Effective as of January 1st, Pennsylvania’s Capital Stock Tax and the Franchise Tax expired. These taxes were slowly being phased out for the past fifteen years, but, until now, they were extended to help fill budgetary gaps in Harrisburg.
The much-reviled Capital Stock Tax actually predates the Civil War and helped bolster the perception that Pennsylvania is not a business-friendly state. The Capital Stock Tax was assessed on corporations, limited liability companies (including limited liability companies taxed as partnerships for federal tax purposes), joint-stock associations and business trusts. The tax was calculated utilizing a mandated formula based on the entity’s balance sheet net equity and its earnings history. The formula often produced a tax liability for the entity even in loss years.
Last year, the Capital Stock Tax brought in over $250,000,000 in revenue for Pennsylvania; therefore, it is important to note that there is a risk that the tax will be reinstated in some capacity, especially in light of Harrisburg’s protracted budget battle.
The expiration of the Capital Stock Tax is important because it now means that the limited partnership may no longer be the entity of choice for real estate projects in Pennsylvania. Instead, the limited liability company would be the preferred entity as it insulates investors from liability, does not require a formal management structure, provides the benefits of pass-through taxation and, unlike the limited partnership, it does not require the creation of two separate entities: the actual limited partnership and its corporate general partner. Utilizing a limited liability company instead of a limited partnership for future real estate projects will help lessen an investor’s administrative burden over the life span of a real estate project.
For more information about this announcement and other corporate law matters, contact Kevin Israel, or any other Meyer, Unkovic & Scott attorney with whom you have worked.