REV-588 (TR) 10-20
STARTINGaBUSINESS
in PENNSYLVANIA
A GUIDE toPENNSYLVANIA TAXES
Tom Wolf, Governor
C. Daniel Hassell, Secretary of Revenue
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REV-588 (TR) 10-20
STARTINGaBUSINESS
in PENNSYLVANIA
A GUIDE toPENNSYLVANIA TAXES
Tom Wolf, Governor
C. Daniel Hassell, Secretary of Revenue
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| 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, C. Daniel Hassell Secretary of Revenue |
| 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 Employer Withholding .......................................... 3 Sales Tax ...................................................... 5 Business Use Tax ............................................... 7 Exemption Certificate ........................................... 8 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. |
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BEFORE REGISTERING YOUR BUSINESS
WITH 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
Tips to Complete the PA-100
required to report items such as sales and use tax or employer
withholding. To register your business for state tax and
employer accounts in Pennsylvania, you will need to complete Before you begin the PA-100, you will need the following:
the PA Enterprise Registration Form called the PA-100. You may 1. EIN, Business Name, Business Address, Phone Number
complete the form online by visiting www.pa100.state.pa.us. 2. School District and Municipality
This form may also be used to add additional taxes or services, 3. NAICS Code
register a new entity that is acquiring all or part of an existing 4. Owner(s) Name(s), SSN / ITIN
entity or request the Unemployment Compensation Experience 5. Date of First Operations (Inside and Outside of PA)
record and Reserve Account Balance of a Predecessor. 6. Business Entity Trade Name
The PA-100 enables taxpayers to establish multiple accounts, 7. Business Entity Fiscal Year End (MM/DD)
including: 8. Form of Organization
• Employer Withholding Tax (as well as 1099 Miscellaneous 9. For Profit or Non-Profit Status
Withholding)
New registrants must complete every item in Sections 1 through
• Promoter License
10 and additional sections as indicated.
• Public Transportation Assistance Tax License
Registered enterprises must complete every item in Sections 1
• Sales, Use, Hotel Occupancy Tax License
through 6 and additional sections as indicated.
• Tobacco Product’s License
You will receive your account number(s) within 24-48 hours via
• Transient Vendor Certificate
e-mail if you provide your e-mail address in Section 4. If you do
• Unemployment Compensation not provide your e-mail address, do not have an e-mail address,
• Use Tax, Wholesaler Certificate or do not receive your e-mail notification, you may retrieve
• Workers’ Compensation Coverage your account number(s), simply by logging on to www.pa100.
• Vehicle Rental Tax state.pa.us. In addition to specific tax account numbers, the
department also issues a 10-digit Revenue Identification Number
(Revenue ID) to all businesses that have any tax filing obligation
with Pennsylvania. The Revenue ID number is referenced on all
NOTE: Corporations, LLCs and business correspondence issued by the department.
trusts registered with the Pennsylvania
Department of State are not required to
register with the Department of Revenue for
corporation taxes. However, when a business IMPORTANT: You cannot use the PA Business
registers with the Department of State, an Entity Registration Online PA-100 to:
EIN must be included so the Department • Register your name with the Department
of Revenue can establish a corporation tax of State, Bureau of Corporations and
account. Failure to include the EIN could Charitable Organizations
result in the delay of processing corporate • Apply for Sales Tax Exempt Status
tax payments made to the Department of (REV-72)
Revenue.
• Register for Motor Carrier Road Tax/
IFTA
• Register for Motor Fuels Tax Permit
NOTE: To register, file and pay for all Motor
and Alternative Fuel Taxes, please visit
mypath.pa.gov
1 Starting a Business in Pennsylvania
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revenue.pa.gov
PA-100 Application Status Descriptions:
How to Avoid Delays in Processing
• Incomplete - All sections, including payment information, if
applicable, have NOT yet been completed. You may still edit
• Review the registration form and accompanying sections to
or delete your application.
be sure that every item is complete.
• Submitted - All sections, including payment information, if
applicable, have been completed and either submitted and/
or confirmed. Your application has been forwarded to the
NOTE: It is your responsibility to notify the appropriate department(s) and can no longer be edited.
department in writing within 30 days of any
• Under Review - Your application has been received and
change to the information provided on the
is under review for compliance will all laws, rules and
registration form.
regulations under the department’s jurisdiction. Please
allow at least 10 business days prior to contacting the
department for more information.
