

(3) The credit allowed under this subsection shall be applied after the application of all other tax credits available 20250SB0396PN034320250SB0396PN0508 - 4 - to the owner for the taxable year.

(4) Each pass-through entity that elects to pay tax under subsection (a) shall report on a return required under this 20250SB0396PN034320250SB0396PN0508 - 5 - article the following:

(6) To meet the requirements of this section, if a taxable owner holds an interest in the pass-through entity through an entity that is a disregarded entity for purposes of this article, the pass-through entity must provide information sufficient to identify both the disregarded entity that holds an 20250SB0396PN034320250SB0396PN0508 - 6 - interest in the pass-through entity and the taxable owner that owns the disregarded entity and is eligible for a credit under subsection (c).

20250SB0396PN034320250SB0396PN0508 - 7 - (4) The taxable owner shall report the adjustment of the credit on an amended return for the taxable owner's taxable year that includes the pass-through entity's taxable year for which the tax was assessed.

(g)(G) (1) UnlessAN otherwiseIRREVOCABLE providedELECTION in,TO orBE inconsistentAN with,ELECTING thisPASS- section,<-- theTHROUGH provisionsENTITY ofFOR thisA articleTAXABLE shallYEAR applySHALL toBE thisMADE section.WITH THE FILING OF A RETURN AND THE PAYING OF ANY TAX DUE FOR THE TAXABLE YEAR ON OR BEFORE THE LATER OF NINETY (90) DAYS AFTER THE EFFECTIVE DATE OF THIS SUBSECTION, OR THE DUE DATE, INCLUDING EXTENSIONS, OF THE PASS-THROUGH ENTITY'S TAX RETURN UNDER SECTION 330.1 OR 335(C).

(2)THE ThePERIOD departmentFOR mayFILING issueA guidanceRETURN andSHALL promulgateNOT regulationsBE necessaryEXTENDED. for the implementation of this section.

(h)AN (1)ELECTION InSHALL theBE caseINVALID ofIF anyTHE taxableRETURN yearIS thatNOT includesFILED theAND effectiveFULL datePAYMENT ofOF thisANY clause,TAX anyDUE nonresidentIS withholdingNOT madeMADE underON sectionOR 324BEFORE byTHE theDUE pass-throughDATE. entity for the current tax year for an owner shall be applied by the pass-through entity against its estimated tax liability.

(2)A InPASS-THROUGH theENTITY caseONLY ofMAY anyMAKE taxableAN yearELECTION thatUNDER includesTHIS theSUBSECTION effectiveFOR dateA ofTAXABLE thisYEAR clause,IN theWHICH departmentTHE mayPASS-THROUGH notENTITY assessFILED interestA andTAX penaltiesRETURN againstOR anIS eligibleUNDER pass-throughA entityVALID forEXTENSION anyTO underpaymentFILE ofA estimatedRETURN taxFOR dueTHE underTAXABLE subsectionYEAR. (d), 20250SB0396PN0343 - 8 - so long as the eligible pass-through entity acted in good faith with no intent to defraud the Commonwealth.

(i)(2) AsTHE usedTAX inRETURN thisSHALL section,REFLECT theASSESSMENTS followingTHAT wordsCHANGE andTHE phrases20250SB0396PN0508 shall- have8 the- meaningsTAXABLE givenINCOME toOF themTHE inELECTING thisPASS-THROUGH subsectionENTITY, unlessOR theAMENDED contextTAX clearlyRETURNS indicatesTHAT otherwise:THE ELECTING PASS-THROUGH ENTITY HAS FILED ON OR BEFORE THE DUE DATE OF THE TAX RETURN UNDER PARAGRAPH (1) THAT WOULD CHANGE A TAXABLE OWNER'S PASS-THROUGH ENTITY CREDIT FOR THE TAXABLE YEAR.

THE CREDIT SHALL NOT BE ADJUSTED AT THE PASS-THROUGH ENTITY LEVEL TO REFLECT ANY SUBSEQUENT CHANGES OF THE ELECTING PASS-THROUGH ENTITY'S TAXABLE INCOME.

