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REV-588 (TS) 08-23 STARTING BUSINESSa in PENNSYLVANIA GUIDE PENNSYLVANIA A TAXESto
Enlarge image | REV-588 (TS) 08-23 STARTING BUSINESSa in PENNSYLVANIA GUIDE PENNSYLVANIA A TAXESto |
 Enlarge image | Dear Taxpayer, Welcome to Pennsylvania’s business community. We want to thank you for bringing growth and innovation to our local economy. Whether you are starting a brand new business or you are a new business owner purchasing an existing business, you will need to know some basic information about Pennsylvania state tax laws and regulations. The Department of Revenue has created this guide to help business owners understand their filing obligations. The guide outlines the procedures to follow and the forms to file with the Pennsylvania Department of Revenue. Your responsibilities as a new business owner will vary depending on the type of organization or entity you operate. Certain types of businesses will need to immediately register for some business taxes in Pennsylvania while others may only need to report Pennsylvania income. Please review the information in this booklet to help determine which taxes apply to your business. This guide is not intended as a substitute for services of tax and legal professionals nor is it intended to replace the Pennsylvania Business One-Stop Shop, located at www.business.pa.gov. This helpful resource connects entrepreneurs with important information on registering, operating, and growing a business. The website’s digital library includes a link to the Entrepreneur’s Guide: Starting and Growing a Business in Pennsylvania, which provides detailed information, instructions ,and personalized business checklists for entrepreneurs to help build a successful business. For more information, visit our website at www.revenue.pa.gov or call our Customer Experience Center at 717-787-1064. The department wishes you success in your future endeavors. Sincerely, Department of Revenue |
 Enlarge image | revenue.pa.govTABLE OF CONTENTS IMPORTANT: This guide is published by the Pennsylvania Department of Revenue to provide information to business owners on how to register their business. It also provides an understanding of various tax obligations, as well as common mistakes to avoid. The guide is for informational purposes only and is not intended to constitute legal advice. This guide will cover three general areas that apply to many businesses: Business Taxes in Pennsylvania 1 Registering for Business Taxes ................................... 1 Withholding Tax ............................................... 3 Sales Tax ...................................................... 5 Sales Tax License ............................................... 6 Business Use Tax ............................................... 7 Exemption Certificate ........................................... 9 Reporting Pennsylvania Income 2 Business Structure .............................................. 11 • Sole Proprietorship ......................................... 11 • Partnership ................................................ 11 • Limited Liability Company ................................... 12 • Corporation ............................................... 13 Expenses and Deductions ....................................... 15 • Business Start-up Costs ..................................... 15 • Depreciation ............................................... 16 • Cost of Goods Sold ......................................... 17 • Vehicle Expenses ........................................... 17 • Business Use of Your Home .................................. 20 Strategies for Success 3 Take Advantage of Electronic Services ............................ 23 Keep Good Records ............................................ 23 Open Accounts for Taxes ........................................ 25 Update Your Address Regularly .................................. 25 Obtain a Bulk Sales Clearance .................................... 26 Know Who to Contact .......................................... 26 To receive email notifications containing links to newly posted tax information, including publications, important notices, and tax bulletins issued by the department, visit www.revenue.pa.gov and click on the “PA Tax Update Newsletter” link to register to receive this information. |
 Enlarge image | BEFORE REGISTERING YOUR BUSINESS WITH THE DEPARTMENT OF REVENUE: 1. Confirm requirements with your financial institution and insurance company. 2. Check for special registrations, if applicable. 3. Confirm your professional licensure is current.* *Only applicable to Professional LLCs or Professional Corporations. All other business structures, skip to the next step. 4. Check with the local municipality concerning taxes, zoning requirements, local licenses and permits, and any other regulations.* *It is important to complete this step before proceeding with your business registration. 5. Register your business structure.* *Make sure you have verified the business name you wish to use is available. 6. Register your Fictitious Name.* *Only required if operating under a name that is not the Legal Name of the business or sole proprietor. 7. Apply for a Federal Employer Identification Number (FEIN). For a more personalized checklist, visit business.pa.gov/register. |
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SECTION 1
BUSINESS
TAXES
in PENNSYLVANIA
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BUSINESS TAXES IN PENNSYLVANIA
Registering for PA Tax Accounts
Depending on your specific activities, your business may be required to report items such as sales
and use tax or withholding tax. To register your business for state tax and withholding accounts in
Pennsylvania, you will complete the Pennsylvania Online Business Tax Registration form available at
myPATH.pa.gov.
is already registered to use myPATH, login to myPATH and use
the Register New Business Tax Accounts feature. This includes
IMPORTANT: You cannot use the Online individuals registered for myPATH for personal income tax
Business Tax Registration to: purposes looking to register a business as a sole proprietorship
• Register your name with the Department for business taxes.
of State, Bureau of Corporations and New customers are able to register for various taxes and services
Charitable Organizations without logging in to myPATH. Existing customers will need to
• Apply for Sales Tax Exempt Status log into myPATH to register for additional taxes or services. Taxes
(REV-72) and services include:
• Alternative Fuels Tax
• Business Use Tax
This registration is also used by new entities that are acquiring all
or part of an existing entity that has been assigned a new FEIN by • Corporation Taxes
the Internal Revenue Service. If the business entity or individual • Fuel Transporter Permits
1 Starting a Business in Pennsylvania
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 Enlarge image | revenue.pa.gov • Motor Carrier Road Tax (MCRT) • The Federal Employer Identification number (FEIN) issued • Motor Fuels Tax by the Internal Revenue Service, if applicable. Additional • International Fuel Tax Agreement (IFTA) information on obtaining an FEIN can be found at IRS.gov • Promoter License • Department of State entity number, if applicable • Public Transportation Assistance Taxes and Fees • The business addresses and contact information • Sales, Use, and Hotel Occupancy Tax • Banking information for Tobacco Products License fees, if applicable • Tobacco Products License • The name(s), home address(es), and Social Security Number • Transient Vendor Certificate or Individual Taxpayer Identification Number of the owners/ • Unemployment Compensation officers/other responsible parties. • Vehicle Rental Tax If you’ve received a Registration Required letter from the • Withholding Taxes: department, make sure to have the Letter ID readily available. ڤ Employer Withholding, New registrants can complete the PA Online Business Registration ڤ Other Income Withholding (1099 MISC and NEC), or directly from the myPATH homepage. ڤ Retirement Withholding (1099R) Registered enterprises should create a myPATH profile and log in • Workers’ Compensation Coverage to select the Register New Business Tax Accounts hyperlink from • Wholesaler Certificate their logged in profile. You will receive your account number(s) via e-mail. How to Avoid Delays in Processing NOTE: Registering corporations must also contact the PA Department of State to secure a corporate name clearance and • Review the registration form and accompanying sections to register for corporation tax purposes. You be sure that every item is complete. must provide a FEIN to the Department of State during registration in order to be registered to file and pay corporate taxes. NOTE: It is your responsibility to notify the Associations and individuals desiring to do department in writing within 30 days of any business in Pennsylvania may have to apply change to the information provided on the to the Secretary of the Commonwealth for registration form. authority to conduct business, incorporate, organize, or file an assumed or fictitious name through the Bureau of Corporations and Charitable Organizations of the How to Check the Status Department of State. For more information, visit the Department of State at dos.pa.gov. To check the status of your registration, you will need your Confirmation Code and email address. Visit myPATH.pa.gov and select What’s the Status of my Registration from the Registration panel on the myPATH homepage. Tips to Complete the PA Online Business Tax Registration Before you begin the registration process, you will need the following: • The legal name of the business • The name by which the business is doing business as (commonly known as, trading as, also known as), if applicable myPATH.pa.gov 2 |
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BUSINESS TAXES IN PENNSYLVANIA
Withholding Tax
• Semi-Monthly - If total withholding is $1,000 to $4,999.99
Employee Compensation
per quarter, the taxes are due within 3 banking days of the
close of the semi-monthly period.
If you employ one or more persons, your business needs to
register for an Employer Withholding Account. Pennsylvania law • Monthly – If total withholding is $300 to $999 per quarter,
requires employers to withhold and remit PA personal income the taxes are due the 15th day of the following month.
tax from employees’ compensation in two common cases: • Quarterly – If total withholding is under $300 per quarter,
• When resident employees perform services within or the taxes are due the last day of April, July, October, and
outside PA; and January.
• When nonresident employees (other than residents of Filing a Quarterly Withholding Return (W-3)
Indiana, Maryland, New Jersey, Ohio, Virginia, and West The Employer Withholding Return (W-3) is required to be
Virginia, and from whose wages you withhold at the electronically filed every quarter even when no wages were paid
reciprocal state’s tax rate) perform services within PA. during that period. Each W-3 should reconcile the total amount
of withholding remitted within each quarter.
