Tax Reform

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NO OPPORTUNITIES LOST

HOW IMPROVING PA’S TREATMENT OF NET OPERATING LOSSES
WILL ATTRACT INVESTMENT, JOBS


Net Operating Loss (NOL) carryforward is a tax provision that allows businesses having losses in a taxable year to carry those losses forward and deduct them from future years’ profits.

The ability to carry losses forward particularly benefits two types of businesses, both of which are critical to our economy:

· Start-up firms (including those in technology or biosciences) often experience significant losses in early years that could be reinvested by reducing future tax liabilities if they become profitable.

· Employers that operate in cyclical business cycles, such as manufacturers in the commodity markets like metals, chemicals, or pulp and paper, where profits and losses can fluctuate greatly.

HOW PENNSYLVANIA COMPARES

 

Pennsylvania currently caps a business’s NOL carryforward deduction at 40 percent of taxable income. We are one of only two states that cap NOL deductions below the federal limit of 80 percent of taxable income. There are 18 states that align with the federal rules, while 24 states have no deduction cap at all. Six states do not have a corporate net income tax. 

WHICH STATE WOULD YOU CHOOSE?

Consider a hypothetical start-up company that has a choice to do business in Pennsylvania or in another state that has the same tax rates as Pennsylvania. In its first year of operation (2023), the Company had significant start-up costs and recorded a $50 million loss. Once the business started generating sales, they earned a $75 million profit in 2024.

Under Pennsylvania’s uncompetitive NOL rules, the company is limited to reducing their taxable liability in 2024 to 40 percent of their taxable income ($75M x 40% = $30M).  Unable to deduct the full amount of losses carried forward from the previous year, they end up paying $3.82 million in taxes, an effective tax rate of 15.28 percent!

In the other state, the company can deduct up to 80 percent of taxable income ($75 x 80% = $60). Because this amount is greater than the $50 million loss carried forward from the previous year, the company can deduct the full $50 million loss. This results in a total tax liability of $2.12 million, or an effective tax rate of 8.49 percent.

If you had the option between two states to start a company, would you choose Pennsylvania where you will pay $1.7 million more in taxes and an effective tax rate that is 80 percent higher?

 

For more insights into the PA Chamber’s NOL reform leadership, visit our NOL information page!

 

Accelerating the CNI Phase Down 

The PA Chamber saw a major tax reform goal realized last session through the enactment of Act 53 – a historic reform that included the reduction of Pennsylvania’s uncompetitive Corporate Net Income Tax, which, at 9.99 percent, was the second-highest in the nation.

Now at 8.49 percent, PA’s CNI is set to be phased down gradually each year until the rate reaches 4.99 percent in 2031 – but should we really have to wait nearly a decade to realize the full benefits of this reform? 


Accelerating the CNI phasedown would make even greater strides in the PA Chamber’s mission to bring more jobs, investment, and economic opportunity to Pennsylvania. The PA Chamber enthusiastically supports Gov. Josh Shapiro and a strong bipartisan group of lawmakers’ call to accelerate the CNI phasedown and maximize the benefits of Act 53 to keep pace with other states.

A lower CNI offers benefits beyond generating more overall investment. Studies show broad economic gains across the board when a state’s CNI is reduced – including higher GDP, higher wages, greater home values, and increased job creation by businesses of all sizes.

And once the phasedown is complete in 2031 and Pennsylvania reaches a 4.99 percent CNI rate, a Tax Foundation analysis shows Pennsylvania will leap from 44th in corporate tax structure to 27th. In terms of overall competitiveness, Pennsylvania will have improved from 29th place to 17th, and will have gone from the second highest CNI rate in the nation to the eighth lowest, based on current rates.