An Act amending the act of March 4, 1971 (P.L.6, No.2), known as the Tax Reform Code of 1971, in personal income tax, further providing for definitions, providing for elective tax imposed at pass-through entity level and further providing for taxability of partners and for income of a Pennsylvania S corporation.

PRIOR PRINTER'S NO. 343 PRINTER'S NO. 508
THE GENERAL ASSEMBLY OF PENNSYLVANIA
SENATE BILL
No. 396
Session of
2025
INTRODUCED BY MASTRIANO, CULVER, PISCIOTTANO AND STEFANO,
MARCH 6, 2025
SENATOR HUTCHINSON, FINANCE, AS AMENDED, APRIL 1, 2025
AN ACT
Amending the act of March 4, 1971 (P.L.6, No.2), entitled "An
act relating to tax reform and State taxation by codifying
and enumerating certain subjects of taxation and imposing
taxes thereon; providing procedures for the payment,
collection, administration and enforcement thereof; providing
for tax credits in certain cases; conferring powers and
imposing duties upon the Department of Revenue, certain
employers, fiduciaries, individuals, persons, corporations
and other entities; prescribing crimes, offenses and
penalties," in personal income tax, further providing for
definitions, providing for elective tax imposed at pass-
through entity level and further providing for taxability of
partners and for income of a Pennsylvania S corporation.
The General Assembly of the Commonwealth of Pennsylvania
hereby enacts as follows:
Section 1. Section 301(w) of the act of March 4, 1971
(P.L.6, No.2), known as the Tax Reform Code of 1971, is amended
to read:
Section 301. Definitions.--Any reference in this article to
the Internal Revenue Code of 1986 shall mean the Internal
Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. § 1 et seq.),
as amended to January 1, 1997, unless the reference contains the
phrase "as amended" and refers to no other date, in which case
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the reference shall be to the Internal Revenue Code of 1986 as
it exists as of the time of application of this article. The
following words, terms and phrases when used in this article
shall have the meaning ascribed to them in this section except
where the context clearly indicates a different meaning:
* * *
(w) "Taxpayer" means any individual, estate or trust subject
to the tax imposed by this article, any partnership having a
partner who is a taxpayer under this act, any Pennsylvania S
corporation having a shareholder who is a taxpayer under this
act [and], any person required to withhold tax under this
article and, unless otherwise provided, a pass-through entity
that elects to pay the tax imposed under section 302.3.
Section 2. The act is amended by adding a section to read:
Section 302.3. Elective Tax Imposed at Pass-Through Entity
Level.--(a) Notwithstanding any other provision of this
article, a pass-through entity may elect, on an annual basis, to
have the tax imposed under this article applied to the income of
the pass-through entity. The following shall apply:
(1) An electing partnership shall be subject to and shall
pay a tax imposed at the rate provided in section 302(b) on:
(i) Each resident taxable owner's share of each class of
income and gain enumerated in section 303 for the taxable year.
(ii) Each nonresident taxable owner's share of each class of
income and gain enumerated in section 303 from sources within
this Commonwealth for the taxable year.
(2) An electing Pennsylvania S corporation with all resident
shareholders shall be subject to and shall pay a tax imposed at
the rate provided in section 302(b) on each resident taxable
owner's share of each class of income and gain enumerated in
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section 303 from sources within this Commonwealth for the
taxable year.
(3) An electing Pennsylvania S corporation whose
shareholders are comprised of either nonresident shareholders,
or resident and nonresident shareholders shall be subject to and
shall pay a tax imposed at the rate provided in section 302(b)
on each taxable owner's share of each class of income and gain
enumerated in section 303 from sources within this Commonwealth
for the taxable year.
(4) An entity that is disregarded for tax purposes under
this article shall be disregarded for the purposes of this
section.
(5) In determining its tax under this section, a pass-
through entity that owns a direct or indirect ownership interest
in one or more pass-through entities shall include its share of
each class of income enumerated in section 303 received from
those pass-through entities. The pass-through entity that
generates an item of income, gain or loss shall determine its
classification and whether that item of income, gain or loss
constitutes income or loss from sources within this
Commonwealth.
