Research and Experimentation Expenditures (R&E)
Act 45 requires corporate taxpayers to add back into Pennsylvania taxable income deductions taken federally for both foreign and domestic R&E. Taxpayers are then allowed to deduct those research and experimental expenditures from Pennsylvania taxable income at the rate of 20% per taxable year until the full amount of the original expense has eventually been deducted. Note, the additional deduction in determining Pennsylvania taxable income can never exceed the amount of federal R&E that has been added back into Pennsylvania taxable income.
This provision applies to taxable years beginning after December 31, 2024. 2025 tax forms will be updated for this adjustment.
“Small” Businesses
The federal bill permits “small” businesses (generally those with averages of $31 million or less in annual gross receipts – per IRC Section 448(c)) to apply the immediate deduction of domestic R&E for tax years 2022 to 2024.
Act 45’s changes to the Pennsylvania treatment of R&E amounts is applicable to tax years beginning 2025 and after. If a “small” business files an amended return at the federal level, it is also required to file a RCT-128C (Report of Change) within six months of filing the amended federal income tax return. Assuming no other issues, the department will process those returns.
“Other” Businesses
The federal bill permits all other businesses to elect to deduct remaining domestic R&E for tax years 2022 to 2024 in 2025 or split between 2025 and 2026.
Act 45 does not permit these deductions and instead requires that the remaining domestic and foreign R&E amounts from 2022 to 2024, that had not previously been amortized for federal purposes, be amortized for Pennsylvania purposes at the rate of 20% per taxable year over a five-year period starting in 2025. 2025 tax forms will be updated for this adjustment.
Depreciation of Qualified Production Property (QPP)
Section 168(n) is a new provision in federal H.R. 1 allowing for the immediate deduction of the full cost of qualified production property (QPP).
Act 45 requires corporate taxpayers to add back into Pennsylvania taxable income deductions taken federally for expenditures on QPP under IRC § 168(n). Taxpayers are then allowed to take Pennsylvania depreciation deductions for that property using the normal depreciation rules found in Sections 167 and 168 of the Internal Revenue Code, with the exception of Section 168(n).
This provision applies immediately.
2025 tax forms will be updated to account for QPP. Because the provision is effective immediately, certain fiscal year 2024 filers may need to account for QPP when filing their 2024 forms. Taxpayers should use the existing line 2e and line 3d of the 2024 RCT-101 Section C to report the required addition and deduction to account for QPP. The associated schedules OA and OD should also be completed with the appropriate information to identify the adjustments to income as resulting from federal 168(n) deductions.
Interest Expenses
Act 45 provides that taxable income as defined in Section 401(3) of the Tax Reform Code of 1971 must be calculated as if Section 163(j) of the Internal Revenue Code applied as it was in effect on December 31, 2024.
No adjustments will be made to the RCT 101 for this adjustment. Instead, taxpayers should file the pro-forma 1120 with the adjustment reflected on that form.