SB 396 — 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.

PRINTER'S NO.   343

                     THE GENERAL ASSEMBLY OF PENNSYLVANIA



                        SENATE BILL
                        No. 396
                                               Session of
                                                 2025

     INTRODUCED BY MASTRIANO, CULVER, PISCIOTTANO AND STEFANO,
        MARCH 6, 2025

     REFERRED TO FINANCE, MARCH 6, 2025


                                    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," in personal income tax, further providing for
11      definitions, providing for elective tax imposed at pass-
12      through entity level and further providing for taxability of
13      partners and for income of a Pennsylvania S corporation.
14      The General Assembly of the Commonwealth of Pennsylvania
15   hereby enacts as follows:
16      Section 1.    Section 301(w) of the act of March 4, 1971
17   (P.L.6, No.2), known as the Tax Reform Code of 1971, is amended
18   to read:
19      Section 301.    Definitions.--Any reference in this article to
20   the Internal Revenue Code of 1986 shall mean the Internal
21   Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. § 1 et seq.),
22   as amended to January 1, 1997, unless the reference contains the
23   phrase "as amended" and refers to no other date, in which case
 1   the reference shall be to the Internal Revenue Code of 1986 as
 2   it exists as of the time of application of this article. The
 3   following words, terms and phrases when used in this article
 4   shall have the meaning ascribed to them in this section except
 5   where the context clearly indicates a different meaning:
 6      * * *
 7      (w)    "Taxpayer" means any individual, estate or trust subject
 8   to the tax imposed by this article, any partnership having a
 9   partner who is a taxpayer under this act, any Pennsylvania S
10   corporation having a shareholder who is a taxpayer under this
11   act [and], any person required to withhold tax under this
12   article and, unless otherwise provided, a pass-through entity
13   that elects to pay the tax imposed under section 302.3.
14      Section 2.    The act is amended by adding a section to read:
15      Section 302.3.    Elective Tax Imposed at Pass-Through Entity
16   Level.--(a)   Notwithstanding any other provision of this
17   article, a pass-through entity may elect, on an annual basis, to
18   have the tax imposed under this article applied to the income of
19   the pass-through entity. The following shall apply:
20      (1)    An electing partnership shall be subject to and shall
21   pay a tax imposed at the rate provided in section 302(b) on:
22      (i)    Each resident taxable owner's share of each class of
23   income and gain enumerated in section 303 for the taxable year.
24      (ii)    Each nonresident taxable owner's share of each class of
25   income and gain enumerated in section 303 from sources within
26   this Commonwealth for the taxable year.
27      (2)    An electing Pennsylvania S corporation with all resident
28   shareholders shall be subject to and shall pay a tax imposed at
29   the rate provided in section 302(b) on each resident taxable
30   owner's share of each class of income and gain enumerated in

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 1   section 303 from sources within this Commonwealth for the
 2   taxable year.
 3      (3)     An electing Pennsylvania S corporation whose
 4   shareholders are comprised of either nonresident shareholders,
 5   or resident and nonresident shareholders shall be subject to and
 6   shall pay a tax imposed at the rate provided in section 302(b)
 7   on each taxable owner's share of each class of income and gain
 8   enumerated in section 303 from sources within this Commonwealth
 9   for the taxable year.
10      (4)     An entity that is disregarded for tax purposes under
11   this article shall be disregarded for the purposes of this
12   section.
13      (5)     In determining its tax under this section, a pass-
14   through entity that owns a direct or indirect ownership interest
15   in one or more pass-through entities shall include its share of
16   each class of income enumerated in section 303 received from
17   those pass-through entities. The pass-through entity that
18   generates an item of income, gain or loss shall determine its
19   classification and whether that item of income, gain or loss
20   constitutes income or loss from sources within this
21   Commonwealth.
22      (6)     Guaranteed payments made to a partner in a partnership
23   shall be treated as additional income allocated to the partner.
24   With respect to a nonresident taxable owner, only guaranteed
25   payments that constitute income from sources within this
26   Commonwealth shall be subject to the tax under this section.
27      (7)     In determining the tax due under this section, a pass-
28   through entity shall not be permitted to use any tax credits
29   otherwise available to the pass-through entity except a credit
30   for estimated taxes paid for the current taxable year under this