(6) Guaranteed payments made to a partner in a partnership
shall be treated as additional income allocated to the partner.
With respect to a nonresident taxable owner, only guaranteed
payments that constitute income from sources within this
Commonwealth shall be subject to the tax under this section.
(7) In determining the tax due under this section, a pass-
through entity shall not be permitted to use any tax credits
otherwise available to the pass-through entity except a credit
for estimated taxes paid for the current taxable year under this
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section or an overpayment of a prior-year tax paid under this
section.
(b) (1) Any election described under subsection (a) shall
be made by an individual with authority to bind the pass-through
entity or sign returns under this article or who is authorized
to make the election and represents to having the authorization
under penalty of perjury on or before the original due date of
the pass-through entity's return under this article for the
taxable year in a manner prescribed by the department.
(2) Only one election may be submitted by an individual
identified under clause (1) on behalf of the pass-through entity
to the department for the taxable year.
(3) An election made under this section shall be irrevocable
for the taxable year.
(4) An election under this section may be made only for tax
years that the limitation on individual deductions applies under
26 U.S.C. § 164(b)(6) (relating to taxes).
(c) (1) A taxable owner of an interest in a pass-through
entity that elects to pay tax under subsection (a) shall be
allowed a refundable credit against the tax imposed under
section 302 in the amount of the taxable owner's share of the
tax that the pass-through entity actually paid under this
section. A taxable owner's share of the tax shall take into
account guaranteed payments and other special allocations made
to the owner.
(2) A taxable owner shall be entitled to claim the credit
under clause (1) on the taxable owner's tax return that includes
the corresponding income and gain of the pass-through entity.
(3) The credit allowed under this subsection shall be
applied after the application of all other tax credits available
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to the owner for the taxable year. If the amount of the credit
allowable under this subsection for any taxable year exceeds the
tax due for the year under this article, the excess amount shall
be treated as an overpayment, to be credited or refunded.
(4) No credit shall be allowed to a taxable owner under
clause (1) unless the electing pass-through entity paid the tax
imposed under this article and provides the department on its
tax return all the information required in subsection (d)(3) and
(4).
(5) The aggregate amount of credits claimed by all taxable
owners of a pass-through entity under clause (1) may not exceed
the tax that the pass-through entity paid under subsection (a)
for the taxable year.
(d) (1) On or before the date provided under section
330.1(b) or 335(c), each pass-through entity that elects to pay
tax under subsection (a) shall file a return for the taxable
year reporting the information required under this subsection
and pay the tax due.
(2) If a pass-through entity is granted an extension to file
a return required to be filed under section 330.1(b) or 335(c),
the extension shall apply for purposes of filing the return
under this section, but not for the payment of any tax due under
subsection (a).
(3) The return filed under clause (1) shall include, in a
format as prescribed by the department, a certification by an
individual authorized to act on behalf of the pass-through
entity, which includes that all statements contained in the
return are true and correct.
(4) Each pass-through entity that elects to pay tax under
subsection (a) shall report on a return required under this
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article the following:
(i) Any tax due under this article. The balance of any tax
shown on the return, not previously paid as installments of
estimated tax or an overpayment of a prior-year tax, shall be
paid with the return.
(ii) Identifying information of each taxable owner eligible
to receive a credit under subsection (c), including a Social
Security number or tax identification number and status as a
resident or nonresident. The pass-through entity must provide
information sufficient to identify a disregarded entity and its
taxable owners.
(iii) For each taxable owner who will be entitled to claim a
credit on a tax return, the taxable owner's share of the tax
imposed on the pass-through entity under this section.
(iv) Each resident taxable owner's share of the pass-through
entity's income and each nonresident taxable owner's share of
income from sources from within this Commonwealth included in
the tax base under this section.
(v) The classification of each owner as a taxable resident
or nonresident for purposes of calculating the pass-through
entity's tax liability under this section.
(vi) Any other information as required by the department.
(5) A pass-through entity that elects to pay tax under
subsection (a) shall not be required to withhold tax from a
nonresident taxable owner under section 324.