An employer is any individual, partnership, association,
corporation, government body or other entity that employs one Filing an Annual Withholding Reconciliation Statement (REV-1667)
or more persons and is required under the Internal Revenue Code Employers are also required to electronically file annual
to withhold federal income tax from wages paid to an employee. reconciliation returns (REV-1667) by January 31 along with the
W-2 forms for each employee. The REV-1667 should reconcile
the total amount of withholding remitted for the entire tax year
according to the W-3s filed.
Please review the Employer Withholding
Information Guide (REV-415) for more Non-Employee Compensation
information on withholding PA personal
income tax. If you make payments to a nonresident who is not your employee
NOTE: Employers are also required to register for services in the course of your trade or business, you may be
for unemployment compensation insurance required to withhold PA personal income tax.
tax, imposed on employers and employees
to help support employees for loss of wages
should they become unemployed through
NOTE: Withholding is optional for payments
no fault of their own. The rate is based on
less than $5,000 annually. However, if you
the employment history of the company.
are unsure of the total amount of payments
This tax is administered through the PA
that will be made during the year, the
Department of Labor & Industry.
department encourages you to withhold and
remit income tax from all payments made.
Filing & Payment Requirements
Governmental payors, including the Pennsylvania State System
Employers should withhold taxes from each paycheck and of Higher Education and its institutions, are exempt from the
remit to the department according to the Withholding Payment requirement of withholding on non-employee compensation
Schedule as follows: and business income.
• Semi-Weekly – If total withholding is $5,000 or greater For more information on non-employee compensation, please
per quarter ($20,000 per year), the taxes are due on the visit our website at www.revenue.pa.gov.
Wednesday following the pay dates for employers whose
paydays fall on a Wednesday, Thursday, or Friday; and on the
Friday following the pay dates for employers whose paydays
fall on Saturday, Sunday, Monday, or Tuesday.
3 Starting a Business in Pennsylvania
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How to File
Employers can file and pay business taxes online using myPATH.
myPATH is an online portal that offers a suite of features and
services, which allows taxpayers to fulfill their tax filing obligations. NOTE: Tax payments of $1,000 or more
Sign up for a username and password for the following: must be remitted electronically through
• View, file, and pay taxes electronic funds transfer or by credit/debit
card, or they may be paid with certified or
• Add new accounts to an existing business
cashier’s checks.
• Update names and addresses
• Maintain officers/responsible parties
• View correspondence
• Request statements of account
1 2
Starting at revenue.pa.gov, click the You are now ready to enter myPATH
icon labeled “myPATH” to either sign-in or create an account
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BUSINESS TAXES IN PENNSYLVANIA
Sales Tax
If your business sells taxable items or performs taxable services, • Monthly returns – Licensees whose actual tax liability is less
you are required to obtain a sales tax license. Taxable items are than $25,000, but greater than $600 per quarter, must file
subject to a 6% sales tax. Additionally, retailers in Allegheny monthly. Monthly returns are due the 20th day of the month
County are required to collect an additional 1% local sales tax that follows the month in which the tax was collected.
and retailers in Philadelphia are required to collect an additional • Quarterly returns – Licensees whose total tax liability is less
2% local sales tax. All three sales taxes are reported on the same than $600 in the third calendar quarter, but greater than
tax return and under the same sales tax Account ID. $300 annually, must file quarterly.
The report for January, February, and March is due by April
To determine if your business is required 20; the report for April, May, and June, is due by July 20; the
to collect and remit sales tax, review the report for July, August, and September is due by Oct. 20; and
Retailer’s Information Guide (REV-717) or visit the report for October, November, and December is due by
our website at www.revenue.pa.gov for more Jan. 20.
information on sales tax. • Semi-annual returns – Licensees whose total tax liability is
$300 or less annually must file semi- annually. The report for
January through June is due on Aug. 20, and the report for
July through December is due Feb. 20 of the following year.
Filing & Payment Requirements
Sales tax must be collected at the time of sale, unless the sale
NOTE: Tax payments of $1,000 or more
is on credit. Taxes due on credit sales must be remitted within
must be remitted electronically through
30 days of the date of sale. A seller is liable for reporting and
electronic funds transfer or by credit/debit
remitting taxes and fees with the tax return covering the period
card, or they may be paid with certified or
in which either a taxable sale was made or the tax, or fee, should
cashier’s checks.
have been collected.
The filing frequency may vary. When you are a new sales tax filer,
you are set up as a quarterly filer, meaning that your returns are
due in April, July, October, and January. But your filing frequency
NOTE: It is important to know your filing
can change. Every year the department reviews each business
and payment frequency. The Department of
that files returns to determine whether or not the filing frequency
Revenue offers a vendor discount for timely
should be changed. If such a change is made by the department,
filed returns and payments. This discount is
the business is notified in writing.
limited to a flat rate or 1% of tax collected,
Payments and reports are required from sales tax licensees as whichever is lesser.
follows:
• Monthly Filers: $25 or 1% of tax
• Monthly returns with pre-payment obligations –
• Quarterly Filers: $75 or 1% of tax
Businesses that have an actual sales/use tax liability for
the third calendar quarter of the previous year totaling at • Semi-Annual Filers: $150 or 1% of tax
least $25,000 but less than $100,000 have two prepayment
calculation options. They can either remit payment equal to
50% of the actual tax liability from the same month of the How to File
previous year or at least 50% of the actual tax liability for the
current period. The department offers two electronic filing options: myPATH and
Businesses remitting more than $100,000 for the third third party vendors.
calendar quarter of the previous year must remit 50% of the The department also has third party vendors who will provide
actual tax liability due from the same month of the previous e-filing software for those taxpayers who do not wish to
year. Prepayments are due by the 20th of the current month use the department’s e-filing options. A list of approved
and returns for the period are due on or by the 20th of the software vendors is available on the department’s website at
following month. www.revenue.pa.gov.
5 Starting a Business in Pennsylvania
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 Enlarge image | revenue.pa.gov Sales Tax License Displaying Sales Tax Licenses All businesses selling products and services subject to sales tax are required to prominently display the license at the business. Sales tax licenses are issued free of charge and are renewable every five years. The Department of Revenue is authorized to issue citations to anyone who operates a business without a valid and current sales tax license. Convictions could result in fines of $300 to $1,500 per offense and/or imprisonment. A sales tax license may be suspended or revoked for failing to file tax reports or make payments. EXAMPLE SALES TAX LICENSE 6 |
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BUSINESS TAXES IN PENNSYLVANIA
Business Use Tax
If your business purchases items subject to sales tax for which Is There a Credit for Tax Paid on an Item
the seller does not charge and collect sales tax on the invoice or in Another State?
receipt, your business is responsible for remitting the tax to the
Department of Revenue. This is called use tax. Yes. Pennsylvania grants a credit for sales tax paid to another state,
Use tax exposure occurs most often when a business buys taxable provided the tax is legally due and paid, and that state offers
goods online, over the phone, or by mail, and the vendor does reciprocal credit to PA. For example, if a PA business purchases
not charge Pennsylvania sales tax. This is also true for purchases and takes delivery of a taxable item in another state and pays a
a business makes while out of state where no sales tax is charged. 5% sales tax there, the purchaser is responsible for reporting and
The items become taxable upon delivery into Pennsylvania. remitting the 1% difference (use tax) due to PA upon the use of
the property in PA. Credit against use tax is not granted for value-
Many businesses believe they save money by making “tax-
added taxes or sales taxes paid to foreign countries. Also, taxes
free” purchases from out-of-state vendors, unaware that these
paid to the federal government, such as customs duties, cannot
transactions are often assessed upon audit by the department.
be claimed as a credit against use tax.
Since assessments include interest and penalty on top of tax,
businesses actually increase operational costs by not voluntarily
How do I Pay Use Tax?
addressing use tax obligations. The department’s audit
experience shows that most businesses owe use tax but many
Any business that incurs Business Use tax liabilities on a regular
do not pay use tax.
basis is encouraged to register for a sales/use tax account number
The use tax rate is the same as the sales tax rate: 6% state tax, by completing the PA Online Business Tax Registration.
plus an additional 1% local tax for items purchased in delivered
If you are already registered for sales tax, then you can file any
to or used in Allegheny County and 2% local tax for Philadelphia.
use tax due with your sales tax return. If the sales tax return is
filed timely, then the use tax is considered timely no matter the
filing frequency of your business.
Why is Use Tax Important?