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 1   section or an overpayment of a prior-year tax paid under this
 2   section.
 3      (b)     (1)   Any election described under subsection (a) shall
 4   be made by an individual with authority to bind the pass-through
 5   entity or sign returns under this article or who is authorized
 6   to make the election and represents to having the authorization
 7   under penalty of perjury on or before the original due date of
 8   the pass-through entity's return under this article for the
 9   taxable year in a manner prescribed by the department.
10      (2)     Only one election may be submitted by an individual
11   identified under clause (1) on behalf of the pass-through entity
12   to the department for the taxable year.
13      (3)     An election made under this section shall be irrevocable
14   for the taxable year.
15      (4)     An election under this section may be made only for tax
16   years that the limitation on individual deductions applies under
17   26 U.S.C. § 164(b)(6) (relating to taxes).
18      (c)     (1)   A taxable owner of an interest in a pass-through
19   entity that elects to pay tax under subsection (a) shall be
20   allowed a refundable credit against the tax imposed under
21   section 302 in the amount of the taxable owner's share of the
22   tax that the pass-through entity actually paid under this
23   section. A taxable owner's share of the tax shall take into
24   account guaranteed payments and other special allocations made
25   to the owner.
26      (2)     A taxable owner shall be entitled to claim the credit
27   under clause (1) on the taxable owner's tax return that includes
28   the corresponding income and gain of the pass-through entity.
29      (3)     The credit allowed under this subsection shall be
30   applied after the application of all other tax credits available

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 1   to the owner for the taxable year. If the amount of the credit
 2   allowable under this subsection for any taxable year exceeds the
 3   tax due for the year under this article, the excess amount shall
 4   be treated as an overpayment, to be credited or refunded.
 5      (4)   No credit shall be allowed to a taxable owner under
 6   clause (1) unless the electing pass-through entity paid the tax
 7   imposed under this article and provides the department on its
 8   tax return all the information required in subsection (d)(3) and
 9   (4).
10      (5)   The aggregate amount of credits claimed by all taxable
11   owners of a pass-through entity under clause (1) may not exceed
12   the tax that the pass-through entity paid under subsection (a)
13   for the taxable year.
14      (d)   (1)   On or before the date provided under section
15   330.1(b) or 335(c), each pass-through entity that elects to pay
16   tax under subsection (a) shall file a return for the taxable
17   year reporting the information required under this subsection
18   and pay the tax due.
19      (2)   If a pass-through entity is granted an extension to file
20   a return required to be filed under section 330.1(b) or 335(c),
21   the extension shall apply for purposes of filing the return
22   under this section, but not for the payment of any tax due under
23   subsection (a).
24      (3)   The return filed under clause (1) shall include, in a
25   format as prescribed by the department, a certification by an
26   individual authorized to act on behalf of the pass-through
27   entity, which includes that all statements contained in the
28   return are true and correct.
29      (4)   Each pass-through entity that elects to pay tax under
30   subsection (a) shall report on a return required under this

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 1   article the following:
 2      (i)    Any tax due under this article. The balance of any tax
 3   shown on the return, not previously paid as installments of
 4   estimated tax or an overpayment of a prior-year tax, shall be
 5   paid with the return.
 6      (ii)    Identifying information of each taxable owner eligible
 7   to receive a credit under subsection (c), including a Social
 8   Security number or tax identification number and status as a
 9   resident or nonresident. The pass-through entity must provide
10   information sufficient to identify a disregarded entity and its
11   taxable owners.
12      (iii)    For each taxable owner who will be entitled to claim a
13   credit on a tax return, the taxable owner's share of the tax
14   imposed on the pass-through entity under this section.
15      (iv)    Each resident taxable owner's share of the pass-through
16   entity's income and each nonresident taxable owner's share of
17   income from sources from within this Commonwealth included in
18   the tax base under this section.
19      (v)    The classification of each owner as a taxable resident
20   or nonresident for purposes of calculating the pass-through
21   entity's tax liability under this section.
22      (vi)    Any other information as required by the department.
23      (5)    A pass-through entity that elects to pay tax under
24   subsection (a) shall not be required to withhold tax from a
25   nonresident taxable owner under section 324.
26      (6)    To meet the requirements of this section, if a taxable
27   owner holds an interest in the pass-through entity through an
28   entity that is a disregarded entity for purposes of this
29   article, the pass-through entity must provide information
30   sufficient to identify both the disregarded entity that holds an

