Article III: Declaration and Payment of Tax

Article III: DECLARATION AND PAYMENT OF TAX
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NET PROFITS

Section 3.01Annual Tax Returns.

A. On or before April 15 every person who has taxable net profits shall file with the Earned Income Tax Administrator, on a form prescribed by him, an annual final return, as required by the local Resolution and/or Ordinance, showing all taxable income from January 1 to December 31, the total amount of tax due, the amount of tax withheld or paid, and the balance due. A return is required from every person subject to the tax regardless of the fact regardless of whether or not any tax is due. All appropriate tax schedules, worksheets, and Federal form 1099s must be attached to the return and signed by the taxpayer. Payment of any tax due should be remitted along with the return. A return will not be considered complete and valid if the appropriate tax schedules, worksheets, and/or Federal form 1099s are not attached; or if the return is not signed; or if payment of any tax due is not remitted with the return.

B. When the return is made for a fiscal year different from the Administrator's calendar year, the return shall be filed within one hundred and five (105) days from the end of said fiscal year.

C. At the time of filing the final return, the taxpayer shall pay the balance of the tax due or shall make demand for refund in the case of overpayment.

D. Every taxpayer who discontinues business prior to the end of the calendar year shall within thirty (30) days after the discontinuance of business, file his final return as hereinabove required and pay the tax due, or demand refund in the case of overpayment. Where discontinuance of business is due to the absence of a personal representative, his heirs as designated by the Pennsylvania Intestate Act of 1947, as amended, or as hereafter amended or supplemented, shall file his return within sixty (60) days after the taxpayer's death and pay the tax due or demand refund in the case of overpayment.

E. If the amount of the net profits as returned by any taxpayer under this Resolution and/or Ordinance is finally changed or corrected by the Federal Commissioner of Internal Revenue, or by any other agency or court of the United States, such taxpayer, within thirty (30) days after receipt of notice of such final change or correction shall make a report of same to the Income Tax Officer.

F. Every person when requested to do so must file a final return, even though he expects to have no net profits, stating on the final return why he expects to have no net profits.

COMMENT: See, § 6913(III)(A) of the LTEA pertaining to the filing of returns and payment of tax. Section F, which requires a taxpayer to file a final return even where he or she expects no income, is based upon the decision in Commonwealth v. Case, 8 D. & C. 3d 611 (1978).

Section 3.02 Quarterly Estimated Tax Returns

A. Where required by local Ordinance and/or Resolution, on or before June 15 of the current year, September 15 of the current year, and January 15 of the succeeding year, every person who receives net profits shall make and file with the Collector, on a form prescribed by him, a return or declaration showing his estimated net profits for the period commencing January 1 and ending December 31 of the current tax year. A return is required from every person subject to the tax regardless of whether or not any tax is due.

B. The declaration or return shall show the amount of tax imposed by this Ordinance on such estimated net profits received by the taxpayer and the balance due. The taxpayer making the declaration or return shall, at the time of filing thereof, pay to the Tax Collector the amount of tax shown as due thereon.

C. On or before April 15 of the succeeding year, every taxpayer shall make and file with the Collector, on a form prescribed by him, a final return or declaration showing the amount of net profits received during the period commencing January 1 of the current and ending on December 31 of the current year, the total amount of tax due thereon and the total amount of tax paid thereon. At the time of filing the final return, the taxpayer shall pay to the officer the balance of tax due or shall make demand for refund or credit in the case of overpayment.

D. Any taxpayer may, in lieu of paying the fourth quarterly installment of his estimated tax, elect to make and file with the officer on or before January 31 of the succeeding year the final return as hereinabove required.

Section 3.03 Computation of Net Profits.

The net profits of a business, trade, profession, or other activity shall be computed by subtracting from gross receipts the cost of goods sold and all ordinary and necessary expenses of doing business. Ordinarily no business deduction which is not permitted by the Federal Government for income tax purposes will be allowed.