(6) To meet the requirements of this section, if a taxable
owner holds an interest in the pass-through entity through an
entity that is a disregarded entity for purposes of this
article, the pass-through entity must provide information
sufficient to identify both the disregarded entity that holds an
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interest in the pass-through entity and the taxable owner that
owns the disregarded entity and is eligible for a credit under
subsection (c).
(7) Each pass-through entity paying tax under this section
shall report to each taxable owner required to file a return
under this article a statement that contains the following
information:
(i) Classification as a resident taxable owner or a
nonresident taxable owner for purposes of calculating the pass-
through entity's tax under subsection (a).
(ii) The taxable owner's allocable share of the pass-through
entity's income included in the tax base for purposes of
computing the tax under subsection (a).
(iii) The owner's allocable share of the tax paid under
subsection (a).
(iv) Any other information, as required by the department.
(e) (1) Any assessment of tax imposed under this section,
including interest, penalties and additions, shall be assessed
against the pass-through entity at the tax rate applicable to
the tax year. The department may not assess any additional tax,
including interest, penalties and additions, against the taxable
owners.
(2) Any determination of an overpayment or refund of tax
imposed under this section made subsequent to the filing of the
return under subsection (d) shall be made at the pass-through
entity level at the tax rate applicable to the tax year.
(3) The pass-through entity shall be required to provide
each owner a statement of any adjustment of the taxable owner's
credit within ninety days of an assessment, overpayment or
refund becoming final.
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(4) The taxable owner shall report the adjustment of the
credit on an amended return for the taxable owner's taxable year
that includes the pass-through entity's taxable year for which
the tax was assessed.
(5) Only the pass-through entity may appeal or settle an
assessment or overpayment of tax issued under this section or
petition for a refund of tax imposed under this section.
(f) The basis of both a resident taxable owner and
nonresident taxable owner of a pass-through entity that elects
to pay tax under subsection (a) shall be determined as if the
election under subsection (b) had not been made and each of the
taxable owners of the taxed pass-through entity had properly
taken into account each taxable owner's pro rata share of the
taxed pass-through entity's items of income, gain, loss and
deduction in the manner required with respect to a pass-through
entity for which no such election is in effect.
(G) (1) AN IRREVOCABLE ELECTION TO BE AN ELECTING PASS-
THROUGH ENTITY FOR A TAXABLE YEAR SHALL BE MADE WITH THE FILING
OF A RETURN AND THE PAYING OF ANY TAX DUE FOR THE TAXABLE YEAR
ON OR BEFORE THE LATER OF NINETY (90) DAYS AFTER THE EFFECTIVE
DATE OF THIS SUBSECTION, OR THE DUE DATE, INCLUDING EXTENSIONS,
OF THE PASS-THROUGH ENTITY ' S TAX RETURN UNDER SECTION 330.1 OR
335(C). THE PERIOD FOR FILING A RETURN SHALL NOT BE EXTENDED. AN
ELECTION SHALL BE INVALID IF THE RETURN IS NOT FILED AND FULL
PAYMENT OF ANY TAX DUE IS NOT MADE ON OR BEFORE THE DUE DATE. A
PASS-THROUGH ENTITY ONLY MAY MAKE AN ELECTION UNDER THIS
SUBSECTION FOR A TAXABLE YEAR IN WHICH THE PASS-THROUGH ENTITY
FILED A TAX RETURN OR IS UNDER A VALID EXTENSION TO FILE A
RETURN FOR THE TAXABLE YEAR.
(2) THE TAX RETURN SHALL REFLECT ASSESSMENTS THAT CHANGE THE
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TAXABLE INCOME OF THE ELECTING PASS-THROUGH ENTITY, OR AMENDED
TAX RETURNS THAT THE ELECTING PASS-THROUGH ENTITY HAS FILED ON
OR BEFORE THE DUE DATE OF THE TAX RETURN UNDER PARAGRAPH (1)
THAT WOULD CHANGE A TAXABLE OWNER ' S PASS-THROUGH ENTITY CREDIT
FOR THE TAXABLE YEAR. THE CREDIT SHALL NOT BE ADJUSTED AT THE
PASS-THROUGH ENTITY LEVEL TO REFLECT ANY SUBSEQUENT CHANGES OF
THE ELECTING PASS-THROUGH ENTITY ' S TAXABLE INCOME.