How to Check the Status • Successfully Processed - Your application has been
processed by the Department of Revenue. The numbers
To check the status of your application, return to www.pa100. provided at the top of the application are for your reference
state.pa.us, log in with your e-Signature username and password only. Your license/account or certificate correspondence will
and select “View” to see the status of the application. If your be mailed to you within 7-10 business days. If the issuing
application has not yet moved to a “Successfully Processed” status, department requires additional information, you will receive
please allow up to 10 days before contacting the department. correspondence outlining what is needed to issue the
Once the status shows “Successfully Processed,” you will receive requested license/account or certificate.
an email with information regarding how to report and remit
taxes, your filing and payment frequencies, and the due dates of
your filings. Your license and account information will be mailed
shortly after receiving the email.
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BUSINESS TAXES IN PENNSYLVANIA
Employer Withholding
If you employ one or more persons, your business needs to • Semi-Monthly - If total withholding is $1,000 to $4,999.99
register for an Employer Withholding Account (Section 9 of the per quarter, the taxes are due within 3 banking days of the
PA-100). Pennsylvania law requires employers to withhold and close of the semi-monthly period.
remit PA personal income tax from employees’ compensation in • Monthly – If total withholding is $300 to $999 per quarter,
two common cases: the taxes are due the 15th day of the following month.
• When resident employees perform services within or • Quarterly – If total withholding is under $300 per quarter,
outside PA; and the taxes are due the last day of April, July, October and
• When nonresident employees (other than residents of New January.
Jersey, Maryland, Virginia, West Virginia, Ohio and Indiana The Employer Withholding Return (W-3) is required to be
from whose wages you withhold at the reciprocal state’s tax electronically filed every quarter even when no wages were paid
rate) perform services within PA. during that period. Each W-3 should reconcile the total amount
An employer is any individual, partnership, association, of withholding remitted within each quarter.
corporation, government body or other entity that employs one Employers are also required to electronically file annual
or more persons and is required under the Internal Revenue Code reconciliation returns (REV-1667) by January 31 along with the
to withhold federal income tax from wages paid to an employee. 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
for services in the course of your trade or business, you may be
NOTE: Employers are also required to register
required to withhold PA personal income tax.
for unemployment compensation insurance
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
of Higher Education and its institutions, are exempt from the
Employers should withhold taxes from each paycheck and requirement of withholding on non- employee compensation
remit to the department according to the Withholding Payment and business income.
Schedule as follows:
For more information on non-employee compensation, please
• Semi-Weekly – If total withholding is $5,000 or greater
visit our website at www.revenue.pa.gov.
per quarter ($20,000 per year), the taxes are due on the
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
NOTE: Tax payments of $1,000 or more
Employers can file and pay business taxes online using our
must be remitted electronically through
Electronic Tax Information and Data Exchange Service (e-TIDES)
electronic funds transfer or by credit/debit
or TeleFile system.
card, or they may be paid with certified or
E-TIDES is an Internet-based filing option that allows taxpayers to cashier’s checks.
file returns and remit payments electronically without cost.
TeleFile is a telephone filing system designed for taxpayers who
do not have computer access. Pre- registration is not necessary
to use TeleFile, however, you will need your Account ID, EIN
or SSN, 10 digit Revenue ID, and the period ending date of the
period you wish to file for prior to calling. TeleFile is toll-free and
can be accessed 24 hours a day, 7 days a week by calling 1-800-
748-8299.
To register for electronic funds transfer, visit the Revenue
TeleFile
e-Services center at www.revenue.pa.gov and file an
Authorization Agreement for Electronic Tax Payments, 1-800-748-8299
(REV-331A).
1 2
Starting at revenue.pa.gov, click the You are now ready to enter e-TIDES to
icon labeled “e-TIDES” 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
is on credit. Taxes due on credit sales must be remitted within NOTE: It is important to know your filing
30 days of the date of sale. A seller is liable for reporting and and payment frequency. The Department of
remitting taxes and fees with the tax return covering the period Revenue offers a vendor discount for timely
in which either a taxable sale was made or the tax, or fee, should filed returns and payments. This discount is
have been collected. limited to a flat rate or 1% of tax collected,
The filing frequency may vary. When you are a new sales tax filer, whichever is lesser.
you are set up as a quarterly filer, meaning that your returns are • Monthly Filers : $25 or 1% of tax
due in April, July, October and January. But your filing frequency collected
can change. Every year the department reviews each business • Quarterly Filers: $75 or 1% of tax
that files returns to determine whether or not the filing frequency collected
should be changed. If such a change is made by the department, • Semi- Annual Filers: $150 or 1% of tax
the business is notified in writing. collected
Payments and reports are required from sales tax licensees as
follows:
• Monthly returns with pre-payment obligations –
Businesses that have an actual sales/use tax liability for How to File
the third calendar quarter of the previous year totaling at
least $25,000 but less than $100,000 have two prepayment The department offers three electronic filing options: e-TIDES,
calculation options. They can either remit payment equal to TeleFile, and third party vendors. (See e-TIDES and TeleFile
50% of the actual tax liability from the same month of the information under Employer Withholding Tax.)