Section 3.04 Taxable Entities.

Persons subject to a tax on net profits shall be the following:

A. Individuals. Any individual engaged in a business, trade, profession, or other activity carried on for profit shall pay a tax on the net profits there from.

B. Partnerships, Associations and other Entities. A partnership, association, or other entity engaged in carrying on a business, trade, profession, or other activity wholly or partly within a taxing jurisdiction shall be required to provide each partner or member with the appropriate information and/or schedule(s), (i.e. Schedule K-1), sufficient to inform the individual of his/her percentage of net profits, whether or not the net profits are actually distributed to the individual. The individual shall include the percentage of the net profits as income when determining his/her tax liability.

Each resident partner or member of a non-resident partnership, association, or other entity must pay the tax on his share of the net profits whether or not it is actually distributed to him.

"Pass-through" income from an S corporation to an individual shareholder is not taxable, Scott v. Hempfield Area School District, 643 A.2d 1140, 164 Pa. Cmwlth. 588,1994. Compensation paid by an S corporation to an individual for services rendered to the corporation is taxable.

C. Trusts or Estates. Every estate or trust must pay the tax on:

1. Net profits resulting from its engagement in any business, trade, or other activity which would require the filing of a return by an individual or partnership, and

2. Income which would be subject to the tax if received by an individual or partnership.

COMMENT: Section 3.04(A) flows from the definition of "Net profits" set forth in Article I of these Rules and Regulations and Section 13(I) of Act 511. Section 3.04(B), which deals with partnerships and other non-individual entities also is derived from this definition.

Section 3.05 Deductions from Gross Profits.

A. All ordinary and necessary expenses of doing business, including reasonable compensation paid employees, shall be allowed. No deduction may be claimed for "salary" or withdrawals of a sole proprietor or of the partners or members of an unincorporated business or enterprise.

B. A taxpayer who is a wage earner and runs a separate and distinct business may deduct a business loss against a salary, wage, commission or other earned compensation, see, O'Reilly v. Fox Chapel School District, 555 A.2d 1288, 521 Pa. 471, 1989. However, a person who runs more than one business may not deduct a loss from one business against the net profits of another business, see, Aronson v. City of Pittsburgh, 485 A.2d 890, 86 Pa. Cmwlth. 591, 1985.

C. Rentals or other payments required to be made as a condition of the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity, shall be allowed as deductions.

D. Interest on indebtedness incurred by the business, including mortgage interest (where proprietor also owns the building) and interest payments on loans made for use in the business, shall be allowed as deductions.

E. Taxes directly connected with the operation of the business and on business property shall be allowed. However, the following taxes are not to be deducted:

1. The tax under the Earned Income Tax Resolution or Ordinance.

2. Any federal, state, or local taxes based upon income.

3. Any gift, estate, or inheritance taxes.

4. Taxes or assessments for local benefits or improvements to property which tend to appreciate the value thereof.

F. Casualty losses sustained during the taxable period and not fully compensated for by insurance or otherwise shall be allowed, if incurred in conducting the trade or business subject to the tax. Where such a loss is claimed, there must be attached to the return a schedule showing in detail the nature of the loss and of the property damaged, destroyed, or stolen, its cost or other valuation, the depreciation sustained prior to the time of the damage, destruction, or theft, the measure of loss, and any recovery through insurance or otherwise. In any event, the amount of the loss to be recognized shall not exceed that permitted for the purpose of the Federal Income Tax.

G. Bad debts, in a reasonable amount, may be allowed in the year ascertained worthless and charged off; or, at the discretion of the Income Tax Officer (if the reserve method is used), a reasonable addition to the reserve may be claimed; but in no event shall the amount allowed exceed the amount recognized as a deduction for the purpose of the Federal Income Tax.

H. Depreciation may be claimed and allowed in a reasonable amount for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) of property used in the trade or business. The amount so allowed, however, may not exceed that recognized for the purpose of the Federal Income Tax. The Accelerated Recovery Systems (ACRS) is an acceptable method of depreciation.