If you are not required to be registered for sales tax and you
Uniform collection and enforcement of use tax
have a use tax liability that needs to be paid, you may still file the
provides fairness. Pennsylvania businesses - those
who employ our residents, pay state and local taxes use tax return and pay electronically by selecting “File a Use Tax
and support our communities - are put at a 6% Return” on the Returns panel. This return is due along with the
disadvantage against out of state businesses when payment of tax on or before the 20th day of the month after the
sales or use tax is not paid on taxable items and month in which the purchase was made.
services.
As online shopping becomes more popular among What if Use Tax is not Paid?
Pennsylvania businesses, use tax compliance helps
to level the playing field among e-commerce The department identifies businesses that owe use tax
retailers and Pennsylvania’s brick and mortar stores. through routine audits, self-assessment programs, complaints,
Use tax is an important source of revenue for the investigations, and lists of out-of-state purchases from vendors
Pennsylvania General Fund. Every dollar collected and other states. The department can also identify businesses
is a dollar available for government and public that report minimal amounts of use tax. Underreporting of use
services. tax can trigger an audit by the department. The Department
From an enforcement standpoint, when the of Revenue may issue an assessment for a use tax liability, on
Department of Revenue receives information on which both penalty and interest charges may be imposed. These
purchases where use tax is owed but was not paid,
additional charges can exceed 30% of the tax amount.
it will assess the purchaser for not only the tax but
also penalty and interest for late payment.
7 Starting a Business in Pennsylvania
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Pennsylvania Exemption Certificate
charity obtain a sales tax exemption number (75 or 76
Purchaser Information
number) by completing the REV-72, Sales Tax Exemption
Application.
Some businesses may purchase an item with the intent to use
it in a manner that has been deemed exempt from one of the • The purchaser is a direct pay permit holder, individual holding
following taxes: a diplomatic identification card, or tourist promotion agency.
These entities do not receive account numbers. Direct pay
• State and Local Sales/ Use Tax
permit holders can obtain their numbers from the Revenue
• State 6% and Local 1% Hotel Occupancy Tax website. Individuals with a diplomatic ID card can furnish
• Public Transportation Assistance Taxes (PTA) and Fees their card as proof of eligibility for the exemption. Tourist
• Vehicle Rental Tax (VRT) promotion agencies must contact the department to receive
• Additional Local, City, County Hotel Tax a letter stating they are exempt. They will provide this letter
to the seller when purchasing promotional materials for
Depending on how you use the item or the type of business you
distribution to the public.
conduct, you may not have to pay these taxes when making a
purchase. • The property or service will be used directly and
predominately by purchaser performing a public utility
In order to claim a tax exemption, you must complete the REV- service.
1220, Pennsylvania Exemption Certificate and give the completed
• The purchaser is located in Keystone Opportunity Zone or
form to the seller. A properly completed exemption certificate
Expanded Zone (KOZ/KOEZ) and has been approved under
that provides a valid reason for exemption and is accepted in
the KOZ regulations. These entities should include their KOZ
good faith will relieve the seller from the duty to collect tax.
number which begins with 72, on Line 2.
The seller has the right to deny the certificate at any time. In
these situations, the purchaser would need to pay the sales tax
and petition the Board of Appeals for a refund.
NOTE: Applications for a KOZ/KOEZ status
Exemption Reasons are made through the Department of
Community and Economic Development
(DCED).
Businesses can use the REV-1220 to claim an exemption on
certain property and services for the following reasons (See
REV-1220 for more details): • The purchaser is providing goods and services under a
• The property or service is being directly and predominantly construction contract with an exempt entity: a charitable
used in manufacturing, mining, dairying, processing, farming, organization, government entity, or a firm in designated KOZ.
and/or shipbuilding.
• The purchaser is a government entity, instrumentality, or
political subdivision; municipal authority; cooperative NOTE: The REV-1220 cannot be used to
Agricultural Association; electric cooperative or credit union. claim an exemption on the registration of a
• The property or service will be resold or rented in the vehicle.
ordinary course of business. Business owners who buy an
To claim an exemption from tax for a motor
item with the intention of resale at a later time do not need
vehicle, trailer, semi-trailer, or tractor with
to pay sales tax. However, they will collect and remit the
the PA Department of Transportation,
sales tax from the ultimate consumer. In most cases, these
Bureau of Motor Vehicles and Licensing, use:
businesses should have already obtained a Sales Tax License
Number when they registered with the department. For • Form MV-1, Application for Certificate of
more information on wholesalers, please visit our website at Title for “first time” registrations.
www.revenue.pa.gov. • Form MV-4ST, Vehicle Sales and Use Tax
• The purchaser is a religious organization, volunteer fireman’s Return/Application for Registration for
organization, non-profit educational institution, charitable all other registrations.
organization, or school district. Institutions of purely public
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BUSINESS TAXES IN PENNSYLVANIA
As the seller, you must be in possession of the certificate within
Seller Information
60 days of the date of sale/lease. It is best practice to collect the
certificate at time of purchase.
If you are the seller and your customer provides you with a
Pennsylvania Exemption Certificate, you are responsible for Although the REV-1220 does not expire, the seller is only required
ensuring that the form is properly completed. An incomplete to retain an exemption certificate for four years from the date
certificate may subject the seller to the tax. You have the right of the exempt sale. However, the seller may periodically request
to deny the certificate at any time. In these situations, the another certificate.
purchaser would need to pay the sales tax and petition the Board
of Appeals for a refund.
Please review the exemption reasons listed under “Purchaser IMPORTANT: Certificates should not be
Information” and type of property or service to ensure it is returned to the Department of Revenue.
consistent with the type of business or organization that you are
selling to.
REV-1220 (TR) 07-23 PENNSYLVANIA EXEMPTION This form cannot be used to
CERTIFICATE obtain a Sales Tax License ID,
STATE AND LOCAL SALES AND USE TAX PTA License ID or Exempt
STATE 6% AND LOCAL 1% HOTEL OCCUPANCY TAX Status.
PUBLIC TRANSPORTATION ASSISTANCE TAXES AND FEES (PTA) (Please Print or Type)
VEHICLE RENTAL TAX (VRT) Read Instructions
REV-1220 ADDITIONAL LOCAL, CITY, COUNTY HOTEL TAX * On Reverse Carefully
THIS FORM MAY BE PHOTOCOPIED – VOID UNLESS COMPLETE INFORMATION IS SUPPLIED
PENNSYLVANIA CHECK ONE: PENNSYLVANIA TAX UNIT EXEMPTION CERTIFICATE (USE FOR ONE TRANSACTION)
PENNSYLVANIA TAX BLANKET EXEMPTION CERTIFICATE (USE FOR MULTIPLE TRANSACTIONS)
EXEMPTION Name of Seller, Vendor or Lessor
CERTIFICATE Street City State ZIP Code
NOTE:cle, trailer, semi-trailer or tractor with the PA Department of Transportation, Bureau of Motor Vehicles, use one of the following forms: Do not use this form for claiming an exemption on the registration of a vehicle. To claim an exemption from tax for a motor vehi-
FORM MV-1, Application for Certificate of Title (first-time registrations)
FORM MV-4ST, Vehicle Sales and Use Tax Return/Application for Registration (other registrations)
Property and services purchased or leased using this certificate are exempt from tax because: (Select the appropriate paragraph
from the back of this form, check the corresponding block below and insert information requested).
1. Property or services will be used directly and predominately by purchaser in performing purchaser's operation of:
2. Purchaser is a/an: holding Sales Tax Exemption Number
3. Property will be resold under License ID (If purchaser does not have a PA Sales Tax License ID, include a
statement under Number 8 explaining why a number is not required).
4. Property or services will be used directly and predominately by purchaser performing a public utility service.
PA Public Utility Commission PUC Number and/or U.S. Department of Transportation MC/MX
5. Exempt wrapping supplies, License ID (If purchaser does not have a PA Sales Tax License ID, include
a statement under Number 8 explaining why a number is not required).
6. Canned computer software purchased by a financial institution subject to the Bank and Trust Company Shares Tax (Article VII) or the Mutual Thrift
Institutions Tax (Article XV).
Businesses can use 7. Canned computer software licenses that are billed to a PA address but used outside of PA. The total number of software licenses purchased for
invoice # is . The total number of users accessing and using the software outside PA is .
the REV-1220 to 8. Other
(Explain in detail. Additional space on reverse side).
claim an exemption I am authorized to execute this certificate and claim this exemption. Misuse of this certificate by seller, lessor, buyer, lessee or their
representative is punishable by fine and imprisonment.
on certain property Name of Purchaser or Lessee Signature EIN Date
and services... Street City State ZIP Code
1. ACCEPTANCE AND VALIDITY:
For this certificate to be valid, the seller/lessor shall exercise good faith in accepting this certificate, which includes: (1) the certificate shall be completed
properly; (2) the certificate shall be in the seller/lessor's possession within 60 days from the date of sale/lease; (3) the certificate does not contain infor-
mation which is knowingly false; and (4) the property or service is consistent with the exemption to which the customer is entitled. For more information,
refer to Exemption Certificates, Title 61 PA Code §32.2. An invalid certificate may subject the seller/lessor to the tax.
