January 04, 2011
Keystone Opportunity Zones - A Great Opportunity to Reduce Philadelphia Taxes
Business taxes in the City of Philadelphia are high. If your business is looking for some alternatives to operate in Philadelphia and take advantage of great tax breaks, you may want to consider moving or locating your business into a Keystone Opportunity Zone (KOZ, KOEZ, KOIZ).
Businesses are generally subject to two taxes if they operate in Philadelphia - a Business Privilege Tax (BPT) and a Net Profits Tax (NPT). All entities, including Subchapter S and C Corporations, Partnerships, LLCs and Sole Proprietors are subject to the BPT. The NPT is imposed on non-corporate entities.
The BPT is comprised of two portions – the Net Income portion and the Gross Receipts portion. The Net Income portion is typically calculated by starting with Federal Net Income and then adjusting for certain nondeductible expenses. If your business apportions its income, the City of Philadelphia recognizes four-factor apportionment, where sales are double-weighted. A three-year net operating loss carryforward is available. A Net Income tax rate of 6.45% is imposed on the apportioned Net Income.
The Gross Receipts portion of the tax includes all receipts earned (less sales derived outside of Philadelphia for those businesses who apportion their income). A rate of .1415% is imposed on the Philadelphia receipts.
The NPT is a tax imposed on the apportioned net profit of the entity. The rate depends on whether the individual owner is a Philadelphia resident or a non-resident. Partnerships may be subject to both rates, depending on their partners. Rates of 3.9280% and 3.4985% are imposed on Residents and Non-Residents, respectively. A credit equal to sixty percent of the amount of Net Profits tax portion of the BPT is allowed against an entity’s NPT liability.
In order to qualify for a Zone Business Privilege Tax and a Zone Net Profits Tax credit, a business must own or lease real property in one of the KOZ’s from which it actively conducts a trade, business or profession. The qualified business must receive initial certification from the Pennsylvania Department of Community and Economic Development (“DCED”) that the business is located, and is actively engaged in a trade, business or profession within the Zone. The qualified business must obtain annual renewal of certification from DCED to continue to qualify for the tax credits. The KOZ provisions contain separate tests which must be met for new businesses locating in to a KOZ versus a currently operating PA business desiring to relocate to the KOZ. Existing PA businesses desiring to relocate to a KOZ must meet one of three possible tests which includes (1) a planned increase of 20% or more of employees; (2) a capital investment equal to 10% of the business’ prior year gross receipts; (3) enters into a lease agreement with certain minimum required rental payments in the KOZ. A copy of the DCED certification must accompany the filing of the Business Privilege Tax and the Net Profits Tax returns in order for the business to obtain and maintain the tax credit.
A significant change in calculating the KOZ credit began in 2010, where the sales factor was dropped from the KOZ apportionment factors. Therefore, if your business is based in Philadelphia where one hundred percent of the business Property and Payroll is apportioned to a Philadelphia KOZ, a one hundred percent KOZ credit would be available on both the BPT and the NPT.
Additionally, operating within a designated KOZ allows exemptions from the sales or use tax incurred on purchases of goods used within the KOZ as well as reductions in the Pennsylvania Capital Stock and/or Income taxes.
The number of locations qualifying for KOZ status in Philadelphia has increased over the years. If you would like to discuss Philadelphia taxes and the process to qualify for KOZ benefits, please contact your Marcum Salt professional.