I. A deduction for an office maintained in the taxpayer's home may be taken where the following requirements are met:

1. The office is used exclusively and regularly as the taxpayer's "regular place of business"; and

2. The office is used exclusively and regularly as a place where clients/customers come to meet the taxpayer during the course of their business.

COMMENT: Section 3.05 permits the deductions of expenses incurred in the operation of a business, as recognized on the federal level, from gross profits of same.

Section 3.06 Items Not Deductible.

In computing net profits, no deduction shall in any case be allowed in respect to the following:

A. Gifts of any kind, regardless of character or purposes of recipient or donor.

B. Personal taxes, including taxes on real estate occupied as taxpayer's residence, personal property taxes, and per capita, occupation, and poll taxes.

C. Premiums paid on any life insurance policy covering the life of any employee or of any person financially interested in any trade or business carried on by the taxpayer, when the taxpayer is directly or indirectly a beneficiary under such policy.

D. Any amount otherwise allowable as a deduction which is allowable to one or more classes of income wholly exempt from the tax imposed herein.

E. Any amount otherwise allowable as an ordinary and necessary expense of doing business which is allowable to interest wholly exempt from the tax imposed herein.

F. Any loss resulting from an activity which in the case of a profit would not be considered earned income or a net profit taxable hereunder.

G. Contributions by an individual to an Individual Retirement Account, a Keogh/Hr10Plan, a tax deferred annuity, a 401(K) plan, or a Simplified Employee Pension Plan (SEP).

Section 3.07 Net Losses / Carry-Over.

A net loss in any year may not be carried over to any other year.

Section 3.08 Rentals and/or Sale of Real Estate.

The income received from the rental or sale of real estate by licensed Realtors in the Commonwealth of Pennsylvania, or persons in the business of renting real estate, shall be subject to the tax imposed herein. Rental income received by a person from real estate and from personal property leased with the real estate is not taxable.

COMMENT: Factors to be considered in determining whether a taxpayer is "in the business" of leasing real estate include the number of properties the taxpayer maintains for rental purposes, whether said properties were acquired for rental purposes, and whether the taxpayer actively manages and maintains said properties.

EARNED INCOME

Section 3.09 Annual Tax Returns.

A. On or before April 15 every person who has taxable earned income shall file with the Earned Income Tax Administrator, on a form prescribed by him, an annual final return, as required by the local Resolution and/or Ordinance, showing all taxable income from January 1 to December 31, the total amount of tax due, the amount of tax withheld or paid, and the balance due. A return is required from every person subject to the tax regardless of the fact that his wages may have been subject to withholding of the tax by his employer, or regardless of whether nor not any tax is due. All appropriate tax schedules, worksheets, and Federal form W-2s and 1099s must be attached to the return and signed by the taxpayer. Payment of any tax due should be remitted along with the return. A return will not be considered complete and valid if the appropriate tax schedules, worksheets, and/or Federal form W-2s and 1099s are not attached; or if the return is not signed; or if payment of any tax due is not remitted with the return.

B. When the return is made for a fiscal year different from the Administrator's calendar year, the return shall be filed within one hundred and five (105) days from the end of said fiscal year.

C. At the time of filing the final return, the taxpayer shall pay the balance of the tax due or shall make demand for refund in the case of overpayment.

D. If the amount of the net earned income as returned by any taxpayer under this Resolution and/or Ordinance is finally changed or corrected by the Federal Commissioner of Internal Revenue, or by any other agency or court of the United States, such taxpayer, within thirty (30) days after receipt of notice of such final change or correction shall make a report of same to the Income Tax Officer.

E. Every person when requested to do so must file a final return, even though he expects to have no earned income; stating on the final return why he expects to have no earnings, i.e., retired, unemployed, housewife, etc.

