1031 NEWS UPDATE – TRY, TRY AGAIN – THE PA LEGISLATURE
REINTRODUCES SMALL BUSINESS TAX REFORM PACKAGE,
WHICH SEEKS TO RECOGNIZE IRC §1031
by James T. Walther, Esq. LL.M.
March 14, 2019
**UPDATE: In July 2022, the Pennsylvania Legislature enacted HB 1342, a budget bill that included sweeping tax reform legislation. A provision of the Bill conforms the state’s treatment of like-like exchanges with Section 1031 of the Federal Internal Revenue Code. Previously, state personal income tax did not conform to IRC Section 1031. We believe that the 1031 provision is effective for tax years beginning after December 31, 2022. Taxpayers are encouraged to discuss with advisors the effect of this legislation on transactions.
Updated Article: Pennsylvania Conforms its State Tax Code to Federal §1031
This article has been superseded but left on our page for informational purposes.
This is an update to a previous article “Pennsylvania Still Doesn’t Recognize 1031 Exchanges”, about Pennsylvania’s latest failed attempt to recognize IRC Section 1031 tax deferred exchanges at the state level, which would make PA law consistent with federal tax law and on par with every other state. Going back at least five years, Pennsylvania legislators have been unsuccessful in their efforts to get with the times.
On February 4, 2019, the Pennsylvania Senate embarked on its latest effort when it reintroduced a Small Business Tax Reform Package that includes legislation to recognize 1031 exchanges. The legislation was referred to the PA Senate Finance Committee, which must hold hearings on any legislation, that if enacted, is expected to generate a significant reduction tax revenue.
Here is a brief summary of the latest proposed Small Business Tax Reform Package – PA Senate Bills 201, 202, and 203 (2019):
• Senate Bill 201 “like kind exchanges”– is intended to conform PA state law to federal law by allowing recognition of IRC §1031 tax deferred “like-kind” exchanges and in addition IRC §1035 tax-free insurance policy exchanges. This Bill applies to tax years beginning after December 31, 2019. See my prior article for an explanation of the current status of 1031 Exchanges in PA.
• Senate Bill 202 “Net Operating Loss”– provides for the recognition of net operating loss (“NOL”) carryovers in accordance with IRC Section 195(b) and Treasury Regulations. This Bill applies to tax years beginning after December 31, 2018. PA currently recognizes federal NOL carryovers, with some limitations – a general limit of 40% of taxable income for tax years after 2019 (35% in 2018 and 30% in prior years). In addition, in tax years prior to 2017, a $3 or $5 million flat cap had applied to corporate taxpayers. The cap was held unconstitutional on uniformity grounds by the PA Supreme Court in 2017. (See Nextel Communications of the Mid-Atlantic, Inc. v. Comm. Dept. of Revenue, October 18, 2017). In response, the law was promptly amended to remove the cap and raise the general limits.
• Senate Bill 203 “179 expense deduction”– provides for the recognition of the IRC §179 election to deduct business property as an expense. This change “allows for a tax deduction earlier in the useful life of depreciable assets.” The Bill increases state limits on the expense deduction $100,000 (currently $25,000). The law would also increase the phase out of the deduction to be consistent with the federal limit of $2,000,000. The version of §179 that was in effect at the time the property was placed in service, or the Internal Revenue Code of 1986, whichever is immediately earlier, controls the tax treatment for that specific property. This Bill applies to tax years beginning after December 31, 2019.
The proposed legislation is intended to make PA laws friendlier towards small businesses. If Pennsylvania finally recognizes 1031 exchanges, it would be a major victory for taxpayers and the commercial real estate industry because it could stimulate investment in PA real estate from outside investors, as well as incentivize continued investment by current property owners. While this legislation is pending, taxpayers should keep in mind that in the past, there have been multiple attempts at similar legislation. Therefore, real estate owners considering the sale of investment or business real estate should carefully analyze their situation and should not delay because of pending legislation. Taxpayers considering a 1031 exchange should always consult with their tax and legal advisors regarding the merits of an exchange and its tax and business planning implications.
Legal 1031 does not provide tax or legal advice, nor can we make any representations or warranties regarding the tax consequences of any transaction. Taxpayers must consult their tax and/or legal advisors for this information. Unless otherwise expressly indicated, any perceived federal tax advice contained in this article/communication, including attachments and enclosures, is not intended or written to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.
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