Pennsylvania 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.

Bill Text

PRIOR PRINTER'S NO. 343 PRINTER'S NO. 508
THE GENERAL ASSEMBLY OF PENNSYLVANIA
SENATE BILL
No. 396
Session of
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; providing procedures for the payment,
collection, administration and enforcement thereof; providing
for tax credits in certain cases; conferring powers and
imposing duties upon the Department of Revenue, certain
employers, fiduciaries, individuals, persons, corporations
and other entities; prescribing crimes, offenses and
penalties," 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.
The General Assembly of the Commonwealth of Pennsylvania
hereby enacts as follows:
Section 1. Section 301(w) of the act of March 4, 1971
(P.L.6, No.2), known as the Tax Reform Code of 1971, is amended
to read:
Section 301. Definitions.--Any reference in this article to
the Internal Revenue Code of 1986 shall mean the Internal
Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. § 1 et seq.),
as amended to January 1, 1997, unless the reference contains the
phrase "as amended" and refers to no other date, in which case
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the reference shall be to the Internal Revenue Code of 1986 as
it exists as of the time of application of this article. The
following words, terms and phrases when used in this article
shall have the meaning ascribed to them in this section except
where the context clearly indicates a different meaning:
* * *
(w) "Taxpayer" means any individual, estate or trust subject
to the tax imposed by this article, any partnership having a
partner who is a taxpayer under this act, any Pennsylvania S
corporation having a shareholder who is a taxpayer under this
act [and], any person required to withhold tax under this
article and, unless otherwise provided, a pass-through entity
that elects to pay the tax imposed under section 302.3.
Section 2. The act is amended by adding a section to read:
Section 302.3. Elective Tax Imposed at Pass-Through Entity
Level.--(a) Notwithstanding any other provision of this
article, a pass-through entity may elect, on an annual basis, to
have the tax imposed under this article applied to the income of
the pass-through entity. The following shall apply:
(1) An electing partnership shall be subject to and shall
pay a tax imposed at the rate provided in section 302(b) on:
(i) Each resident taxable owner's share of each class of
income and gain enumerated in section 303 for the taxable year.
(ii) Each nonresident taxable owner's share of each class of
income and gain enumerated in section 303 from sources within
this Commonwealth for the taxable year.
(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
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section 303 from sources within this Commonwealth for the
taxable year.
(3) An electing Pennsylvania S corporation whose
shareholders are comprised of either nonresident shareholders,
or resident and nonresident shareholders shall be subject to and
shall pay a tax imposed at the rate provided in section 302(b)
on each taxable owner's share of each class of income and gain
enumerated in section 303 from sources within this Commonwealth
for the taxable year.
(4) An entity that is disregarded for tax purposes under
this article shall be disregarded for the purposes of this
section.
(5) In determining its tax under this section, a pass-
through entity that owns a direct or indirect ownership interest
in one or more pass-through entities shall include its share of
each class of income enumerated in section 303 received from
those pass-through entities. The pass-through entity that
generates an item of income, gain or loss shall determine its
classification and whether that item of income, gain or loss
constitutes income or loss from sources within this
Commonwealth.
(6) Guaranteed payments made to a partner in a partnership
shall be treated as additional income allocated to the partner.
With respect to a nonresident taxable owner, only guaranteed
payments that constitute income from sources within this
Commonwealth shall be subject to the tax under this section.
(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 estimat