(3) IN DETERMINING THE AMOUNT OF TAX DUE IN A TAXABLE YEAR,
AN ELECTING PASS-THROUGH ENTITY SHALL BE ENTITLED TO A CREDIT
FOR TAX WITHHELD AND REMITTED ON BEHALF OF A NONRESIDENT TAXABLE
OWNER AND REPORTED ON A SCHEDULE NRK-1 PROVIDED TO THE TAXABLE
OWNER FOR THE TAXABLE YEAR REDUCED BY ANY WITHHELD TAX REFUNDED
TO THE ELECTING PASS-THROUGH ENTITY OR CREDITED TO A SUBSEQUENT
TAX YEAR.
(4) THE DEPARTMENT SHALL HAVE THE AUTHORITY TO ADJUST THE
TAX IN CONNECTION WITH A RETURN FILED UNDER PARAGRAPH (1) WITHIN
TWELVE (12) MONTHS FROM THE FILING OF THE TAX RETURN.
(5) AN ELECTING PASS-THROUGH ENTITY SHALL PROVIDE THE
TAXABLE OWNER A STATEMENT DESCRIBED IN SUBSECTION (D)(7) ON OR
BEFORE THE LATER OF NINETY (90) DAYS FROM THE EFFECTIVE DATE OF
THIS SUBSECTION, OR THE DUE DATE, INCLUDING EXTENSIONS, OF THE
PASS-THROUGH ENTITY ' S TAX RETURN UNDER SECTION 330.1 OR 335(C).
THE PENALTY IN SECTION 353(F) SHALL APPLY TO EACH STATEMENT NOT
PROVIDED TO A TAXABLE OWNER WITHIN THE NINETY-DAY PERIOD.
(6) A TAXABLE OWNER SHALL CLAIM THE CREDIT IN SUBSECTION (C)
ON AN AMENDED TAX RETURN FOR THE TAXABLE YEAR OR IN THE CURRENT
TAX YEAR. AN AMENDED TAX RETURN MUST BE FILED IF THERE IS A
PENDING PETITION FOR REFUND OR PENDING APPEAL OF AN ASSESSMENT
OR PETITION FOR REFUND AS OF THE DUE DATE OF THE AMENDED TAX
RETURN.
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(7) IN DETERMINING THE AMOUNT OF THE CREDIT IN THIS SECTION,
A NONRESIDENT TAXABLE OWNER SHALL NOT BE PERMITTED TO CLAIM A
CREDIT FOR TAX THAT THE ELECTING PASS-THROUGH ENTITY WITHHELD
AND REMITTED ON BEHALF OF THE NONRESIDENT TAXABLE OWNER AND
TREATED AS A PAYMENT OF THE TAX UNDER THIS SECTION. A
NONRESIDENT TAXABLE OWNER SHALL NOT BE ENTITLED TO A REFUND OF,
OR CREDIT FOR, ANY PORTION OF THE CREDIT UNDER SUBSECTION (C)
FOR WHICH A REFUND OF PREVIOUSLY WITHHELD AND REMITTED TAX WAS
RECEIVED, OR AN OVERPAYMENT WAS APPLIED TO ANOTHER TAXABLE YEAR.
(8) IN DETERMINING WHETHER A RESIDENT TAXABLE OWNER IS
ENTITLED TO A REFUND OF THE CREDIT UNDER SUBSECTION (C), TAX
PAYMENTS OR CREDITS SHALL EXCLUDE TAX PAYMENTS MADE FOR THE
TAXABLE YEAR OR AVAILABLE CREDITS THAT WERE REFUNDED OR APPLIED
TO ANOTHER TAX YEAR OR TAX.
(9) A TAXABLE OWNER MAY NOT RECEIVE A DOUBLE TAX BENEFIT
THROUGH THE RETROACTIVE APPLICATION OF THIS SECTION IF THERE HAS
BEEN A PREVIOUS REFUND OR CREDIT TO ANOTHER TAXABLE YEAR OR TAX
OF A TAX OVERPAYMENT OR TAX CREDIT.