2. REPRODUCTION OF FORM:
This form may be reproduced but shall contain the same information as appears on this form.
3. RETENTION:
The seller or lessor must retain this certificate for at least four years from the date of the exempt sale to which the certificate applies.
IMPORTANT: DO NOT RETURN THIS FORM TO THE PA DEPARTMENT OF REVENUE.
4. NONPROFIT EXEMPT ORGANIZATIONS:
This form may be used in conjunction with form REV-1715, Exempt Organization Declaration of Sales Tax Exemption, when a purchase of $200 or more
is made by an organization which is registered with the PA Department of Revenue as an exempt organization. These organizations are assigned an
exemption number, beginning with the two digits 75 (example: 75000000).
9 Starting a Business in Pennsylvania
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SECTION 2
REPORTING
PENNSYLVANIA
INCOME
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REPORTING PENNSYLVANIA INCOME
Business Structure
There are four principal kinds of business structures: sole partnership agreement should at least cover the contributions of
proprietorships, partnerships (general or limited), limited liability each partner, the distribution of profits or losses, and the terms
companies, and corporations (S corporation or C corporation). for dissolution. Without a written agreement, the profits and
Regardless of your business structure, every business has an losses are presumed to be distributed equally. The department
income tax filing requirement in one form or another. How you reserves the right to ask for a copy of this agreement at any time.
report this income and how it is taxed can be different depending
on the type of business structure you choose. General Partnership
A general partnership is formed by an
Sole Proprietorship
agreement entered into by each partner. This
agreement may be informal, but it is advisable
Many small businesses operate as sole proprietorships. This to have a written, legal agreement among all
allows the single owner to have sole control and responsibility. parties.
How to Report: Sole proprietors report income and expenses
using PA Schedule C (Profit or Loss from Business or Profession)
for each business. The sole proprietor then reports the profit or
loss on a PA-40, PA Income Tax Return and pays tax at the state
income tax rate of 3.07%. A taxpayer and spouse who jointly own
a sole proprietorship must separately report their portion of the Limited Partnership
income or loss for the business.
A limited partnership is a partnership having
one or more general partners and one or
If you expect to owe PA personal income tax, you may be more limited partners. The limited partners
required to make estimated tax payments during the year. have limited exposure to liability and are not
If your income is expected to be over $8,000 annually and involved in the day-to-day management of the
is not subject to withholding by a PA employer, you must limited partnership.
file and remit estimated payments by the 15th day of
April, June, September, and January.
Limited Liability Partnership
IMPORTANT: PIT Estimates/Payment over Limited liability partnerships (LLPs) are existing
$15k must be made electronic or will be general or limited partnerships that file elections
subject to an EFT penalty. with the with the PA Department of State, Bureau
Individuals can remit estimated, extension, of Corporations and Charitable Organizations,
and tax due payments through the claiming LLP status. Limited liability partnership
department’s myPATH portal. Visit status provides the general partners with
mypath.pa.gov and select Make a Payment limitations and additional protection on their
to pay via electronic funds transfer. personal liabilities as general partners.
Partnership How to Report: When preparing Pennsylvania tax documents, it
is best to start with the completed Federal Form 1065, U.S. Return
of Partnership Income, and then proceed to the PA schedules,
Partnerships are separate legal entities in which two or
forms, and returns. Partnerships must use PA personal income
more parties are typically involved. Regardless of the type of
tax rules for determining income.
partnership, it is important to have a partnership agreement. The
11 Starting a Business in Pennsylvania
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 Enlarge image | revenue.pa.gov Partnerships, general and limited, are required to file a PA-20S/PA- 65, PA S Corporation/Partnership Information Return, to report Limited Liability Company the adjustments to the federal income, deductions, gains, losses, etc. from their operations for PA personal income tax purposes. Limited liability companies (LLCs) are popular because, similar The partnership then passes any profits or losses through to to corporations, owners have limited personal liabilities for the their partners. They report this income or loss to their partners debts and actions of the LLC. Other features of LLCs are more like by providing each PA resident partner with PA Schedule RK-1, a partnership, providing management flexibility and the benefit Resident Schedule of Shareholder/Partner/Beneficiary Pass- of pass-through taxation. Through Income, Loss and Credits, and each nonresident partner Owners of an LLC are called members. Since most states do with PA Schedule NRK-1, Nonresident Schedule of Shareholder/ not restrict ownership, members may include individuals, Partner/Beneficiary Pass-Through Income, Loss and Credits. corporations, other LLCs, and foreign entities. There is no “Non-individuals”, i.e., trusts, S corporations, partnerships, LLCs, maximum number of members. Most states also permit single- etc. should receive both a RK-1 and NRK-1. These schedules member LLCs and LLCs jointly owned by husband and wife. show the partners what their share of the income or loss is by PA class of income and any other items required to be reported. Copies of all PA Schedules RK-1 and NRK-1 should be included with the PA-20S/PA-65. Also of note: NOTE: A few types of businesses cannot be LLCs, such as banks, insurance companies, and nonprofit organizations. 1. A partner that is an individual, estate, or trust must include their share of income from a partnership on their personal income tax return or fiduciary income Single-Members/How to Report: The individual owner of a single tax return. member LLC that receives net profit income reports its income 2. A partner that is a partnership or an S corporation will and expenses using PA Schedule C (Profit or Loss from Business include its share of income from a partnership on its or Profession). The individual owner of a single-member LLC PA-20S/PA-65 return. that owns and operates a rental property reports its income and 3. A partner that is a C corporation will include its share expenses using PA Schedule E (Rents and Royalty Income (Loss). of income from a partnership on its corporation tax An entity owner of a single member LLC reports its income return. and expenses on the appropriate Pennsylvania tax return (PA-20s/PA-65 Information Return or RCT-101). Multi-Members/How to Report: Multi-member LLCs classified as partnerships or S corporations for federal income tax purposes NOTE: A partnership may file a PA-40 are required to file the PA-20S/PA-65, PA S Corporation/ NRC, Nonresident Consolidated Income Partnership Information Return, and provide each PA resident Tax Return, on behalf of its qualifying partner with a PA Schedule RK-1 and each nonresident partner electing nonresident individual owners. The with a PA Schedule NRK-1. “Non-individuals”, i.e., trusts, PA-40 NRC must be filed separately from all S corporations, partnerships, LLCs, etc. should receive both a other PA tax returns and must include more RK-1 and NRK-1. than one nonresident member electing to Multi-member LLCs that elect to be classified as C corporations be included on the PA-40 NRC. For more for federal income tax purposes are subject to corporate net information, please review the PA-40 NRC income tax reported on the Corporate Net Income Tax Report Instructions. (RCT-101). Partnerships that elect to be classified as corporations for federal income tax purposes are subject to corporate net income tax. For the current corporate net income tax rate, please visit www.revenue.pa.gov. This income is reported on the Corporate Net Income Tax Report (RCT-101). continued on next page 12 |
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REPORTING PENNSYLVANIA INCOME
Business Structure cont.
