For the past decade, the PA Department of Revenue has been committed to abolishing the PA Capital Stock/Franchise Tax, which is a tax on the value of a corporation's capital stock. The value is determined by a fixed formula. The structure of real estate transactions has been influenced by the existence of this tax. Instead of holding real estate in a corporation or in a limited liability company (which is taxed as a corporation for purposes of this tax), as a general rule, real estate has been held by limited partnerships. Under this structure, the general partner, generally, is a limited liability company that holds a minor interest, i.e. one percent in the entity and thus, the parties have successfully minimized the tax implications of the tax and, at the same time, insulated the "owners" from personal liability related to claims against the real estate.
The Department's good-faith intention to abolish this tax has been compromised by the revenue needs of the state's budget. The initial goal was to completely phase-out out the tax at the end of 2008, through a series of tax rate reductions. Due to revenue needs, the tax was extended, with continued tax rate reductions, with the anticipated phase-out at the end of tax year 2013. Included in the current state budget that was signed into law by the Governor on July 9, the tax was extended for another two years, i.e. phase-out to expire at the end of tax year 2015. Again, the phase-out includes further reductions of the rate -- reduced to 0.67 mills for tax year 2014 and to 0.45 mills for tax year 2015.
In view of the history associated with the goal to abolish the tax completely, real estate investors must continue to be sensitive to the tax implications of this tax in planning the appropriate structure for holding real estate.
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