What is the Pennsylvania Capital Stock Tax?

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The Pennsylvania Capital Stock Tax is a property tax applicable to all Pennsylvania corporations, S-Corporations and limited liability companies. The tax is reported on the Pennsylvania RCT-101 tax return and is also known as the Franchise tax. Pennsylvania replaced the 7 digit box number with a 10 digit business partner number in the fall of 2013, and will begin using the business partner number on 2013 RCT 101 Returns

This tax is computed by multiplying the Capital Stock Value of the entity times the Capital Stock Tax Rate.

The Capital Stock Value is determined according to the following statutory formula: the product of 1/2 the sum of (1) the five year average net income capitalized at the rate of 9.5% plus (2) 75% of net worth*, from which you subtract $160,000.

The Capital Stock Rate is subject to the following gradual reduction: 2.89 mills (.00289) for tax years beginning during 2008 through 2011; 1.89 mills (.00189) for tax years beginning during 2012; and 0.89 mills (.00089) for tax years beginning in 2013. The rate is reduced to .67 mills (00067) in 2014 and .45 mills (.00045) in 2015. The tax is supposed to phase out completely on December 31, 2015.

*Net worth for a corporation is calculated by adding capital stock, paid-in capital and retained earnings, and subtracting treasury stock. All values are determined as of the end of the tax year which is typically December 31, unless the corporation uses a fiscal year. If the corporation had losses in prior years or the current year the number can be negative.

The net worth for LLCs is the entity’s assets minus its liabilities.

If your Corporation does business or owns property in Pennsylvania but is incorporated in another State you need to file RCT-106 along with the RCT-101 to pay the Foreign Franchise Tax.

Please contact Gregory J. Spadea of Spadea & Associates, LLC in Ridley Park if you need assistance in filing an RCT-101 or have any other corporate tax questions at 610-521-0604. Spadea & Associates, LLC prepares individual and business income tax returns year round.

What Business Expenses Are Deductible?

If you are self-employed or have an LLC or S-corporation any expense that your business incurs that is ordinary and necessary is deductible under Section 162 of the Internal Revenue Code. Therefore, please list the total spent on the expense categories broken down as follows:

  • Advertising;
  • Car expense (need business miles plus parking, tolls or actual fuel invoices, insurance, repairs and total miles driven and business miles plus parking and tolls);
  • Fixed Asset – If you bought a vehicle, computer, equipment, office furniture or placed it in service during the tax year, even if you already owned it, bring in the purchase invoice so we can expense it under IRC Sec. 179;
  • W-3 – Salaries that your company paid to others. List officer and shareholder salary separately;
  • Employer share of employment taxes like FICA and FUTA;
  • Commissions or fees paid to other contractors, Get them to fill in W-9 if not incorporated so we can issue them a 1099;
  • If you already issued them a 1099, bring in the 1096 – showing total independent contractors paid.
  • Insurance but list health insurance separately;
  • Supplies;
  • Materials or Purchase of inventory for resale;
  • Travel, Hotel, Airfare and Car Rental;
  • Meals (need date, place, person entertained and business purpose) Only need receipt if you pay more than $75.00 and have a day timer, If you do not have a day timer or digital calendar (such as Outlook or Google Calendar) then you need a receipt for everything;
  • Telephone including local, long distance, fax and mobile;
  • DSL, cable and internet charges;
  • Postage;
  • Continuing education and business seminars and conferences;
  • Interest expense paid on business loans and provide year end balances;
  • Rent;
  • Utilities like electricity, oil or gas;
  • Prior year PA franchise (Capital Stock) tax from Page 2 of the PA RCT-101;
  • Prior Year Local Income Tax paid;
  • Total state sales tax paid if you included it in gross sales receipts.

Contact Gregory Spadea at 610-521-0604, if you have any questions or need your tax returns prepared.

Learn About the Advantages of Organizing as an LLC

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Anybody interested in starting a new business, or in formalizing the organization of an existing sole proprietorship, should pay careful attention to the entity selection decisions they will need to make. An experienced business law attorney can guide you through the considerations that will affect your decision to form a C corporation, an S corporation, a limited liability company (LLC), any form of partnership, or stay with a sole proprietorship in your own name.

Though they are relatively new in the United States, LLCs have emerged as a highly popular and flexible way of organizing a new business entity. Virtually unknown in this country 40 years ago, LLCs can be formed today in every state, and in some industries, they represent the standard form of business organization.

Flexibility and Ease of Formation

Although the details vary from state to state, an LLC combines certain features of the business partnership and the business corporation. The personal liability of an LLC’s members is protected in much the same way that a corporation shelters its shareholders from liability. Unlike corporations, however, most LLCs are taxed on a pass-through basis to its individual members. In other words, the LLC pays no taxes on its profits, but each member pays income tax on his or her share.

Perhaps the main advantage of the LLC is its flexibility in organization and management. Corporations and partnerships alike are free to vary many of the state laws related to corporate and partnership governance through corporate bylaws and partnership agreements, but the level of default statutory regulation applicable to LLCs is very limited. An operating agreement defines the rights and responsibilities of the membership, and creating an LLC is as simple as filing a certificate of organization (Pennsylvania) or certificate of formation (New Jersey) together with a modest filing fee.

Unlike corporations, LLCs are not managed by boards of directors with specific duties and responsibilities.  Instead, the management functions of an LLC are spelled out in the operating agreement. When the LLC has more than one member, the operating agreement can also spell out details as to the transferability of interests, rights of first refusal and restrictive covenants with respect to proprietary information, customer lists and noncompetition terms.

Tax Election Options for LLCs

Some entrepreneurs or existing businesses might find the tax characteristics of an LLC to be disadvantageous. Because the LLC itself is not taxed, distributions to members are taxed as ordinary income to the individuals. For most startups, however, this will represent no practical difference from self-employment tax. LLCs can also elect to be taxed in any of several ways: sole proprietorship, S corporation, or if there are multiple members, as a C corporation or partnership. LLCs seeking corporate tax treatment can set up a Simple IRA retirement plan and pay themselves a reasonable salary to reduce some of their self-employment tax that they would incur as a sole proprietorship.

When the primary impetus for organizing as an LLC is to shelter personal assets from business liability, the limited liability company form is hard to beat. Many real estate companies, property investment and management firms set up a separate LLC for each building, to ensure that the tort or contract liability for each project is contained to the asset value of that property. The LLC elect to be taxed as partnerships are taxed with the general partner organized as a corporation or another LLC.

Contact Spadea & Associates, LLC in Ridley Park: 610-521-0604

Any business entity selection and formation decision should be based on your own personal and business objectives, needs and characteristics. The Law Offices of Spadea & Associates works with business owners and entrepreneurs in Greater Philadelphia, southeastern Pennsylvania and South Jersey on matters of business law, tax law and estate planning. To learn more about the ways an LLC could meet your objectives in Pennsylvania or New Jersey, contact us in Ridley Park.

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