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 1   interest in the pass-through entity and the taxable owner that
 2   owns the disregarded entity and is eligible for a credit under
 3   subsection (c).
 4      (7)    Each pass-through entity paying tax under this section
 5   shall report to each taxable owner required to file a return
 6   under this article a statement that contains the following
 7   information:
 8      (i)    Classification as a resident taxable owner or a
 9   nonresident taxable owner for purposes of calculating the pass-
10   through entity's tax under subsection (a).
11      (ii)    The taxable owner's allocable share of the pass-through
12   entity's income included in the tax base for purposes of
13   computing the tax under subsection (a).
14      (iii)    The owner's allocable share of the tax paid under
15   subsection (a).
16      (iv)    Any other information, as required by the department.
17      (e)    (1)   Any assessment of tax imposed under this section,
18   including interest, penalties and additions, shall be assessed
19   against the pass-through entity at the tax rate applicable to
20   the tax year. The department may not assess any additional tax,
21   including interest, penalties and additions, against the taxable
22   owners.
23      (2)    Any determination of an overpayment or refund of tax
24   imposed under this section made subsequent to the filing of the
25   return under subsection (d) shall be made at the pass-through
26   entity level at the tax rate applicable to the tax year.
27      (3)    The pass-through entity shall be required to provide
28   each owner a statement of any adjustment of the taxable owner's
29   credit within ninety days of an assessment, overpayment or
30   refund becoming final.

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 1      (4)     The taxable owner shall report the adjustment of the
 2   credit on an amended return for the taxable owner's taxable year
 3   that includes the pass-through entity's taxable year for which
 4   the tax was assessed.
 5      (5)     Only the pass-through entity may appeal or settle an
 6   assessment or overpayment of tax issued under this section or
 7   petition for a refund of tax imposed under this section.
 8      (f)     The basis of both a resident taxable owner and
 9   nonresident taxable owner of a pass-through entity that elects
10   to pay tax under subsection (a) shall be determined as if the
11   election under subsection (b) had not been made and each of the
12   taxable owners of the taxed pass-through entity had properly
13   taken into account each taxable owner's pro rata share of the
14   taxed pass-through entity's items of income, gain, loss and
15   deduction in the manner required with respect to a pass-through
16   entity for which no such election is in effect.
17      (g)     (1)   Unless otherwise provided in, or inconsistent with,
18   this section, the provisions of this article shall apply to this
19   section.
20      (2)     The department may issue guidance and promulgate
21   regulations necessary for the implementation of this section.
22      (h)     (1)   In the case of any taxable year that includes the
23   effective date of this clause, any nonresident withholding made
24   under section 324 by the pass-through entity for the current tax
25   year for an owner shall be applied by the pass-through entity
26   against its estimated tax liability.
27      (2)     In the case of any taxable year that includes the
28   effective date of this clause, the department may not assess
29   interest and penalties against an eligible pass-through entity
30   for any underpayment of estimated tax due under subsection (d),

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 1   so long as the eligible pass-through entity acted in good faith
 2   with no intent to defraud the Commonwealth.
 3      (i)     As used in this section, the following words and phrases
 4   shall have the meanings given to them in this subsection unless
 5   the context clearly indicates otherwise:
 6      "Electing pass-through entity."      A pass-through entity that
 7   elects for a taxable year to be subject to the tax under this
 8   section to determine its tax in accordance with subsection (a).
 9      "Nonresident taxable owner."     An individual, estate or trust
10   subject to the tax imposed under this article, other than a
11   resident taxable owner, that is a partner, shareholder, member
12   or other owner of an interest in a pass-through entity that has
13   income from sources within this Commonwealth.
14      "Partnership."    A domestic or foreign general partnership,
15   joint venture, limited partnership, limited liability company,
16   business trust or other unincorporated entity that for Federal
17   income tax purposes is classified as a partnership. The term
18   does not include a publicly traded partnership.
19      "Pass-through entity."    A partnership or Pennsylvania S
20   corporation.
21      "Resident taxable owner."    A resident individual, resident
22   trust or resident estate that is a partner, shareholder, member
23   or other owner of an interest in a pass-through entity.
24      "Taxable owner."    A resident taxable owner or nonresident
25   taxable owner.
26      Section 3.    Sections 306 and 307.8(a) of the act are amended
27   to read:
28      Section 306.    Taxability of Partners.--Except as provided
29   under [section] sections 302.3 and 306.2, a partnership as an
30   entity shall not be subject to the tax imposed by this article,

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 1   but the income or gain of a member of a partnership in respect
 2   of said partnership shall be subject to the tax and the tax
 3   shall be imposed on his share, whether or not distributed, of
 4   the income or gain received by the partnership for its taxable
 5   year ending within or with the member's taxable year.
 6      Section 307.8.   Income of a Pennsylvania S Corporation.--(a)
 7   A Pennsylvania S corporation shall not be subject to the tax
 8   imposed by this article, except as provided under subsection (f)
 9   and section 302.3, but the shareholders of the Pennsylvania S
10   corporation shall be subject to the tax imposed under this
11   article as provided in this article.
12      * * *
13      Section 4.   The amendment or addition of sections 301(w),
14   302.3, 306 and 307.8(a) of the act shall apply to taxable years
15   beginning after December 31, 2020.
16      Section 5.   This act shall take effect immediately.




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