PA Intangible Expense Add-back Law-change Creates Opportunities And Challenges For 2023 Returns

Key takeaways

• For taxpayers with related-party intangible payments, Pennsylvania has a new election available on 2023 returns (calendar-year returns due this November).¹ The recipient (e.g., an intangible holding company) that is now subject to Pennsylvania tax can elect to exclude the income from its base if the payor foregoes claiming an add-back exception.
• The "election" seems taxpayer-friendly because it eliminates the risk of double-taxation that may occur when the Department denies the payor's deduction, and the intangible holding company has already paid tax on the income.
• The downside is that, by making the election, the taxpayer concedes the benefit of an add-back exception by shifting the income from the intangible holding company to the payor. This eliminates the tax benefit of the intangible holding company's lower apportionment. The problem is that the election must be made on the originally filed return, before the taxpayers know whether the