previous year or at least 50% of the actual tax liability for the
The department also has third party vendors who will provide
current period.
e-filing software for those taxpayers who do not wish to
Businesses remitting more than $100,000 for the third use the department’s e-filing options. A list of approved
calendar quarter of the previous year must remit 50% of the software vendors is available on the department’s website at
actual tax liability due from the same month of the previous www.revenue.pa.gov.
year. Prepayments are due by the 20th of the current month
and returns for the period are due on or by the 20th of the
following month.
5 Starting a Business in Pennsylvania
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revenue.pa.gov
Displaying Sales Tax Licenses
NOTE: Tax payments of $1,000 or more All businesses selling products and services
must be remitted electronically through subject to sales tax are required to prominently
electronic funds transfer or by credit/debit display the license at the business. Sales tax
card, or they may be paid with certified or licenses are issued free of charge and are
cashier’s checks. 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
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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 over the internet, through toll free numbers or through reciprocal credit to PA. For example, if a PA business purchases
the mail and the vendor does not charge Pennsylvania sales tax. and takes delivery of a taxable item in another state and pays a
This is also true for purchases a business makes while out of state 5% sales tax there, the purchaser is responsible for reporting and
where no sales tax is charged. The items become taxable upon remitting the 1% difference (use tax) due to PA upon the use of
delivery into Pennsylvania. the property in PA. Credit against use tax is not granted for value-
added taxes or sales taxes paid to foreign countries. Also, taxes
Many businesses believe they save money by making “tax-
paid to the federal government, such as customs duties, cannot
free” purchases from out-of-state vendors, unaware that these
be claimed as a credit against use tax.
transactions are often assessed upon audit by the department.
Since assessments include interest and penalty on top of tax,
How do I Pay Use Tax?
businesses actually increase operational costs by not voluntarily
addressing use tax obligations. The department’s audit
Any business that incurs use tax liabilities on a regular basis is
experience shows that most businesses owe use tax but many
encouraged to register for a sales/use tax account number by
do not pay use tax. It is estimated that upon audit, 80% to 90% of
completing the PA-100 PA Enterprise Registration Form.
businesses are found to owe use tax.
If you are already registered for sales tax, then you can file any
The use tax rate is the same as the sales tax rate: 6% state tax,
use tax due with your sales tax return. If the sales tax return is
plus an additional 1% local tax for items purchased in delivered
filed timely, then the use tax is considered timely no matter the
to or used in Allegheny County and 2% local tax for Philadelphia.
filing frequency of your business.
If you are not required to be registered for sales tax and you have
Why is Use Tax Important? a use tax liability that needs to be paid, you may still file the use
Uniform Unif collection and enforcement of use tax orm collection tax return and pay electronically by completing the department’s and enforcement of use tax
providespr fairness. Pennsylvania businesses - those ovides fairness.Online PA-1PennsylvaniaUse Tax Returnbusinesses at www.etides.state.pa.us/UseTax- those .
whowho employ our residents, pay state and local taxes employThis return is due along with the payment of tax on or before the our residents, pay state and local taxes
andand supportsupport ourour communitiesc - are put at a 6% ommunities20th day of the month after the month in which the purchase - are put at a 6%
disadvantagedisadv against out of state businesses when antage againstwas made.out of state businesses when
sales sales or use tax is not paid on taxable items and or use tax is not paid on taxable items and
servicservices.es.
AsAs internetint and mail-order shopping becomes more ernet and mail-order shopping becomes more
popularpopular amongamong PennsylvaniaP businesses, use tax ennsylvania businesses,IMPORTANT:use tax A one-time registration for an
compliance c helps to level the playing field among ompliance e-Signaturehelps to level businessthe playing tax accountfield amongis required
e-commercee-c retailers and Pennsylvania’s brick and ommerce retailersto logandin.Pennsylvania’sVisitwww.pa100.state.pa.usbrick and .
mortarmortar stores.tores.s
Use Use tax is an important source of revenue for the tax is an important source of revenue for the
PennsylvaniaP General Fund. Every dollar collected is ennsylvania General Fund. Every dollar collected is
aa dollardollar aavailable for government and public services.vailable for governmentWhatandif UsepublicTaxservices.is not Paid?