Corporation Pennsylvania S Corporation
Status Revocations
A corporation is the most complex form of business organization
primarily due to the paperwork required to establish a corporation. As stated above, the election to not be taxed
Business activities are restricted to those listed in the corporate as a PA S corporation may not be revoked for
charter. However, most corporations define business activities in five years from the date it went into effect. A
very broad terms within the charter. revocation received within this five year period
will be effective for the first tax period for
There are two types of corporations in Pennsylvania: S which the taxpayer is eligible to revoke the
corporations and C corporations. The letters S and C represent election.
subchapters in the Internal Revenue Code and relate to the
different types of taxation. S corporations must use PA personal To revoke the election, the corporation must
income tax rules for determining income. C corporations follow send a letter signed by the shareholders holding
federal income tax rules for determining income with some more than one-half of the shares of stock
adjustments. of the corporation on the day on which the
revocation is made. This letter must contain the
Pennsylvania S Corporation name of the corporation, the federal employer
identification number (FEIN), the Pennsylvania
Department of State Entity Number, and the
An S corporation is a closely held corporation which has elected,
effective date of the revocation. If no effective
with the consent of all shareholders, a taxation status which
date is provided, the revocation will be
permits shareholders to pay taxes on the individual level and
effective for the first tax period for which the
at the individual tax rates, similar to a partnership with “pass-
revocation was timely submitted. In the case
through taxation” rather than at the corporate level. Shareholders
of a corporation with qualified subchapter
of PA S corporations include their shares of income, loss,or credit
S subsidiaries, the letter must include the
on PA personal income tax returns and pay tax at the personal
names and the federal employer identification
income tax rate of 3.07%. S corporation status is limited to
numbers (FEIN)s of all qualified subchapter S
corporations that have a limited number of shareholders. Unless
subsidiaries doing business in PA.
the shareholders of a PA S corporation are members of the same
family, the maximum number of shareholders an S corporation Fax the letter to:
may have is 100. 717-787-3708
For tax periods beginning after Dec. 31, 2005, entities considered Email the letter to:
to be federal S corporations are automatically considered to be RA-BTFTREGISFAX@PA.GOV
PA S corporations (IRC 1361-1379). A federal S corporation may The deadline for revocation of an election not
elect not to be taxed as a PA S corporation by filing the REV-976, to be taxed as a PA S corporation is the 15th
Election not to be Taxed as a PA S corporation, on or before the day of the third month of the year in which
due date or extended due date of the PA Corporate Net Income the revocation is to be in effect. A revocation
Tax Report for the first year in which the election is to take effect. submitted after the due date will be in effect
Once this election is made, it cannot be revoked for five years. for the next tax period.
13 Starting a Business in Pennsylvania
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Qualified Subchapter S subsidiaries
C Corporation
Since 1997, Pennsylvania has recognized qualified subchapter
S subsidiaries when corporations are recognized as such by
the federal government. For income tax purposes, all income All corporations are C corporations unless they opt to take
is considered as earned by the parent corporation and passed advantage of a provision in both federal and state tax laws to be
through from the parent corporation to the shareholders. If treated as S corporations.
the only Pennsylvania activity of the parent corporation is A corporation pays taxes on profits and shareholders pay taxes
the investment in the qualified subchapter S subsidiary, the when profits are received as dividends. However, shareholders
parent corporation does not need to register to do business in cannot deduct any losses posted by a corporation.
Pennsylvania to make this election.
How to Report: A PA S corporation is not subject to corporate
For years beginning after December 31, 2012, income is
net income tax; rather, the income is passed through to the
apportioned to Pennsylvania based solely on the sales
shareholders to claim on their personal income tax returns.
factor. Corporations required to apportion income must
The income passed through to a shareholder from a PA S use 100% of sales when calculating PA income tax liabilities
corporation is calculated based on personal income tax law and or PA net operating losses.
not corporation tax law. The determination of income for personal
income tax purposes differs from the income determined for
corporate net income purposes. For example, there are no Pennsylvania’s net operating loss (NOL) carry-forward provisions
provisions to allow a net operating loss carry-forward in the permit C corporations to offset current-year income with net
calculation of income for personal income tax purposes. operating losses carried forward from a prior year. This is subject
PA S corporations are required to file a PA-20S/PA-65, S to a 20 year carry-forward limitation, as well as, a limitation to
Corporation/Partnership Information Return, provide each the total amount of taxable income that can be offset. Please
PA resident shareholder with a PA Schedule RK-1 and provide reference the chart below for NOL Cap.
each nonresident shareholder with a PA Schedule NRK-1.
“Non-individuals”, i.e., trusts, S corporations, partnerships, LLCs, Net Operating Losses Cap
etc. should receive both a RK-1 and NRK-1. These schedules
show the shareholder’s portion of the income or loss by PA class Taxable Year Net Operating Loss Cap
of income and determine which other items are required to be
reported. Copies of all PA Schedules RK-1s and NRK-1s should be 2017 30% of PA taxable income
included with the PA-20S/PA-65. 2018 35% of PA taxable income
2019+ 40% of PA taxable income
NOTE: If an S corporation has taxable built- How to Report: All corporations must file an RCT-101, PA
in gains, it will be subject to corporate net Corporate Tax Report and include copies of appropriate federal
income tax. In such a case, the S corporation forms (1120 or 1120-REIT) and supporting schedules.
must file an RCT-101, to report and pay
corporate net income tax on the built-in
gains.
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REPORTING PENNSYLVANIA INCOME
Withholding Requirements
Corporate Net Income Tax Withholding: Partnerships with one trusts are required to make withholding payments on behalf of
or more partners that are C corporations subject to corporate nonresident owners.
net income tax are required to make withholding payments on Estimated and extension payments made are reported on
behalf of nonfiling corporate partners. Calculate the withholding PA Schedule NW, Nonresident Withholding Payments for PA
for each non-filing corporate partner on the PA Schedule CP, S corporations and Partnerships. If additional nonresident
Corporate Partner CNI Withholding. You then list each non-filing withholding is due, you should send the payment with the
corporate partner on the PA-65 Corp, Directory of Corporate PA-20S/PA-65, PA S Corporation/Partnership Information Return,
Partners, and send in the withholding with this form. the PA-40 NRC, Nonresident Consolidated Income Tax Return, or
Personal Income Tax Withholding for Nonresidents: Partnerships both, depending upon your situation. See instructions for both
and PA S corporations with one or more nonresident partner(s) forms for details.
and shareholder(s) (owners) that are individuals, estates, and
Expenses & Deductions
You may deduct ordinary and necessary business expenses from For PA personal income tax purposes, you may directly expense
your business income. An ordinary expense is one that is common (deduct) up to $5,000 of business start-up costs in the first year
and accepted in your field of business, trade, or profession. A in which the business begins operations. You must amortize
necessary expense is one that is helpful and appropriate for your all start-up costs greater than $5,000 over 180 months. If total
business, trade, or profession. An expense does not have to be start-up costs exceed $50,000, you must reduce the amount of
indispensable to be necessary. the direct expense by a dollar-for-dollar reduction of the direct
Following are examples of deductible business expenses: expense amount for each dollar over $50,000.
• Amortization of business start-up costs Sole Proprietorships/ How to Report: Report business start-
• Depreciation up costs using PA Schedule C (Profit or Loss from Business or
Profession). Record only the direct expense amount of start-up
• Cost of goods sold
costs on Line 36 and report the amortization of any start-up costs
• Vehicle expenses on Line 7.
• Cost of using your home for business
Partnerships and PA S corporations/ How to Report: Report
Many other expenses may be deductible for income tax purposes. business start-up costs on the federal Form 1065 or Form 1120-S.
Visit www.revenue.pa.gov for more information. Report only the directly expensed amount on Form 1065, Line 20
or Form 1120-S, Line 19.
Business Start-Up Costs
Report the amortization of any start-up costs on Form 1065, Line
16a or Form 1120-S, Line 14. If you are amortizing start-up costs,
Business start-up costs are expenses your business incurs before you will also need to complete federal Form 4562, Depreciation
beginning business operations. They may include advertising, and Amortization.
travel, surveys, and training. You must capitalize these initial
costs as an asset of the business. Capitalized expenses are C corporations: Report business start-up costs on the federal
combined expenses and you gradually deduct the total over a Form 1120. Report only the directly expensed amount on Form
number of months or years. The gradual expense of these costs 1065, Line 26 and report any amortized costs on Line 20. If you
is amortization expense. However, you may not deduct start-up are amortizing start-up costs, you will also need to complete
costs if business operations never begin. federal Form 4562, Depreciation and Amortization.
15 Starting a Business in Pennsylvania
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revenue.pa.gov
code of 1986. If the basis of any asset differs from the federal basis,
you must use straight-line depreciation for PA personal income tax
NOTE: Usually costs for a particular asset purposes.
(such as machinery or office equipment) For tax years beginning prior to January 1, 2023, businesses may
are recovered through depreciation. Other also elect to expense up to $25,000 of the cost of certain assets as
start-up costs can be recovered through an IRC Section 179 expense. There is a dollar-for-dollar reduction
amortization, when the costs are deducted of the PA Section 179 expense for each dollar of investment in new
in equal amounts over a period of 180 assets that exceeds $200,000.
months or more. Business start-up costs For tax years beginning January 1, 2023 and after, businesses
that are not amortized generally cannot may elect to expense up to $1,000,000 (indexed for inflation) of
be recovered until assets are sold or the the cost of certain assets as an IRC Section 179 expense. There
business is discontinued. is dollar-for-dollar reduction of the PA Section 179 expense for
each dollar of investment in new assets that exceeds $2,500,000
(indexed for inflation).