(10) A TAXABLE OWNER SHALL FILE AN AMENDED TAX RETURN ON OR
BEFORE ONE HUNDRED EIGHTY (180) DAYS AFTER THE EFFECTIVE DATE OF
THIS SUBSECTION. THE PERIOD FOR FILING AN AMENDED TAX RETURN
SHALL NOT BE EXTENDED. AN AMENDED TAX RETURN REQUESTING A REFUND
OR CREDIT FILED AFTER THE DUE DATE SHALL NOT BE ACCEPTED AND
PROCESSED.
(11) THE AMENDED TAX RETURN SHALL REFLECT ASSESSMENTS THAT
CHANGE THE TAXABLE INCOME OF THE TAXABLE OWNER AND REFUND CLAIMS
PENDING ON OR BEFORE THE DUE DATE OF THE TAX RETURN. IF AN
AMENDED TAX RETURN HAS BEEN FILED AFTER A PETITION FOR REFUND
HAS BEEN FILED, OR AN ADMINISTRATIVE OR JUDICIAL APPEAL OF AN
ASSESSMENT OR REFUND PETITION HAS BEEN TAKEN, THE AMENDED TAX
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RETURN SHALL BE DEEMED A PART OF THE ORIGINAL TAX RETURN UPON
PETITION OF THE TAXPAYER AT ANY SUBSEQUENT PROCEEDING AS THOUGH
IT HAD BEEN FILED WITH THE ORIGINAL TAX RETURN. A SEPARATE
APPEAL OF AN ASSESSMENT OR PETITION FOR REFUND SHALL NOT BE
REQUIRED TO BE FILED IF THE DETERMINATION OF THE CORRECT AMOUNT
OF THE CREDIT IN THIS SECTION DEPENDS UPON THE RESOLUTION OF THE
ISSUES IN THE APPEAL OR PETITION FOR REFUND.
(12) PARAGRAPH (6) SHALL APPLY TO AN ELECTING PASS-THROUGH
ENTITY THAT HAS FILED A CONSOLIDATED RETURN ON BEHALF OF SOME OR
ALL ELECTING NONRESIDENT TAXABLE OWNERS FOR A TAXABLE YEAR. AN
ELECTING PASS-THROUGH ENTITY ALSO MUST FILE AN AMENDED TAX
RETURN IF THE COMPOSITION OF TAXABLE OWNERS ELECTING TO FILE AS
PART OF THE CONSOLIDATED GROUP DIFFERS IN THE TAXABLE YEAR FOR
WHICH THE CREDIT IS BEING CLAIMED AND THE CURRENT TAXABLE YEAR.
(13) THE DEPARTMENT SHALL HAVE THE AUTHORITY TO ASSESS TAX
IN CONNECTION WITH AN AMENDED TAX RETURN FILED UNDER PARAGRAPH
(6) OR (12) WITHIN THE LATER OF TWELVE (12) MONTHS FOR THE
FILING OF THE AMENDED TAX RETURN, OR THE EXPIRATION OF THE
APPLICABLE STATUTE IN SECTION 348. IF THE STATUTE OF LIMITATIONS
FOR ASSESSING ADDITIONAL TAX IN SECTION 348 FOR A TAX YEAR HAS
OTHERWISE LAPSED, THE DEPARTMENT ONLY MAY ADJUST ITEMS RELATED
TO THE CREDIT DETERMINED IN SUBSECTION (C) AND PARAGRAPH (5).
(14) THE DEPARTMENT SHALL NOT ASSESS ANY INTEREST OR PENALTY
ARISING FROM THE TIMELY FILING OF A TAX RETURN AND PAYMENT OF
ANY TAX ARISING FROM THE APPLICATION OF THIS SUBSECTION. THE
DEPARTMENT SHALL NOT PAY ANY INTEREST ARISING FROM A REFUND OR
OVERPAYMENT ARISING FROM THE APPLICATION OF THIS SUBSECTION.