FromFr an enforcement standpoint, when the om an enforcement standpoint, when the
DepartmentDepartment ofof RevenueR receives information on evenue receivesThe department identifies businesses that owe use tax information on
purchasespur where use tax is owed but was not paid, it chasesthrough routine audits, self-assessment programs, complaints, where use tax is owed but was not paid, it
willwill assessas the purchaser for not only the tax but also sess theinvestigations and lists of out-of-state purchases from vendors purchaser for not only the tax but also
penaltypenalty andand interestint for late payment.erest for late payment.and other states. The department can also identify businesses
that report minimal amounts of use tax. Underreporting of use
tax can trigger an audit by the department. The Department
of Revenue may issue an assessment for a use tax liability, on
which both penalty and interest charges may be imposed. These
additional charges can exceed 30% of the tax amount.
7 Starting a Business in Pennsylvania
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Pennsylvania Exemption Certificate
charity obtain a sales tax exemption number (75 number) by
Purchaser Information
completing the REV-72, Sales Tax Exemption Application.
Some businesses may purchase an item with the intent to use • The purchaser is a direct pay permit holder, individual holding
it in a manner that has been deemed exempt from one of the a diplomatic identification card, or tourist promotion agency.
following taxes: These entities do not receive account numbers. Direct pay
permit holders can obtain their numbers from the Revenue
• State and Local Sales/ Use Tax
website. Individuals with a diplomatic ID card can furnish
• State 6% and Local 1% Hotel Occupancy Tax their card as proof of eligibility for the exemption. Tourist
• Public Transportation Assistance Taxes (PTA) and Fees promotion agencies must contact the department to receive
• Vehicle Rental Tax (VRT) a letter stating they are exempt. They will provide this letter
• Additional Local, City, County Hotel Tax to the seller when purchasing promotional materials for
distribution to the public.
Depending on how you use the item or the type of business you
conduct, you may not have to pay these taxes when making a • The property or service will be used directly and
purchase. predominately by purchaser performing a public utility
service.
In order to claim a tax exemption, you must complete the REV-
The purchaser is located in Keystone Opportunity Zone or
1220, Pennsylvania Exemption Certificate and give the completed
Expanded Zone (KOZ/KOEZ) and has been approved under
form to the seller. A properly completed exemption certificate
the KOZ regulations. These entities should include their KOZ
that provides a valid reason for exemption and is accepted in
number which begins with 72, on Line 4.
good faith will relieve the seller from the duty to collect tax.
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
are made through the Department of
Community and Economic Development
Exemption Reasons
(DCED).
Businesses can use the REV-1220 to claim an exemption on
certain property and services for the following reasons: • 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
Agricultural Association; electric cooperative or credit union. NOTE: The REV-1220 cannot be used to
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 item with the intention of resale at a later time do not To claim an exemption from tax for a motor
need to pay sales tax. However, they will collect and remit vehicle, trailer, semi-trailer or tractor with the
the sales tax from the ultimate consumer. In most cases, PA Department of Transportation, Bureau of
these businesses should have already obtained a Sales Tax Motor Vehicles and Licensing, use:
License Number by completing the PA-100 Application. 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) 05-20 PENNSYLVANIA EXEMPTION This form cannot be used to
CERTIFICATE obtain a Sales Tax Account
STATE AND LOCAL SALES AND USE TAX ID, PTA Account 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:
3. Property will be resold under Account ID (If purchaser does not have a PA Sales Tax Account ID, include a
statement under Number 8 explaining why a number is not required).
4. Purchaser is a/an: holding Sales Tax Exemption Number
5. 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
6. Exempt wrapping supplies, Account ID (If purchaser does not have a PA Sales Tax Account ID, include
a statement under Number 8 explaining why a number is not required).
7. Canned computer software purchased by a financial institution subject to the Bank and Trust Company Shares Tax (Article VII) or the Mutual Thrift
Businesses can use Institutions Tax (Article XV).
8. Other
(Explain in detail. Additional space on reverse side).
the REV-1220 to 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.
claim an exemption Name of Purchaser or Lessee Signature EIN Date
on certain property Street City State ZIP Code
1. ACCEPTANCE AND VALIDITY:
and services... 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 information which is knowingly false; and (4) the property or service is consistent with the exemp-
tion to which the customer is entitled. For more information, refer to Exemption Certificates, Title 61 PA Code §32.2. An invalid certifi-
cate 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 pur-
chase 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
proprietorships, partnerships (general or limited), limited liability General Partnership
companies and corporations (S corporation or C corporation). A general partnership is formed by an
Regardless of your business structure, every business has an agreement entered into by each partner. This
income tax filing requirement in one form or another. How you agreement may be informal, but it is advisable
report this income and how it is taxed can be different depending to have a written, legal agreement among all
on the type of business structure you choose. parties.