Depreciation
If property acquired for your business has a useful life exceeding NOTE: PA income tax rules do not allow you
one year, you generally cannot deduct the entire cost as a business to immediately expense a percentage of
expense in the year you acquire the property. Instead, you must your assets (called “bonus depreciation”)
spread the deduction out over more than one tax year. This method like federal does.
of deducting the cost of business property is depreciation. The key
difference between amortization and depreciation is that you use
amortization for intangible assets, while you use depreciation for
tangible assets. Businesses may elect to expense certain assets as an IRC Section
179 expense. Please review current guidance on the department’s
Examples of depreciable property include the following: website for guidance.
• Office furniture
Sole Proprietorships/ How to Report: Use the appropriate lines
• Buildings and leasehold improvements on the PA Schedule C (Profit or Loss from Business or Profession)
• Machinery and equipment to report depreciation expense on your assets and any Section 179
You may deduct a limited amount of the cost of certain depreciable expense you elect to take.
property in the year you place the property in service (and each Partnerships and PA S corporations/ How to Report: You report
year thereafter throughout its useful life) as depreciation expense. depreciation expense on either the federal Form 1065, Line 16a
You usually maintain and keep track of depreciable assets and the or Form 1120-S, Line 14. You will also need to complete federal
yearly depreciation expense via a depreciation schedule. Form 4562, Depreciation and Amortization. Remembering that PA
To set up a simple depreciation schedule, record the date of personal income tax rules do not allow bonus depreciation and do
purchase, the amount paid for an item and its useful life, then not follow federal IRC Section 179 expense limits for years prior
decide upon a depreciation method. Straight-line depreciation to January 1, 2023, you may need to make an adjustment to your
is the simplest method, where you deduct the cost of each item federal income. You make this adjustment on the PA Schedule
equally over time. M for the PA-20S/PA-65. See the Instructions for Schedule M for
where to include your adjustment(s)
For example, you can deduct the cost of an $1,800 computer with
a useful life of five years at $30 a month ($1,800 divided by 60 C corporations/ How to Report: You report depreciation expense
months). on the federal Form 1120. You will also need to complete
federal Form 4562, Depreciation and Amortization. Pennsylvania
You must track the depreciation expense claimed each taxable year corporate net income tax rules also do not allow federal bonus
until you fully depreciate the item. You record the amount deducted depreciation. You would adjust your federal income using
each year as a depreciation expense as accumulated depreciation. Schedule C-8, Adjustment for Bonus Depreciation, or Schedule C-9,
For PA personal income tax purposes, the depreciation method Adjustment for Deduction for Property, which is Fully Depreciated,
and useful life may follow the federal rules for determining the Sold or Otherwise Disposed.,
depreciation expense as long as the basis of the asset is the same
for federal and Pennsylvania purposes and the method and useful
life for the asset for federal purposes follows the Internal Revenue continued on next page
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REPORTING PENNSYLVANIA INCOME
Expenses & Deductions cont.
Costs of Goods Sold Vehicle Expenses
Generally, when you engage in a trade or business in which If you use a vehicle for both business and personal reasons,
production, purchase, or sales of merchandise is an income- generally the business portion is deductible. Keeping good
producing factor, you must value inventory at the beginning and records is key. You must determine what percent of the vehicle
end of each tax year to determine your cost of goods sold. In you use for business purposes and what percent you use for
determining inventory value, use the cost, lower of cost or market personal purposes. To do this, track the entire use of the vehicle
value, or other method allowable under generally accepted by keeping a usage log in order to allocate the usage between
accounting principles and practices. If you change your method the two.
of valuing inventory, restate the value at the beginning of the Example: A sole proprietor of a flower shop drives his van 20,000
year based on the changed method and include an explanation. miles during the year: 16,000 miles for delivering flowers to
Some of your expenses may be included in figuring the cost of customers and 4,000 miles for personal use. The sole proprietor
goods sold. You deduct the cost of goods sold from your gross may claim 80% (16,000 divided by 20,000) of the costs of
receipts to determine the amount of gross profit for the year. operating the van as a business expense.
If you include an expense in the cost of goods sold, you cannot A business may use either the actual or the standard mileage
deduct it again as a business expense. rate method for determining vehicle expenses. The method a
The following are types of expenses used to calculate the cost of business uses depends on a few different factors such as the
goods sold: amount of time and attention to detail the business wishes to
• The cost of products or raw materials, including freight extend to keeping records for the expenses, whether the vehicle
• Storage is leased or owned, if the vehicle being used is a small or large
vehicle, or if the vehicle is an older, newer, or inexpensive model.
• Direct labor costs (including contributions to pensions or
annuity plans) for workers who produce the products A business that uses the standard mileage rate method simply
• Factory overhead needs to keep track of the business and personal mileage use
of the vehicle. A business that uses the actual method must
Under the uniform capitalization rules, you must capitalize keep track of all the vehicle’s expenses as noted below and the
direct costs and part of the indirect costs for certain production business and personal use mileage. Typically, a business that
or resale activities. Indirect costs include rent, interest, taxes, chooses the standard mileage rate method can switch back
storage, purchasing, processing, repackaging, handling, and and forth between methods but only if the business used the
administrative costs. standard mileage rate in the first year of business use. However,
Sole Proprietorships/ How to Report: Report costs of goods sold if the business used the standard mileage rate in the first year for
using PA Schedule C (Profit or Loss from Business or Profession), a leased vehicle, it must use that for the entire usage period for
on Line 2 and on Schedule C-1. that vehicle. A business that uses the actual method in the first
year must use the actual method for the life of the vehicle.
Partnerships and PA S corporations/ How to Report: Cost of
goods sold is calculated on federal Form 1125-A and carried to With a smaller or inexpensive vehicle, it is sometimes better to
page 1 of the Federal tax return. For partnerships, it goes to Form use the mileage rate method than the actual expense method. A
1065, Line 2 and for PA S corporations, it goes to Form 1120-S, business may also benefit from using the mileage rate method
Line 2. versus the actual expense method with older vehicles. A business
with larger, more expensive or newer vehicles may benefit by
C corporations/ How to Report: Calculate cost of goods sold on
using the actual expense method over the standard mileage rate
Federal Form 1125-A and carry it to page 1 of the federal Form
method.
1120, Line 2.
To determine which method is best for a vehicle, track both
expenses for the first year of business use for the vehicle and
decide which is best. The decision on what method to choose is
critical in the first year of business use as that method can lock a
business into the same method for the life of the vehicle.
17 Starting a Business in Pennsylvania
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Actual Expense Method
If the business chooses the actual expense method to calculate
its vehicle expenses, the following expenses would be allowable NOTE: If you choose the standard mileage
up to the amount of the business use percentage for the vehicle: method to calculate vehicle expenses, you
• Depreciation • Lease fees • Rental fees may not deduct actual expenses except for
business-related parking fees and tolls.
• Towing charges • License fees • Auto club dues
In order to track total mileage, the business
• Gas and oil • Car repair tools • Tires should maintain a detailed travel log to
• Insurance • Car washes • Registration fees verify the mileage claimed. The detailed
• Repairs and maintenance • Business trip parking fees mileage log must contain the following
information:
You should keep dated receipts for each transaction. The
department will consider credit card statements and/or other • Date traveled
similar documentation in some situations. You must keep the • Beginning destination
business purpose and description of the vehicle for all vehicle • Ending destination
expenses.
• Total miles per trip
Standard Mileage Method
If you choose to deduct vehicle expenses using the standard • Purpose of trip
mileage method rather than deducting actual expenses, you • Business relationship
must use the standard mileage rate announced by the IRS to
claim deductible costs of operating the car, van, or truck for
business purposes.
continued on next page
EXAMPLE
MILEAGE LOG
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REPORTING PENNSYLVANIA INCOME
Expenses & Deductions cont.
Business miles are the number of miles actually driven for can treat vehicles used by employees as being used 100% for
business, such as visiting a customer or meeting a client. business purposes and may deduct 100% of the auto expenses.
Remember that any miles driven to the bank, office supply store, If an employer provides an employee with unrestricted use of
or computer store to meet with an accountant or to meet with a vehicle, the value attributable to the employee’s personal use
a lawyer on business matters also counts as part of the business of the vehicle is required to be included in the employee’s gross
use mileage. income. The employer must withhold the appropriate taxes
Some travel is not business-related: from the employees’ wages. This is typically the case when an
employee gets the use of a company car as an employee benefit.
• Driving from home to work and back is commuting. It is not
The corporation’s deduction for the personal-use percentage is a
deductible on either your business or individual income tax
compensation expense.
return.
