The BIRT has two components: a net-income-based tax and a gross-receipts tax. The income tax component is calculated using one of two methods, the books and records method and the federal income tax method. The method used is elected on a business’s first BIRT filing, and once elected it is irrevocable and must be used for all future filings. The vast majority of BIRT filers use the federal income tax method.
The starting point for federal-income-tax-method filers is the amount of taxable income or loss reported on their applicable federal income tax return, prior to deductions for dividends and net operating losses.
For tax years beginning after Dec. 31, 2024, BIRT filers who use the federal income tax method must take into account the following “decoupling” measures from federal law that apply for Pennsylvania corporate net income tax (but not personal income tax) purposes:
Expenses for domestic research and experimental (R&E) costs which are deductible under federal tax code Section 174A must be capitalized and amortized over 60 months for Philadelphia BIRT purposes.
The federal “super deduction” for previously capitalized 2022-2024 domestic R&E costs which are allowable as a deduction for 2025 or ratably over the 2025 and 2026 tax years must continue to be amortized over the remaining months of their 60-month useful life for BIRT purposes.
Federal amortization of foreign Research & Experimental costs. Such costs must be amortized over 180 months for federal purposes but are amortized over 60 months for Philadelphia BIRT purposes.
Any federal 100% depreciation deduction claimed for qualified production property (QPP) – generally factory buildings and similar structures – placed in service in or after 2025 and before 2031 is to be depreciated using general MACRS rules and useful lives for BIRT purposes.
Businesses that are subject to federal Section 163(j)’s interest expensing limits must calculate their adjusted taxable income net of deductions for amortization and depreciation. This may limit the amount of interest that a business can deduct for BIRT purposes.
Note that Philadelphia has not been decoupled from the federal increases in Section 179 expensing, but it historically has been, and continues to be, decoupled from Section 168(k) bonus depreciation.
As noted above, these changes to the BIRT base are retroactive to tax years beginning after Dec. 31, 2024. Businesses that have already filed their 2025 BIRT returns and took advantage of enhanced federal deductions for R&E costs, interest, or QPP depreciation must consider filing amended returns with the City. Presumably, the Philadelphia Department of Revenue will issue guidance providing for a deadline to file amended returns without the imposition of penalties and interest for late payment of additional taxes owed as a result of the retroactive law change.
Tax practitioners should not presume that their tax return preparation software will automatically incorporate these tax law changes into their clients’ Philadelphia BIRT filings for several months, if ever.
Act 21 also provides that any future Pennsylvania corporate net income tax decoupling provisions that are intended to preserve state tax collections will also automatically apply for BIRT purposes.
Note that that the above provisions do not affect the calculation of Philadelphia’s net profits tax, nor do they in any way affect the calculation of local earned income tax or the Commonwealth’s personal income tax.
Act 21’s incorporation of Pennsylvania corporate net income tax decoupling rules into the Philadelphia BIRT represents a meaningful compliance change for businesses that calculate the BIRT net income component using the federal income tax method. Because the changes apply retroactively to tax years beginning after Dec. 31, 2024, affected taxpayers should review their 2025 BIRT positions, determine whether federal deductions for R&E expenditures, qualified production property, or business interest expense were claimed in a manner inconsistent with the new Philadelphia rules, and evaluate whether amended returns or revised estimated tax calculations may be required. Taxpayers and practitioners should also monitor forthcoming guidance from the Philadelphia Department of Revenue regarding amended return procedures, penalty relief, and reporting mechanics.
James (Jay) Brower, CPA, is managing director, CBIZ National Tax Office, in Philadelphia and is chair of the PICPA State Taxation Steering Committee. He can be reached at james.brower@cbiz.com.
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Statements of fact and opinion are the author's responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.