Sole Proprietorship
Many small businesses operate as sole proprietorships. This
allows the single owner to have sole control and responsibility.
Limited Partnership
How to Report: Sole proprietors report income and expenses
using PA Schedule C (Profit or Loss from Business or Profession) A limited partnership is a partnership having
for each business. The sole proprietor then reports the profit or one or more general partners and one or
loss on a PA-40, PA Income Tax Return and pays tax at the state more limited partners. The limited partners
income tax rate of 3.07%. A taxpayer and spouse who jointly have limited exposure to liability and are not
own a sole proprietorship must separately report their portion of involved in the day-to-day management of the
the income or loss for the business. limited partnership.
If you expect to owe PA personal income tax, you may be
required to make estimated tax payments during the year.
If your income is expected to be over
$8,000 annually and is not subject to withholding by a PA Limited Liability Partnership
employer, you must file and remit estimated payments by Limited liability partnerships (LLPs) are
the 15th day of April, June, September and January. existing general or limited partnerships that file
elections with the Bureau of Corporations and
Charitable Organizations of the PA Department
Partnership of State, claiming LLP status. Limited liability
partnership status provides the general partners
Partnerships are separate legal entities in which two or with limitations and additional protection on
more parties are typically involved. Regardless of the type of their personal liabilities as general partners.
partnership, it is important to have a partnership agreement. The
partnership agreement should at least cover the contributions of
each partner, the distribution of profits or losses, and the terms
How to Report: When preparing Pennsylvania tax documents, it
for dissolution. Without a written agreement, the profits and
is best to start with the completed federal Form 1065, U.S. Return
losses are presumed to be distributed equally. The department
of Partnership Income, and then proceed to the PA schedules,
reserves the right to ask for a copy of this agreement at any time.
forms and returns. Partnerships must use PA personal income tax
rules for determining income.
11 Starting a Business in Pennsylvania
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revenue.pa.gov
Partnerships, general and limited, are required to file a PA-
20S/PA-65, PA S Corporation/Partnership Information Return, Limited Liability Company
to report the adjustments to the federal income, deductions,
gains, losses, etc. from their operations for PA personal income Limited liability companies (LLCs) are popular because, similar
tax purposes. The partnership then passes any profits or losses to corporations, owners have limited personal liabilities for the
through to their partners. They report this income or loss to their debts and actions of the LLC. Other features of LLCs are more like
partners by providing each PA resident partner with PA Schedule a partnership, providing management flexibility and the benefit
RK-1, Resident Schedule of Shareholder/Partner/Beneficiary of pass-through taxation.
Pass-Through Income, Loss and Credits, and each nonresident Owners of an LLC are called members. Since most states do
partner with PA Schedule NRK-1, Nonresident Schedule of not restrict ownership, members may include individuals,
Shareholder/Partner/Beneficiary Pass- Through Income, Loss corporations, other LLCs and foreign entities. There is no
and Credits. These schedules show the partners what their share maximum number of members. Most states also permit single-
of the income or loss is by PA class of income and any other items member LLCs and LLCs jointly owned by husband and wife.
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
1. A partner that is an individual, estate, or trust must LLCs, such as banks, insurance companies
include their share of income from a partnership on and nonprofit organizations.
their personal income tax return or fiduciary income
tax return.
2. A partner that is a partnership or an S corporation will Single-Members/How to Report: The individual owner of a single
include its share of income from a partnership on its member LLC that receives net profit income reports its income
PA-20S/PA-65 return. and expenses using PA Schedule C (Profit or Loss from Business
3. A partner that is a C corporation will include its share or Profession). The individual owner of a single-member LLC
of income from a partnership on its corporation tax that owns and operates a rental property reports its income and
return. expenses using PA Schedule E (Rents and Royalty Income (Loss).
An entity owner of a single member LLC reports its income 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
NOTE: A partnership may file a PA-40 NRC, as partnerships or S corporations for federal income tax purposes
Nonresident Consolidated Income Tax are required to file the PA-20S/PA-65, PA S Corporation/
Return, on behalf of its qualifying electing Partnership Information Return, and provide each PA resident
nonresident individual owners. The PA- partner with a PA Schedule RK-1 and each nonresident partner
40 NRC must be filed separately from all with a PA Schedule NRK-1.
other PA tax returns and must include more
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
at the current rate of 9.99%. This income is reported on the
Corporate Net Income Tax Report (RCT-101).
continued on next page
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REPORTING PENNSYLVANIA INCOME
Business Structure cont.