• If you make a stop at a store on the way home from a
business trip, the remaining miles from the store to home
are personal mileage, so they can’t be included. NOTE: The corporation determines the
employee’s income for personal use of a
You cannot use the standard mileage rate if:
corporate vehicle by using the market value
• You used five or more vehicles at the same time (as in fleet of the vehicle, not on the actual expenses or
operations). standard mileage rate, such as the cost to
• You used the actual expense method for calculating vehicle rent a vehicle.
expenses in the first year you used the vehicle for business,
including situations where a Section 179 deduction was
claimed. Buy or lease?
• You claimed the special depreciation allowance on the You can also use the standard mileage rate for a leased vehicle.
vehicle. If you use the standard mileage rate in the first year for a leased
The five or more vehicles restriction applies to vehicles used at vehicle, you cannot switch to the actual expense method in a
the same time. For example, a business owns three vans and two later year or vice versa.
cars. The three vans can be on the road together at the same If you use the standard mileage rate for a leased vehicle, the
time, but only one person ever drives the cars, so only one will lease payment amount is not deductible.
ever be in use at any time. This scenario won’t break the four car
You do not depreciate leased vehicles. Instead, you deduct the
maximum.
business portion of the lease payment.
Vehicle Owned by Employee
Sole Proprietorships/ How to Report: Complete PA Schedule
An employee (or a shareholder employee) who uses a personal
C (Profit or Loss from Business or Profession), and include the
vehicle for business can submit a request for reimbursement
amount of vehicle expenses on Line 10.
to the corporation, based on documented business miles.
The corporation can then reimburse the employee based Partnerships and PA S corporations/ How to Report: Any car
on the standard mileage rate for business. In this case, the and truck expenses are included as “Other Deductions” on the
corporation gets a deduction for vehicle expenses paid, and federal Form 1065, Line 20 or Form 1120-S, Line 19.
the reimbursement is not reportable as taxable income to the C corporations/ How to Report: Vehicle expenses are included
employee. If the company paid the auto loan, insurance, gas, with “Other Deductions” on the federal Form 1120, Line 26.
repairs, etc. to the owners, these payments are not valid business
expenses. They will be either an auto allowance or distribution to
shareholder-employees.
Vehicle Owned by the Corporation
Corporations cannot use the standard mileage rate method. They
must determine the deduction for any vehicles owned based on
actual operating expenses. The corporation can deduct auto loan,
interest, insurance, repair, gas, etc. However, the business-use
percentage of the vehicle limits the deductions. The corporation
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gas, kerosene, fuel oil, or bottled gas, the taxpayer is required to
Business Use of Your Home remit use tax.
If you use your home for business purposes, you may deduct How to Report: Taxpayers should be reporting their use tax on
some home expenses. However, the business use of your home home office utilities or other commercial use of utilities on the
must meet strict requirements before you can deduct any home PA-1, Use Tax Return. You can do this online at mypath.pa.gov.
expenses. In order to calculate how much use tax is due on utilities, you
You may claim limited deductions for business use when you use must calculate the business use percentage of the residence you
part of your home exclusively and regularly as follows: are using for commercial activities and multiply the total utility
bill by that percent.
• The principal place where you conduct any trade or business.
• A place to meet or deal with patients, clients, or customers Example: Dave is a salesman and his employer requires him to
in the normal course of your trade or business. maintain a home office. He has 2,000 square feet in his house -
of which 300 square feet he uses exclusively as his office. He uses
• In connection with your trade or business, if you are using a
15% of his house as his office. He pays $2,400 for electricity. He
separate structure not attached to your residence.
owes use tax on $360 (15% of $2,400).
Examples of business use of your home expenses generally
include the following:
• Mortgage interest The department will mail notices to the taxpayers who
• Rent have not registered for sales tax and have not remitted use
• Utilities expense tax on utilities during the previous filing period using their
PA-40, Personal Income Tax Return. These notices will
• Insurance expense
include key points of reference, such as PATH ID numbers
• Repairs and maintenance expense and notice numbers to enable taxpayers to report and pay
• Real estate taxes online.
REMINDER: Pennsylvania does not
recognize the federal safe harbor method
for determining the allowable deduction for IMPORTANT: A taxpayer with an active sales
business use of a residence. All home office tax number should use its regular sales tax
expenses must be determined by using filing for use tax on utilities. Taxpayers are
actual costs incurred. not required to separately register for a
sales tax license in order to report use tax
on utilities.
In order to claim any expenses related to business use of your All payment due dates will remain consistent
home, you must calculate the percentage of the property you with PA-40 due dates to maintain timeliness.
are using for commercial activities. To calculate the business use The department will not impose penalty if
percentage, divide the square footage of the property used for a this approach is used.
work area by the total square footage of the entire property or
dwelling. Multiply the result by the total expenses to arrive at the
home office expense deduction.
How to Report: Taxpayers should file PA Schedule C (Profit or Loss
from Business or Profession) to report their expenses related to
business use of their home.
Use Tax on Home Office Utilities
Keep in mind, although you can claim utilities as an expense, they
may be subject to sales and use tax when used for commercial
purposes. This means if the utility provider is not already taxing
the estimated commercial usage for electricity, steam, natural
continued on next page
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REPORTING PENNSYLVANIA INCOME
Expenses & Deductions cont.
Future Sale of Your Residence
EXAMPLE: You claim that 25% of your home was
used for your home office and you deducted
If you do take a home office deduction on your PA-40, you will the appropriate expenses. Then you sell your
have to pay Pennsylvania personal income tax on the gain from home and your overall gain from the sale of
the sale of your home on the portion of your home that you that home (minus original cost) was $10,000.
claimed as a home office. You would be required to pay PA personal
income tax on 25% of that gain ($2,500).
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STRATEGIES
for
SUCCESS
SECTION 3
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STRATEGIES FOR SUCCESS
PA Tax Strategies
Understanding Pennsylvania taxes can be challenging and staying
Keep Good Records
compliant can be even harder if you are not properly prepared.
The Department of Revenue has identified key areas to help
businesses be successful and avoid common errors. Keeping good records is the most important task of a successful
business. Good recordkeeping allows you to function seamlessly
Take Advantage of Electronic Services and ensures your information is complete and accurate.
Reference to “61 PA Code $34.2 Keeping Records”.
The department offers a full range of online features that allow
Helpful Practices
you to fulfill your tax needs at any time, from anywhere. We
encourage taxpayers to use these services to become more
efficient and accurate when dealing with their tax obligations. Maintain daily business records: Records can help you to monitor
Below are just a few things that we have to offer: the progress of your business which allows you to see whether
your business is improving or if you need to make any changes.
Electronic Filing: We offer an online portal, called myPATH, for
filing your returns and payments electronically. myPATH is both Identify the source of all receipts: You will receive money or
fast and easy. Upon filing your returns, you will receive proof of property from many sources. Your records identify the sources of
submission. This can help you to avoid additional penalties and your receipts, and you need this information to separate business
interest. The department also ensures that our electronic filing from nonbusiness receipts, and taxable from nontaxable income.
systems are safe and secure to help protect your information. Record expenses when they occur: You may forget deductible
Electronic Payments: Tax obligations, including estimated business expenses when you prepare your tax return. Recording
payments, may be paid electronically by credit card, debit card, or them when they occur helps you to track your deductible
by electronic funds transfer. You no longer have to be concerned expenses and ensure you are receiving the credit you deserve.
about a payment getting lost in the mail. Keep complete records on all assets: Good records enable you to
Account Maintenance: You can change an address, view filing prepare accurate financial statements, including income (profit
history, add and remove third party access for preparers or and loss) statements, and balance sheets. Such statements help
bookkeepers, and much more. you in dealing with your bank or creditors. An income statement
shows the income and expenses of the business for a given
Statement of Account: You can receive an electronic Statement period of time. A balance sheet shows the assets, liabilities, and
of Account for your business taxes instantaneously via the your equity in the business on a given date.
myPATH portal. Each Statement of Account includes the three
most recently filed tax periods, non-filed tax periods, tax periods Retain supporting documents: Your business records must
with open liabilities, payments or credits grouped by tax type. be available for inspection by the IRS and/or the Department
Additional sections show tax periods under appeal, unused of Revenue. If the IRS or department examine any of your
restricted credits, and W-2 annual reconciliation, if applicable. tax returns, you may be asked to explain the items reported.
Complete records will facilitate the examination.