(g) (H) (1) Unless otherwise provided in, or inconsistent
with, this section, the provisions of this article shall apply
to this section.
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(2) The department may issue guidance and promulgate
regulations necessary for the implementation of this section.
(h) (1) (I) In the case of any taxable year that includes
the effective date of this clause, any nonresident withholding
made under section 324 by the pass-through entity for the
current tax year for an owner shall be applied by the pass-
through entity against its estimated tax liability.
(2) In the case of any taxable year that includes the
effective date of this clause, the department may not assess
interest and penalties against an eligible pass-through entity
for any underpayment of estimated tax due under subsection (d),
so long as the eligible pass-through entity acted in good faith
with no intent to defraud the Commonwealth.
(J) EXCEPT FOR SUBSECTION (G), THE PENALTY IN SECTION 353(F)
SHALL APPLY TO EACH STATEMENT NOT PROVIDED TO A TAXABLE OWNER
UNDER THIS SECTION.
(i) (K) As used in this section, the following words and
phrases shall have the meanings given to them in this subsection
unless the context clearly indicates otherwise:
"Electing pass-through entity." A pass-through entity that
elects for a taxable year to be subject to the tax under this
section to determine its tax in accordance with subsection (a).
"Nonresident taxable owner." An individual, estate or trust
subject to the tax imposed under this article, other than a
resident taxable owner, that is a partner, shareholder, member
or other owner of an interest in a pass-through entity that has
income from sources within this Commonwealth.
"Partnership." A domestic or foreign general partnership,
joint venture, limited partnership, limited liability company,
business trust or other unincorporated entity that for Federal
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income tax purposes is classified as a partnership. The term
does not include a publicly traded partnership.
"Pass-through entity." A partnership or Pennsylvania S
corporation.
"Resident taxable owner." A resident individual, resident
trust or resident estate that is a partner, shareholder, member
or other owner of an interest in a pass-through entity.
"Taxable owner." A resident taxable owner or nonresident
taxable owner. FOR TAX YEARS BEGINNING AFTER 2024, THE TERMS
" NONRESIDENT TAXABLE OWNER, " " RESIDENT TAXABLE OWNER " AND
" TAXABLE OWNER " SHALL INCLUDE THE GRANTOR OF A TRUST OR OTHER
PERSON TO THE EXTENT THAT THE GRANTOR OR THE OTHER PERSON IS
TAXABLE ON TRUST INCOME UNDER SECTION 302(C).
Section 3. Sections 306 and 307.8(a) of the act are amended
to read:
Section 306. Taxability of Partners.--Except as provided
under [section] sections 302.3 and 306.2, a partnership as an
entity shall not be subject to the tax imposed by this article,
but the income or gain of a member of a partnership in respect
of said partnership shall be subject to the tax and the tax
shall be imposed on his share, whether or not distributed, of
the income or gain received by the partnership for its taxable
year ending within or with the member's taxable year.
Section 307.8. Income of a Pennsylvania S Corporation.--(a)
A Pennsylvania S corporation shall not be subject to the tax
imposed by this article, except as provided under subsection (f)
and section 302.3, but the shareholders of the Pennsylvania S
corporation shall be subject to the tax imposed under this
article as provided in this article.
* * *
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Section 4. The amendment or addition of sections 301(w),
302.3, 306 and 307.8(a) of the act shall apply to taxable years
beginning after December 31, 2020. THIS ACT SHALL APPLY AS
FOLLOWS:
(1) THE AMENDMENT OR ADDITION OF SECTION 301(W), 306 AND
307.8(A) OF THE ACT SHALL APPLY TO TAXABLE YEARS BEGINNING
AFTER DECEMBER 31, 2022.
(2) (I) EXCEPT FOR SUBPARAGRAPH (II), THE AMENDMENT OF
SECTION 302.3 OF THE ACT SHALL APPLY TO TAXABLE YEARS
BEGINNING AFTER DECEMBER 31, 2022.
(II) THE ADDITION OF SECTION 302.3(G) OF THE ACT
SHALL APPLY TO TAXABLE YEARS BEGINNING IN 2023 AND 2024.
Section 5. This act shall take effect immediately.
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