Corporation Pennsylvania S Corporation S
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
federal income tax rules for determining income with some holding more than one-half of the shares of
adjustments. stock of the corporation on the day on which
the revocation is made. This letter must
Pennsylvania S Corporation contain the name of the corporation, the
federal employer identification number (FEIN),
and the 10-digit Revenue ID/BP number and
An S corporation is a closely held corporation which has elected,
the effective date of the revocation. If no
with the consent of all shareholders, a taxation status which
effective date is provided, the revocation will
permits shareholders to pay taxes on the individual level and
be effective for the first tax period for which
at the individual tax rates, similar to a partnership with “pass-
the revocation was timely submitted. In the
through taxation” rather than at the corporate level. Shareholders
case 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 Revenue ID numbers of all qualified
income tax rate of 3.07%. S corporation status is limited to
subchapter S subsidiaries doing business in PA.
corporations that have a limited number of shareholders. Unless
the shareholders of a PA S corporation are members of the same Mail the letter to:
family, the maximum number of shareholders an S corporation PA DEPARTMENT OF REVENUE
may have is 100. PO BOX 280901
HARRISBURG PA 17128-0901
For tax periods beginning after Dec. 31, 2005, entities considered
to be federal S corporations are automatically considered to be Fax the letter to:
PA S corporations (IRC 1361-1379). A federal S corporation may 717-787-3708
elect not to be taxed as a PA S corporation by filing the REV-976, Or, email the letter to:
Election not to be Taxed as a PA S corporation, on or before the RA-BTFTREGISFAX@PA.GOV
due date or extended due date of the PA Corporate Net Income
Tax Report for the first year in which the election is to take effect. The deadline for revocation of an election not
Once this election is made, it cannot be revoked for five years. to be taxed as a PA S corporation is the 15th
day of the third month of the year in which
the revocation is to be in effect. A revocation
submitted after the due date will be in effect
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. These
schedules show the shareholder’s portion of the income or loss Net Operating Losses Cap
by PA class of income and determine which other items are
required to be reported. Copies of all PA Schedules RK-1s and Taxable Year Net Operating Loss Cap
NRK-1s should be included with the PA-20S/PA-65.
2017 30% of PA taxable income
2018 35% of PA taxable income
NOTE: If an S corporation has taxable built- 2019+ 40% of PA taxable income
in gains, it will be subject to corporate net
income tax. In such a case, the S corporation
must file an RCT-101, to report and pay How to Report: All corporations must file an RCT-101, PA
corporate net income tax on the built-in Corporate Tax Report and include copies of appropriate federal
gains. forms (1120 or 1120-REIT) and supporting schedules.
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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 PA-
corporate partner on the PA-65 Corp, Directory of Corporate 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
For PA personal income tax purposes, the depreciation method
and useful life may follow the federal rules for determining the
NOTE: Usually costs for a particular asset depreciation expense as long as the basis of the asset is the
(such as machinery or office equipment) same for federal and Pennsylvania purposes and the method and
are recovered through depreciation. Other useful life for the asset for federal purposes follows the Internal
start-up costs can be recovered through Revenue code of 1986. If the basis of any asset differs from the
amortization, when the costs are deducted federal basis, you must use straight-line depreciation for PA
in equal amounts over a period of 180 personal income tax purposes.
months or more. Business start-up costs Businesses may also elect to expense up to $25,000 of the cost
that are not amortized generally cannot of certain assets as an IRC Section 179 expense. There is a dollar-
be recovered until assets are sold or the for-dollar reduction of the PA Section 179 expense for each dollar
business is discontinued. of investment in new assets that exceeds $200,000.
Depreciation
NOTE: For PA personal income tax
If property acquired for your business has a useful life exceeding purposes, the limit for IRC Section 179
one year, you generally cannot deduct the entire cost as a is different than the federal limit. Also,
business expense in the year you acquire the property. Instead, PA income tax rules do not allow you to
you must spread the deduction out over more than one tax immediately expense a percentage of your
year. This method of deducting the cost of business property assets (called “bonus depreciation”) like
is depreciation. The key difference between amortization and federal does.
depreciation is that you use amortization for intangible assets,
while you use depreciation for tangible assets.
Sole Proprietorships/ How to Report: Use PA Schedule C
Examples of depreciable property include the following: (Profit or Loss from Business or Profession), Line 13a to report
• Office furniture depreciation expense on your assets. Use Line 13b to report any
• Buildings and leasehold improvements Section 179 expense you elect to take.
