PRINTER'S NO. 3889
No. 2912 Session of 1994
INTRODUCED BY S. H. SMITH, CESSAR, STEELMAN, FARGO, FLEAGLE,
NICKOL, GEIST, STETLER, BROWN, SATHER, LAUB, ADOLPH, MERRY,
REBER, STAIRS, ROHRER, BARLEY, STERN, HENNESSEY,
E. Z. TAYLOR, EGOLF, WOGAN, D. W. SNYDER, STEIL, ARMSTRONG,
TOMLINSON AND SERAFINI, JUNE 14, 1994
REFERRED TO COMMITTEE ON FINANCE, JUNE 14, 1994
AN ACT
1 Amending the act of March 4, 1971 (P.L.6, No.2), entitled "An
2 act relating to tax reform and State taxation by codifying
3 and enumerating certain subjects of taxation and imposing
4 taxes thereon; providing procedures for the payment,
5 collection, administration and enforcement thereof; providing
6 for tax credits in certain cases; conferring powers and
7 imposing duties upon the Department of Revenue, certain
8 employers, fiduciaries, individuals, persons, corporations
9 and other entities; prescribing crimes, offenses and
10 penalties," further providing for the definition of "small
11 corporation," for elections by small corporations, for
12 corporations that cease to be small corporations and for loss
13 deductions by small corporations.
14 The General Assembly of the Commonwealth of Pennsylvania
15 hereby enacts as follows:
16 Section 1. Sections 301(s.2), 307 and 307.4 of the act of
17 March 4, 1971 (P.L.6, No.2), known as the Tax Reform Code of
18 1971, added December 23, 1983 (P.L.370, No.90), are amended to
19 read:
20 Section 301. Definitions.--The following words, terms and
21 phrases when used in this article shall have the meaning
22 ascribed to them in this section except where the context
1 clearly indicates a different meaning. Any reference in this
2 article to the Internal Revenue Code shall include the Internal
3 Revenue Code of 1954, as amended to the date on which this
4 article is effective:
5 * * *
6 (s.2) "Small corporation" means any corporation which has a
7 valid election in effect under subchapter S of Chapter 1 of the
8 Internal Revenue Code of 1954, as amended as of January 1, 1983,
9 and which does not have passive investment income in excess of
10 twenty-five per cent of its gross receipts for each of three
11 consecutive tax years. For purposes of this clause, "passive
12 investment income" means gross receipts derived from royalties,
13 rents, dividends, interest, annuities and sales or exchanges of
14 stock or securities (gross receipts from such sales or exchanges
15 being taken into account only to the extent of gains therefrom).
16 * * *
17 Section 307. [Election by Small Corporation.--Except as
18 provided in section 307.6, any small corporation may elect not
19 to be subject to the tax imposed under Article IV. Such election
20 shall be valid only if all the shareholders of the corporation
21 on the day on which the election is made consent to the
22 election.] Automatic Exemption.--Notwithstanding any other
23 provision of this act, any small corporation shall automatically
24 be exempt from Article IV without filing a separate election
25 with the department. Any small corporation that wishes to be
26 subject to the tax imposed under Article IV must make a special
27 election with the department.
28 Section 307.4. Termination by Corporation Ceasing to be a
29 Small Corporation.--(a) If a corporation ceases to be a small
30 corporation, as defined in section 301(s.2), [the election under
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1 section 307 shall terminate] the corporation shall no longer be
2 considered a small corporation for purposes of this article.
3 (b) Such termination shall be effective on the date on which
4 the corporation ceases to be a small corporation, as defined in
5 section 301(s.2).
6 Section 2. Section 401(3)4 of the act, amended July 1, 1985
7 (P.L.78, No.29) and August 4, 1991 (P.L.97, No.22), is amended
8 to read:
9 Section 401. Definitions.--The following words, terms, and
10 phrases, when used in this article, shall have the meaning
11 ascribed to them in this section, except where the context
12 clearly indicates a different meaning:
13 * * *
14 (3) "Taxable income." * * *
15 4. (a) For taxable years beginning in 1982 through taxable
16 years beginning in 1990, a net loss deduction shall be allowed
17 from taxable income as arrived at under subclause 1 or, if
18 applicable, subclause 2. For taxable years beginning in 1991 and
19 thereafter, the net loss deduction allowed for years prior to
20 1991 shall be suspended, and no carryover of net losses from
21 taxable years 1988, 1989 and 1990 shall be utilized in
22 calculating net income.
23 (b) A net loss for a taxable year is the negative amount for
24 said taxable year determined under subclause 1 or, if
25 applicable, subclause 2. Negative amounts under subclause 1
26 shall be allocated and apportioned in the same manner as
27 positive amounts.
28 (c) The net loss deduction shall be the lesser of the amount
29 of the net loss or losses which may be carried over to the
30 taxable year or taxable income as determined under subclause 1
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1 or, if applicable, subclause 2. A net loss for a taxable year
2 may only be carried over pursuant to the following schedule:
3 Taxable Year Carryover
4 1981 1 taxable year
5 1982 2 taxable years
6 1983 and thereafter 3 taxable years
7 The earliest net loss shall be carried over to the earliest
8 taxable year to which it may be carried under this schedule.
9 (d) No loss shall be a carryover from a taxable year when
10 the corporation [elects to be treated as a Pennsylvania S
11 corporation pursuant to] is considered to be a small corporation
12 under section 307 of Article III of this act to a taxable year
13 when the corporation is subject to the tax imposed under this
14 article.
15 (e) Paragraph (d) shall not prevent a taxable year when a
16 corporation is a Pennsylvania S corporation from being
17 considered a taxable year for determining the number of taxable
18 years to which a net loss may be a carryover.
19 (f) For purposes of the net loss deduction, the short
20 taxable year of a corporation, after [the revocation or
21 termination of an election to be treated as a Pennsylvania S
22 corporation pursuant to sections 307.3 and 307.4] election to
23 become subject to this article under section 307 of Article III
24 of this act, shall be treated as a taxable year.
25 (g) In the case of a change in ownership by purchase,
26 liquidation, acquisition of stock or reorganization of a
27 corporation in the manner described in section 381 or 382 of the
28 Internal Revenue Code of 1954, as amended, the limitations
29 provided in the Internal Revenue Code with respect to net
30 operating losses shall apply for the purpose of computing the
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1 portion of a net loss carryover recognized under paragraph
2 (3)4(c) of this section. When any acquiring corporation or a
3 transferor corporation participated in the filing of
4 consolidated returns to the Federal Government, the entitlement
5 of the acquiring corporation to the Pennsylvania net loss
6 carryover of the acquiring corporation or the transferor
7 corporation will be determined as if separate returns to the
8 Federal Government had been filed prior to the change in
9 ownership by purchase, liquidation, acquisition of stock or
10 reorganization.
11 * * *
12 Section 3. This act shall apply to the tax year beginning
13 January 1, 1994.
14 Section 4. This act shall take effect immediately.
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