Until it expired at the end of 2015, Pennsylvania Capital Stock Franchise Tax (CSFT) was imposed on all limited liability companies (LLCs), corporations, joint-stock associations, and business trusts doing business in or owning property in Pennsylvania, including LLCs that were treated as partnerships or disregarded entities for federal income tax purposes. Because CSFT was not imposed on an entity that was formed as a state law partnership, many taxpayers used state law limited partnerships (LPs), instead of LLCs, to do business in or own property in Pennsylvania.

The CSFT was phased out effective for tax years beginning on or after January 1, 2016. Of course, without a budget currently in place in Pennsylvania, we cannot say with absolute certainty that this phase-out is permanent.

Now that the CSFT has phased out, there currently is no reason to use a state law partnership to own property or do business in Pennsylvania. Just like in other states, an LLC now is the entity of choice for a pass-through entity in Pennsylvania.

The Pennsylvania Department of Revenue (DOR) published guidance (available here) instructing taxpayers, such as LLCs treated as partnerships or disregarded entities for federal income tax and S corporations, that were subject to CSFT but not corporate net income tax (CNIT) how to file a final CSFT return:

  • Taxpayers that were subject to CSFT but not CNIT should treat their 2015 RCT-101 as their final report by checking the "Final Report" box on page 5 of Form RCT-101 under Section E: Corporate Status Changes.
  • For the questions below the Final Report box on the RCT-101, taxpayers should state that the last day of their 2015 tax year is the date that business activity ceased. Such taxpayers are not required to file a Schedule of Disposition of Assets. In lieu of a Schedule of Disposition, taxpayers should attach a brief statement that, because the entity is no longer subject to CSFT, the RCT-101 is their final corporate tax report in Pennsylvania. See here for the DOR's specific instructions regarding the RCT-101. 
  • Special rules apply to S corporations that have built-in gains that are subject to CNIT. Such S corporations should file a final RCT-101 for their 2015 tax year and, if built-in gains are triggered for CNIT purposes in any subsequent tax year, such S corporations should again file a Form RCT-101 (marked as both ''First Report'' and ''Final Report") reporting the amount of the built-in gain subject to CNIT. 

For questions about filing a final CSFT return, choice of entity for doing business or owning property in Pennsylvania, or other Pennsylvania tax issues please contact the authors of this alert.

Copyright © 2016 by Ballard Spahr LLP.
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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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