The Pennsylvania Department of Revenue recently issued guidance, including examples, addressing the computation of the IRC section 163(j) limitation for corporate net income tax (CNIT) purposes. In the guidance, the Department provides that it will not expect any Pennsylvania corporate taxpayer that files its federal return on a consolidated basis to limit its separate company interest expense deduction for Pennsylvania purposes in a given tax period unless the federal consolidated group of which it is a part reports an IRC section 163(j) limit for the same tax period. If the federal consolidated group reports an interest limitation under section 163(j), then each member with a Pennsylvania CNIT filing obligation will need to determine if it has a limitation by performing its own set of calculations on a separate company basis. This calculation will also include determining whether the separate entity has sufficient gross receipts on a stand-alone basis to be subject to the section 163(j) limitation process ($25,000,000). The Bulletin confirms that to compute the separate entity limitation, taxpayers must utilize the federal interest expense deduction rules and may not make adjustments to account for Pennsylvania CNIT specific items.
The Bulletin also addresses the situation in which a taxpayer has a limitation that includes interest expense or costs subject to the state’s related party interest addback rules. In this situation, the Department will expect taxpayers to allocate the federal limitation on a pro-rata basis between interest subject addback and not subject to addback, under steps outlined in the Bulletin. Finally, the Bulletin provides guidance on the treatment of interest expense amounts for partnerships with corporate partners and the allocation that must be made when a taxpayer has a section 163(j) limitation and reports nonbusiness income. Please contact Howard Sklaroff at (267) 256-2891 with questions on Corporation Tax Bulletin 2019-03.