COMMENT: This section is based upon § 6913(III)(A) of the LTEA pertaining to the filing of returns and payment of tax. Section E, which requires a taxpayer to file a final return even where he or she expects no income, is based upon the decision in Commonwealth v. Case, 8 D. & C. 3d 611 (1978).

Section 3.10 Quarterly Estimated Tax Returns

A. Where required by local Ordinance and/or Resolution, on or before June 15 of the current year, September 15 of the current year, and January 15 of the succeeding year, every person who receives earned income shall make and file with the Collector, on a form prescribed by him, a return or declaration showing his estimated net profits for the period commencing January 1 and ending December 31 of the current tax year. A quarterly return is required from every person subject to the tax regardless of the fact that his wages may have been subject to withholding of the tax by his employer, or regardless of whether or not any tax is due.

B. The declaration or return shall show the amount of tax imposed by this Ordinance on such estimated earned income received by the taxpayer and the balance due. The taxpayer making the declaration or return shall, at the time of filing thereof, pay to the Tax Collector the amount of tax shown as due thereon.

Section 3.11 Exclusions and Deductions from Earnings.

The following payments or benefits received by an individual shall not be subject to the tax:

A. "Social Security Benefits, Retirement Pay and Pensions."

B. "Sick or Disability Benefits." Periodical payments received by an individual under a sickness or disability insurance plan are not taxable. Where, however, an employee received a regular salary from his employer during a period of sickness or disability by virtue of his contract of employment, such compensation shall be fully taxed.

C. "Benefits Arising Under Workmen's Compensation Acts, Occupational Disease Acts, and Similar Legislation." Compensation received by employees under the provisions of workmen's compensation acts, occupational disease acts, or similar legislation together with any amount received as damages by suit or agreement on account of any injury or disease is not taxable.

D. "Public Assistance or Unemployment Compensation Payments." Payments made under any public assistance or unemployment compensation legislation are not taxable.

E. "Active Military Service Pay." Compensation paid by the United States to any person for active service in the armed forces of the United States is not taxable. This includes compensation paid to Reserve or National Guard for active duty service.

F. "Bonuses Paid by United States, Pennsylvania, or any other State, for Active Military Service." Any bonus or additional compensation paid to a person by the United States, by the Commonwealth of Pennsylvania, or by any other state, for active service in the armed forces of the United States is not taxable.

G. "Death Benefits." Where an employer makes death benefit payments to the beneficiary of an employee or to his estate, whether payable in a lump sum or otherwise, such payments are not taxable.

H. "Proceeds of Life Insurance Policies." Proceeds of life insurance policies payable by reason of the death of an insured to his estate or to a beneficiary are not taxable.

I. "Gifts and Bequests." Cash or property received as a gift or under a will or under statutes of descent and distribution is not taxable.

J. "Interest Received." All forms of interest, e.g., on obligations of the United States or its possessions, the Commonwealth of Pennsylvania, or any political subdivision thereof, or on bank or postal savings accounts, mortgages, or loans received by an individual, are not taxable. However, where a person, other than a Corporation, is engaged in the business of lending money at interest, e.g., loan or finance companies or private bankers, the net profits of such business are taxable.

K. "Board and Lodging to Employees for Convenience of Employer." The value of meals and lodging furnished to domestics or other employees by the employer for the employer's convenience is not considered earned income and is not taxable.

L. "Income from stocks, trusts, and rental of dwellings", or the mere passive ownership and residing in a dwelling, is not taxable. Gain or loss from rental of real estate and from personal property leased with real estate is not taxable.

M. "Contributions to an Employee's Trust or Annuity Plan and Compensation under a Deferred Payment Plan." Contributions paid by an employer to or under a stock bonus, pension profit-sharing or annuity plan and compensation paid or accrued on account of any employee under a plan deferring the receipt of such compensation shall not be included in gross taxable earnings. Payments to reimburse expenses or payments made by employers or labor unions for wage and salary supplemental programs, including, but not limited to programs covering hospitalization, sickness, disability or death, strike benefits, social security and retirement are not taxable.