• Machinery and equipment Partnerships and PA S corporations/ How to Report: You report
You may deduct a limited amount of the cost of certain depreciation expense on either the federal Form 1065, Line 16a
depreciable property in the year you place the property in or Form 1120-S, Line 14. You will also need to complete federal
service (and each year thereafter throughout its useful life) as Form 4562, Depreciation and Amortization. Remembering that
depreciation expense. You usually maintain and keep track of PA personal income tax rules do not allow IRC 179 expenses
depreciable assets and the yearly depreciation expense via a over $25,000 or bonus depreciation, you may need to make an
depreciation schedule. adjustment to your federal income. You make this adjustment on
the PA Schedule M for the PA-20S/PA-65. See the Instructions for
To set up a simple depreciation schedule, record the date of Schedule M for where to include your adjustment(s).
purchase, the amount paid for an item and its useful life, then
decide upon a depreciation method. Straight-line depreciation C corporations/ How to Report: You report depreciation
is the simplest method, where you deduct the cost of each item expense on the federal Form 1120, Line 20. You will also need
equally over time. to complete federal Form 4562, Depreciation and Amortization.
Pennsylvania corporate net income tax rules also do not allow
For example, you can deduct the cost of an $1,800 computer federal bonus depreciation. You would adjust your federal
with a useful life of five years at $30 a month ($1,800 divided by income using Schedule C-8, Adjustment for Bonus Depreciation,
60 months). or Schedule C-9, Adjustment for Deduction for Property which is
You must track the depreciation expense claimed each taxable Fully Depreciated, Sold or Otherwise Disposed.
year until you fully depreciate the item. You record the amount
deducted each year as a depreciation expense as accumulated
depreciation. 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
19 Starting a Business in Pennsylvania
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revenue.pa.gov
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 www.etides.state.
expenses. pa.us/usetax.
You may claim limited deductions for business use when you use In order to calculate how much use tax is due on utilities, you
part of your home exclusively and regularly as follows: must calculate the business use percentage of the residence you
are using for commercial activities and multiply the total utility
• The principal place where you conduct any trade or business.
bill by that percent.
• A place to meet or deal with patients, clients or customers in
the normal course of your trade or business. Example: Dave is a salesman and his employer requires him to
maintain a home office. He has 2,000 square feet in his house -
• In connection with your trade or business, if you are using a
of which 300 square feet he uses exclusively as his office. He uses
separate structure not attached to your residence.
15% of his house as his office. He pays $2,400 for electricity. He
Examples of business use of your home expenses generally owes use tax on $360 (15% of $2,400).
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
• Utilities expense use tax on utilities during the previous filing period
• Insurance expense using Line 25 of the PA-40, Personal Income Tax Return.
• Repairs and maintenance expense These notices will include key points of reference, such
• Real estate taxes as Business Partner (BP) numbers and notice numbers to
enable taxpayers to report and pay 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
home, you must calculate the percentage of the property you All payment due dates will remain consistent
are using for commercial activities. To calculate the business use with PA-40 due dates to maintain timeliness.
percentage, divide the square footage of the property used for a The department will not impose penalty if
work area by the total square footage of the entire property or this approach is used.
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
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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.
Helpful Practices
The department offers a full range of online features that allow
you to fulfill your tax needs at any time, from anywhere. We
encourage taxpayers to use these services to become more Maintain daily business records: Records can help you to monitor
efficient and accurate when dealing with their tax obligations. the progress of your business which allows you to see whether
Below are just a few things that we have to offer: your business is improving or if you need to make any changes.
Electronic Filing: We offer two options for filing your returns Identify the source of all receipts: You will receive money or
and payments electronically. E-TIDES and TeleFile are both fast property from many sources. Your records identify the sources of
and easy. Upon filing your returns, you will receive proof of your receipts, and you need this information to separate business
submission regardless of which system you use. This can help you from nonbusiness receipts, and taxable from nontaxable income.
to avoid additional penalties and interest. The department also Record expenses when they occur: You may forget deductible
ensures that our electronic filing systems are safe and secure to business expenses when you prepare your tax return. Recording
help protect your information. them when they occur helps you to track your deductible
Electronic Payments: Tax obligations, including estimated expenses and ensure you are receiving the credit you deserve.
payments, may be paid electronically by credit card, debit card or Keep complete records on all assets: Good records enable you to
by electronic funds transfer. You no longer have to be concerned prepare accurate financial statements, including income (profit
about a payment getting lost in the mail. and loss) statements and balance sheets. Such statements help
Account Maintenance: You can change an address, view filing you in dealing with your bank or creditors. An income statement
history, add and remove third party access for preparers or shows the income and expenses of the business for a given
bookkeepers, and much more. period of time. A balance sheet shows the assets, liabilities and
your equity in the business on a given date.
e-SOA: You can receive an electronic Statement of Account for
your business taxes within 24 hours of requesting the document. Retain supporting documents: Your business records must
Each e-SOA includes the three most recently filed tax periods, be available for inspection by the IRS and/or the Department
non-filed tax periods, tax periods with open liabilities, payments of Revenue. If the IRS or department examine any of your
or credits grouped by tax type. Additional sections show tax tax returns, you may be asked to explain the items reported.
periods under appeal, unused restricted credits and W-2 annual Complete records will facilitate the examination.
reconciliation, if applicable.