View Letters: When you enroll to receive your business tax
correspondence electronically, it streamlines the process Supporting Documents
and allows you to access your information faster and more
efficiently. You can view, download, and print your business tax It is important to retain supporting documents in an orderly
correspondence at your own convenience, saving you valuable fashion and in a safe place because they support your
time. recordkeeping and information on your tax return. Generally, it is
Online Customer Service Center: You can go online to search a good idea to keep these documents in file folders by designated
thousands of frequently asked questions. If you still cannot find categories.
the answer you are looking for, create an account and submit Assets: Assets are property, such as machinery and furniture,
your question. We will respond via email within 72 hours. which you own and use in your business. You must keep records
to calculate annual depreciation and gain or loss when you sell
the assets. Your asset records should show the following:
• When and how you acquired the asset
• Purchase price
23 Starting a Business in Pennsylvania
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 Enlarge image | revenue.pa.gov • Date of purchase • Cost of any improvements Supporting documents should show the • Deductions taken for depreciation amount paid for such purchases. These records will help you determine the value of inventory • Deductions taken for casualty losses at the end of the year: • How you used the asset • Canceled checks • When and how you disposed of the asset • Cash register tapes • Selling price • Credit card sales slips • Expenses of sale • Invoices Examples of supporting documents for assets: • Purchase and sales invoices Travel, transportation, entertainment, and gift expenses: These • Real estate closing statements expenses require extra documentation before they may be deducted as business expenses. • Canceled checks Example: To deduct the cost of taking a client to lunch, you should record the name of the person and the purpose of the Expenses: Expenses are costs incurred to carry on your business, business lunch or the topics discussed over lunch. For more and supporting documents should detail the amounts paid for information on federal rules, consult Internal Revenue Service business expenses. Examples are: Publication 463, Travel, Entertainment Gift and Car Expenses. For • Canceled checks Pennsylvania rules, see the instruction booklets accompanying • Cash register tapes your PA tax returns. • Account statements Employees: Any person employed for wages or salary by your • Credit card sales slips company is considered an employee. It is important to keep records of payroll information pertaining to your employees’ • Invoices wages and withholding, as well as records of their personnel files. • Petty cash system for small cash purchases* Examples of employee personnel records are: *A petty cash fund allows you to make payments without • Names of Employees having to write checks for small amounts. Each time you • Addresses of Employees make a payment from petty cash, you should prepare a disbursement slip and attach it to your receipt as proof of • SSN of Employees payment. • Occupation Gross receipts: Gross receipts are payments you receive for • Dates of Employment goods and services you provide in your business. You should If there are changes to names, addresses, and/or the employee’s retain supporting documents that show the amounts and sources occupation, you will want to keep both the old record and the of your gross receipts, such as: updated one until that employee’s departure from your company. • Cash register tapes Examples of payroll records include: • Bank deposit slips • Amounts and dates of all wage, annuity, pension payments, • Receipt books and tax withheld • Invoices • Amounts of tips reported to you by your employee • Credit card sales slips • Records of allocated tips • 1099-MISC Forms • Dates and amounts of tax deposits • 1099-K Forms • Copies of returns filed and confirmation numbers • 1099 NEC • Records of fringe benefits and expense reimbursements provided by your employees Purchases: Purchases are items you buy and resell to customers. • Issued W2’s and 1099 Statements If you are a manufacturer or producer, purchases include the cost of all raw materials and parts purchased for manufacturing finished products. continued on next page 24 |
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STRATEGIES FOR SUCCESS
PA Tax Strategies cont.
Retain Your Records Open Accounts for Taxes
Records must be maintained for periods of time so the Internal One of the first things you should do when starting a business is
Revenue Service and the Department of Revenue may administer open a business checking account. You should keep your business
tax laws effectively. Generally, this means you must keep records account separate from any personal checking account.
supporting information on a tax return until the statute of In addition to establishing a separate business bank account, you
limitations for that return expires. may find it helpful to open a bank account for sales tax you collect
A statute of limitations is the amount of time the IRS or from customers or withholding taxes deducted from employees’
department has to assess additional tax and the amount of time compensation.
you have to amend a return to claim a credit or refund. Periods One of the biggest mistakes business owners make is mixing
of limitations vary by tax, and a period of limitations begins when sales tax or employer withholding with other business income,
a return is filed. Returns filed before they are due are considered or spending taxes due to the commonwealth. These taxes are
filed on the due date. Generally, you should retain copies of all considered trust fund taxes in which we are trusting you to collect
returns and supporting schedules for at least four years after on behalf of the commonwealth. Civil and criminal penalties
filing. If you claim depreciation, deductions or losses, you may could result from the misuse of these funds.
want to hold onto your documentation even longer. Returns and
supporting schedules are required to identify adjusted basis in You may also find it helpful to deposit the employers’ portion of
a partnership or LLC interest, or in shares of a PA S corporation. Social Security and Medicare into a separate account.
Basis documentation for any item reported or potentially
reportable on current or future tax returns must be kept
indefinitely or until the asset is sold, exchanged or disposed of
IMPORTANT: Reconciling your accounts
by a taxpayer. For example, books and records used to calculate
regularly can help to avoid headaches in
basis for retirement plans, stocks, bonds, mutual funds, business
the future. Simple steps, like requesting an
assets, business interests, principal residence, etc. must be kept
electronic statement of account, can help
indefinitely.
business owners compare their monthly
records to the department’s records. This
ensures that everything is posted correctly
IMPORTANT: You may want to create a and we are all on the same page.
backup set of records and store them
electronically. Even if the original records are
paper, they can be scanned and converted
Update Your Address Regularly
to a digital format. Once the documents are
in electronic form, they can be downloaded
It is important to keep the Department of Revenue updated
to a storage device or burned onto a CD.
with your current address. When you alert the department of an
address change, you ensure you receive all important documents
and letters pertaining to your business.
Many licenses or certificates are mailed in physical form and are
required to be displayed. If you do not update your address, you
CAUTION: Identity theft is a serious threat delay the process of receiving these items.
in today’s world, and it is important to Also, the department mails out letters for non-filed returns or
take every precaution to avoid it. You tax liabilities. You will want to have your address current so that
should always dispose of these records by if one of these notices are sent out you can rectify the situation
shredding them and not by merely throwing right away and minimize any penalties or interest.
them away in the trash.
Refunds are another item that get mailed out from the
Department of Revenue. Again, if the department have an invalid
address, receipt of your refund will be delayed.
25 Starting a Business in Pennsylvania
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Finally, the department uses addresses as one of the verification
factors when individuals call in to discuss their accounts. If your IMPORTANT: While the seller is supposed
address is never updated and you call in for assistance, we may to advise the purchaser of this notification
not be able to help you if you cannot verify the proper address requirement, failure of the seller to give this
on file. notification does not relieve the purchaser
of the obligation to timely notify the
How to Update Your Address: To update your business address,
department of the planned bulk purchase,
complete form REV-1705 R, Tax Account Information Change/
nor does it relieve the purchaser of any
Correction Form.
liability for the seller’s unpaid sales and use
taxes.
If you are registered for myPATH, log into your profile and
select the Manage Names and Addresses hyperlink from
The purchaser or seller must notify the Department of Revenue
the Names and Addresses Panel on the “More...” tab.
of the pending bulk sale transaction at least 10 days before
Updating your address electronically will ensure that the
paying for or taking possession of any business assets, whichever
new address is reflected within 24 business hours.
occurs first. This notification is typically a written request on
letterhead stating the purchaser, seller, and business information
One of the most important things you can do for your business on the notice of sale or by completing the REV-181, Application
is to make sure your information is always up-to-date with the for Tax Clearance Certificate.
Department of Revenue. With updated information, you will not If the sale has already taken place, the purchaser should retain
have to worry about problems when it comes to your taxes. a portion of the sales price in escrow that should only be
When you are completing the form for your new address, include released when a bulk sale clearance is provided. This protects
pertinent information, such as the apartment, room, or suite the purchaser if there are any liabilities.
number. If your business is moving out of the country, do not
abbreviate the location of your new address. The country name
will not display properly if it is abbreviated. KNOW
Obtain a Bulk Sales Clearance WHO
If you are purchasing or otherwise acquiring more than 51% of TO
another business’ assets, including real estate or machinery and
equipment, you may be held personally liable for the amount of CONTACT
the seller’s unpaid taxes up to the sales price or fair market value Online Customer Service Center
of the assets you purchased or acquired, whichever is greater. www.revenue.pa.gov
To protect yourself against a situation like this, you would need Customer Experience Center
to obtain a Bulk Sales Clearance Certificate from the seller. This Personal Taxes: 717-787-8201
certificate is evidence that all tax returns/reports have been filed Business Taxes: 717-787-1064
and all tax obligations have been satisfied up to and including myPATH Help: 717-425-2495 ext. 72841
the date of transfer. If the purchaser fails to obtain a Bulk Sales
Clearance Certificate from the seller, the purchaser will become Automated Forms
liable for all unpaid taxes the seller owes up to and including Ordering Service
the date of transfer, regardless of whether or not the taxes have 1-800-362-2050
been settled, assessed, or determined at that time.
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