N. "Employees' Deductions for Expenses Directly Connected with employment." Employees who incur and pay expenses directly connected with the performance of their duties or services, may deduct such expenses in computing the amount subject to the tax provided:

1. No reimbursement is made by the employer;

2. They are reasonable and actual;

3. They are recognized as deductions by Federal authorities for Federal income tax purposes.

4. Allowable employee business expenses include:

a. Travel while away from home overnight including:

i. Air, rail and bus fares.

ii Operation and maintenance of an automobile.

iii. Taxi fares or other transportation, such as trips between airport or station and hotel; from one place of business to another; or from where you eat and sleep to temporary work assignment.

iv. Meals and lodging when away from home on business.

v. Tips that are incidental to any of the above.

b. The costs of traveling from one place to another if directly attributable to the conduct of employment and incurred while the employee is not in a travel status. Commuting to and from work are not allowable transportation costs.

c. Allowable education expenses which meet the express requirements of the employer or laws or regulations for keeping a job or position. Tuition, books, supplies, laboratory fees and similar items and certain related travel and transportation costs may be deducted from income. Reimbursements for graduate courses are allowable provided that the courses aid in job skills and do not qualify the employee for a new career.

5. Other allowable expenses include but are not limited to:

a. Union dues and initiation fees.

b. Professional dues and subscriptions to professional journals.

c. Small tools and supplies.

d. Uniforms, not suitable for everyday, and protective clothing required by an employer.

e. Home Computers. The cost of a home computer which substantially aides the taxpayer in the performance of his employment duties may be depreciated; a letter from the taxpayer's employer must be attached verifying that it is a requirement and/or condition of the job.

f. Cellular Telephones. Costs of cellular telephones may be deducted/depreciated where the taxpayer uses same predominantly for his trade or business (i.e. over 50% of said use is for business), and can prove said use with adequate documentation. Employees may deduct the costs of leasing or purchasing of cellular telephones where it is a condition of their employment and used for the employer's convenience.

g. Malpractice insurance. Costs/premiums paid for malpractice insurance for attorneys and doctors are deductible business expenses.

6. An exclusion for an office maintained in the employee’s home for the convenience of the employer may be taken if the following requirements are met:

a. A suitable work space is not provided by the employer.

b. The activity of work is such that it requires a work area for its performance or for the storage of goods and wares on the premises other than that of the employer.

c. A letter is submitted on employer's letterhead stating in detail that office is necessary in order for the employee to work for the employer. Said letter must be signed by an appropriate representative of the company.

7. Expenses which are not allowable include, but are not limited to, child care and moving costs in connection with a change in jobs.

COMMENT:The list of excluded income set forth in Section 3.11 flows from the definition of "Earned income" set forth in Act 511 and Article I of these Rules and Regulations.

Section 3.12 Taxable Earnings of Employees.

The items of compensation listed below are taxable. They are subject to the tax whether an employee received them directly or through an agent. Moreover, neither kind of rate of payment nor the manner of employment exempts an employee from the tax.

1. Salaries

2. Wages

3. Commissions

4. Bonuses

5. Drawing Accounts. If amounts received as a drawing account exceed the salaries or commissions earned, the tax is payable on the amounts received. If the employee subsequently repays to the employer any amounts not in fact earned, the tax shall be adjusted accordingly.

6. Incentive payments for services rendered

7. Tips received

8. Fees, such as those received by a director or officer of a Corporation.

9. Benefits accruing from employment, including but not limited to annual leave, vacation, holiday and/or severance pay, personal use of company cars, cafeteria plan/welfare and benefit programs.

10. Taxes assumed by the employer.

11. Fellowships. The portion, if any, of payment to a graduate student in a college or university as a fellowship or scholarship grant which represents compensation for services required to be performed by him, is taxable.

12. Compensation received in the form of property shall be taxed at its fair market value at the time of receipt.