Supporting Documents
e-Correspondence: When you enroll to receive your business
tax correspondence electronically, it streamlines the process It is important to retain supporting documents in an orderly
and allows you to access your information faster and more fashion and in a safe place because they support your
efficiently. You can view, download, and print your business tax recordkeeping and information on your tax return. Generally, it is
correspondence at your own convenience, saving you valuable a good idea to keep these documents in file folders by designated
time. categories.
Online Customer Service Center: You can go online to search Assets: Assets are property, such as machinery and furniture,
thousands of frequently asked questions. If you still cannot find which you own and use in your business. You must keep records
the answer you are looking for, just create an account and submit to calculate annual depreciation and gain or loss when you sell
your question. We will respond via email within 72 hours. the assets. Your asset records should show the following:
• When and how you acquired the asset
• Purchase price
• Date of purchase
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revenue.pa.gov
• Cost of any improvements
• Deductions taken for depreciation Supporting documents should show the
• Deductions taken for casualty losses amount paid for such purchases. These records
will help you determine the value of inventory
• How you used the asset
at the end of the year:
• When and how you disposed of the asset
• Canceled checks
• Selling price
• Cash register tapes
• Expenses of sale
• Credit card sales slips
• 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
• Canceled checks deducted as business expenses.
Example: To deduct the cost of taking a client to lunch, you
Expenses: Expenses are costs incurred to carry on your business, should record the name of the person and the purpose of the
and supporting documents should detail the amounts paid for business lunch or the topics discussed over lunch. For more
business expenses. Examples are: information on federal rules, consult Internal Revenue Service
• Canceled checks Publication 463, Travel, Entertainment Gift and Car Expenses. For
• Cash register tapes Pennsylvania rules, see the instruction booklets accompanying
your PA tax returns.
• Account statements
• Credit card sales slips Employees: Any person employed for wages or salary by your
company is considered an employee. It is important to keep
• Invoices
records of payroll information pertaining to your employees’
• Petty cash system for small cash purchases* wages and withholding, as well as records of their personnel files.
*A petty cash fund allows you to make payments without Examples of employee personnel records are:
having to write checks for small amounts. Each time you • Names of Employees
make a payment from petty cash, you should prepare a
• Addresses of Employees
disbursement slip and attach it to your receipt as proof of
payment. • SSN of Employees
• Occupation
Gross receipts: Gross receipts are payments you receive for
goods and services you provide in your business. You should • Dates of Employment
retain supporting documents that show the amounts and sources If there are changes to names, addresses and/or the employee’s
of your gross receipts, such as: occupation, you will want to keep both the old record and the
• Cash register tapes updated one until that employee’s departure from your company.
• Bank deposit slips Examples of payroll records include:
• Receipt books • Amounts and dates of all wage, annuity, pension payments
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
Purchases: Purchases are items you buy and resell to customers.
• Records of fringe benefits and expense reimbursements
If you are a manufacturer or producer, purchases include the
provided by your employees
cost of all raw materials and parts purchased for manufacturing
finished products. • Issued W2’s and 1099 Statements
continued on next page
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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
How to Update Your Address: To update your business address, of the obligation to timely notify the
complete form REV-1705 R, Tax Accovunt Information Change/ department of the planned bulk purchase,
Correction Form. nor does it relieve the purchaser of any
liability for the seller’s unpaid sales and use
taxes.
If you are registered with e-TIDES, you can select “Enterprise
Maintenance” and follow the prompts until it gives you
The purchaser or seller must notify the Department of Revenue
the option to “View/Update Enterprise Information.”
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
CONTACT
equipment, you may be held personally liable for the amount of
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 e-Business Center: 717-783-6277
the date of transfer. If the purchaser fails to obtain a Bulk Sales
Clearance Certificate from the seller, the purchaser will become 1-888-PATAXES (728-2937)
liable for all unpaid taxes the seller owes up to and including Call to order forms or check the status
the date of transfer, regardless of whether or not the taxes have of a personal income tax account or
been settled, assessed or determined at that time. property tax and rent rebate.
Automated Forms
Ordering Service
1-800-362-2050
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