(3) IN DETERMINING THE AMOUNT OF TAX DUE IN A TAXABLE YEAR, AN ELECTING PASS-THROUGH ENTITY SHALL BE ENTITLED TO A CREDIT FOR TAX WITHHELD AND REMITTED ON BEHALF OF A NONRESIDENT TAXABLE OWNER AND REPORTED ON A SCHEDULE NRK-1 PROVIDED TO THE TAXABLE OWNER FOR THE TAXABLE YEAR REDUCED BY ANY WITHHELD TAX REFUNDED TO THE ELECTING PASS-THROUGH ENTITY OR CREDITED TO A SUBSEQUENT TAX YEAR.

(4) THE DEPARTMENT SHALL HAVE THE AUTHORITY TO ADJUST THE TAX IN CONNECTION WITH A RETURN FILED UNDER PARAGRAPH (1) WITHIN TWELVE (12) MONTHS FROM THE FILING OF THE TAX RETURN.

(5) AN ELECTING PASS-THROUGH ENTITY SHALL PROVIDE THE TAXABLE OWNER A STATEMENT DESCRIBED IN SUBSECTION (D)(7) ON OR BEFORE THE LATER OF NINETY (90) DAYS FROM THE EFFECTIVE DATE OF THIS SUBSECTION, OR THE DUE DATE, INCLUDING EXTENSIONS, OF THE PASS-THROUGH ENTITY'S TAX RETURN UNDER SECTION 330.1 OR 335(C).

THE PENALTY IN SECTION 353(F) SHALL APPLY TO EACH STATEMENT NOT PROVIDED TO A TAXABLE OWNER WITHIN THE NINETY-DAY PERIOD.

(6) A TAXABLE OWNER SHALL CLAIM THE CREDIT IN SUBSECTION (C) ON AN AMENDED TAX RETURN FOR THE TAXABLE YEAR OR IN THE CURRENT TAX YEAR.

AN AMENDED TAX RETURN MUST BE FILED IF THERE IS A PENDING PETITION FOR REFUND OR PENDING APPEAL OF AN ASSESSMENT OR PETITION FOR REFUND AS OF THE DUE DATE OF THE AMENDED TAX RETURN.

20250SB0396PN0508 - 9 - (7) IN DETERMINING THE AMOUNT OF THE CREDIT IN THIS SECTION, A NONRESIDENT TAXABLE OWNER SHALL NOT BE PERMITTED TO CLAIM A CREDIT FOR TAX THAT THE ELECTING PASS-THROUGH ENTITY WITHHELD AND REMITTED ON BEHALF OF THE NONRESIDENT TAXABLE OWNER AND TREATED AS A PAYMENT OF THE TAX UNDER THIS SECTION.

A NONRESIDENT TAXABLE OWNER SHALL NOT BE ENTITLED TO A REFUND OF, OR CREDIT FOR, ANY PORTION OF THE CREDIT UNDER SUBSECTION (C) FOR WHICH A REFUND OF PREVIOUSLY WITHHELD AND REMITTED TAX WAS RECEIVED, OR AN OVERPAYMENT WAS APPLIED TO ANOTHER TAXABLE YEAR.

(8) IN DETERMINING WHETHER A RESIDENT TAXABLE OWNER IS ENTITLED TO A REFUND OF THE CREDIT UNDER SUBSECTION (C), TAX PAYMENTS OR CREDITS SHALL EXCLUDE TAX PAYMENTS MADE FOR THE TAXABLE YEAR OR AVAILABLE CREDITS THAT WERE REFUNDED OR APPLIED TO ANOTHER TAX YEAR OR TAX.

(9) A TAXABLE OWNER MAY NOT RECEIVE A DOUBLE TAX BENEFIT THROUGH THE RETROACTIVE APPLICATION OF THIS SECTION IF THERE HAS BEEN A PREVIOUS REFUND OR CREDIT TO ANOTHER TAXABLE YEAR OR TAX OF A TAX OVERPAYMENT OR TAX CREDIT.

(10) A TAXABLE OWNER SHALL FILE AN AMENDED TAX RETURN ON OR BEFORE ONE HUNDRED EIGHTY (180) DAYS AFTER THE EFFECTIVE DATE OF THIS SUBSECTION.

THE PERIOD FOR FILING AN AMENDED TAX RETURN SHALL NOT BE EXTENDED.

AN AMENDED TAX RETURN REQUESTING A REFUND OR CREDIT FILED AFTER THE DUE DATE SHALL NOT BE ACCEPTED AND PROCESSED.

(11) THE AMENDED TAX RETURN SHALL REFLECT ASSESSMENTS THAT CHANGE THE TAXABLE INCOME OF THE TAXABLE OWNER AND REFUND CLAIMS PENDING ON OR BEFORE THE DUE DATE OF THE TAX RETURN.

IF AN AMENDED TAX RETURN HAS BEEN FILED AFTER A PETITION FOR REFUND HAS BEEN FILED, OR AN ADMINISTRATIVE OR JUDICIAL APPEAL OF AN ASSESSMENT OR REFUND PETITION HAS BEEN TAKEN, THE AMENDED TAX 20250SB0396PN0508 - 10 - RETURN SHALL BE DEEMED A PART OF THE ORIGINAL TAX RETURN UPON PETITION OF THE TAXPAYER AT ANY SUBSEQUENT PROCEEDING AS THOUGH IT HAD BEEN FILED WITH THE ORIGINAL TAX RETURN.

A SEPARATE APPEAL OF AN ASSESSMENT OR PETITION FOR REFUND SHALL NOT BE REQUIRED TO BE FILED IF THE DETERMINATION OF THE CORRECT AMOUNT OF THE CREDIT IN THIS SECTION DEPENDS UPON THE RESOLUTION OF THE ISSUES IN THE APPEAL OR PETITION FOR REFUND.

(12) PARAGRAPH (6) SHALL APPLY TO AN ELECTING PASS-THROUGH ENTITY THAT HAS FILED A CONSOLIDATED RETURN ON BEHALF OF SOME OR ALL ELECTING NONRESIDENT TAXABLE OWNERS FOR A TAXABLE YEAR.

AN ELECTING PASS-THROUGH ENTITY ALSO MUST FILE AN AMENDED TAX RETURN IF THE COMPOSITION OF TAXABLE OWNERS ELECTING TO FILE AS PART OF THE CONSOLIDATED GROUP DIFFERS IN THE TAXABLE YEAR FOR WHICH THE CREDIT IS BEING CLAIMED AND THE CURRENT TAXABLE YEAR.

(13) THE DEPARTMENT SHALL HAVE THE AUTHORITY TO ASSESS TAX IN CONNECTION WITH AN AMENDED TAX RETURN FILED UNDER PARAGRAPH (6) OR (12) WITHIN THE LATER OF TWELVE (12) MONTHS FOR THE FILING OF THE AMENDED TAX RETURN, OR THE EXPIRATION OF THE APPLICABLE STATUTE IN SECTION 348.

IF THE STATUTE OF LIMITATIONS FOR ASSESSING ADDITIONAL TAX IN SECTION 348 FOR A TAX YEAR HAS OTHERWISE LAPSED, THE DEPARTMENT ONLY MAY ADJUST ITEMS RELATED TO THE CREDIT DETERMINED IN SUBSECTION (C) AND PARAGRAPH (5).

(14) THE DEPARTMENT SHALL NOT ASSESS ANY INTEREST OR PENALTY ARISING FROM THE TIMELY FILING OF A TAX RETURN AND PAYMENT OF ANY TAX ARISING FROM THE APPLICATION OF THIS SUBSECTION.

THE DEPARTMENT SHALL NOT PAY ANY INTEREST ARISING FROM A REFUND OR OVERPAYMENT ARISING FROM THE APPLICATION OF THIS SUBSECTION.

(g) (H) (1) Unless otherwise provided in, or inconsistent <-- with, this section, the provisions of this article shall apply to this section.

20250SB0396PN0508 - 11 - (2) The department may issue guidance and promulgate regulations necessary for the implementation of this section.