EARNED INCOME TAX

RULES AND REGULATIONS

PREFACE

IN ACCORDANCE WITH SECTION 13, ARTICLE V, SUBSECTION (c) OF THE PENNSYLVANIA LOCAL TAX ENABLING ACT (“LTEA”), COMMONLY REFERRED TO AS “ACT 511,” 53 P.S. '6913(V)(c), THE FOLLOWING RULES AND REGULATIONS ARE PRESCRIBED AND ENFORCED TO MATTERS PERTAINING TO THE ADMINISTRATION OF THE EARNED INCOME TAX RESOLUTION AND/OR ORDINANCES. WHILE THE REGULATIONS DO NOT SPECIFY PARTICULAR TAXING JURISDICTIONS, THEY APPLY TO ALL THOSE DISTRICTS WHICH HAVE APPOINTED BERKHEIMER ASSOCIATES AS EARNED INCOME TAX ADMINISTRATOR. ACCEPTANCE OF THESE RULES AND REGULATIONS ARE APPROVED UPON ENTERING A CONTRACTUAL AGREEMENT BETWEEN THE DISTRICTS AND BERKHEIMER ASSOCIATES AND SHALL BE IN EFFECT AT THE SAME TIME THE ARTICLES OF AGREEMENT ARE ACCEPTED. REVISIONS, ADDITIONS, OR DELETIONS, IF ANY, MADE IN BEHALF OF ANY DISTRICT, ARE CONTAINED IN THE ADDENDUM ATTACHED TO THESE RULES AND REGULATIONS.

ARTICLE I

DEFINITIONS

“Association” A partnership, limited partnership, or any other unincorporated group of two or more persons.

“Business” An enterprise, activity, profession or any other undertaking of any unincorporated nature conducted for profit or ordinarily conducted for profit whether by a person, partnership, association, or any other entity.

“Corporation” A corporation or joint stock association organized under the laws of the United States, the Commonwealth of Pennsylvania, or any other state, territory, foreign country, or dependency.

“Current Year” The calendar year for which the tax is levied.

“Domicile” The place where one lives and has his permanent home and to which he has the intention of returning whenever he is absent. Actual residence is not necessarily domicile, for domicile is the fixed place of abode which, in the intention of the taxpayer, is permanent rather than transitory. Domicile is the voluntarily fixed place of habitation of a person, not for a mere special or limited purpose, but with the present intention of making a permanent home, until some event occurs to induce him to adopt some other permanent home. In the case of businesses or associations, the domicile is that place considered as the center of business affairs and the place where its functions are discharged.

“Earned Income” Compensation as determined under section 303 of the act of March 4, 1971 (P.L. 6, No. 2), known as the “Tax Reform Code of 1971,” and regulations in 61 PA. Code Pt. I subpt. B. Art. V (relating to personal income tax). Employee business expenses are allowable deductions as determined under Article III of the “Tax Reform Code of 1971.” The amount of any housing allowance provided to a member of the clergy shall not be taxable as earned income.

“Earned Income Tax Administrator, Income Tax Officer or officer” Person, public employee or private agency designated by governing body to collect and administer the tax on earned income and net profits.

“Employee” Any person who renders services to another for a financial consideration or its equivalent, under an express or implied contract, and who is under the control and direction of the latter and shall include temporary, provisional, casual, or part-time employment.

“Employer” A person, partnership, association, corporation institution, governmental body, unit or agency, or any other entity employing one or more persons for a salary, wage, commission, or other compensation.

“Independent Contractor” A person who, while performing services, is not under the direction and control of another person, as to the result to be accomplished by the work and as to the details and means by which that result is accomplished, such as authors, professional men, seamstresses, laundresses, tailors and registered and practical nurses. Where the independent contractor is in the permanent or part-time employment of an employer, however, that contractor will be considered an employee of said employer for the purpose of withholding the tax due under the resolution.

“Net Profits” The net income from the operation of a business, profession, or other activity, except corporations, determined under section 303 of the act of March 4, 1971 (P.L. 6, No. 2), known as the “Tax Reform Code of 1971,” and regulations in 61 PA. Code Pt. I subpt. B. Art. V (relating to personal income tax). The term does not include income which is not paid for services provided and which is in the nature of earnings from an investment. For taxpayers engaged in the business, profession or activity of farming, the term shall not include:
(1) any interest earnings generated from any monetary accounts or investment instruments of the farming business;
(2) any gain on the sale of farm machinery;
(3) any gain on the sale of livestock held twelve months or more for draft, breeding or dairy purposes; and
(4) any gain on the sale of other capital assets of the farm.

“Non-resident” A person, partnership, association or other entity domiciled outside the taxing district.

“Person” Any individual, partnership, association or other entity.

“Preceding Year” The calendar year before the current year.

“Resident” A person, partnership, association or other entity domiciled in the taxing district.

“Resolution or Ordinance” As adopted by the respective Districts empowering the tax for a given year, or any part thereof.

“State” Encompasses government entities other than the Commonwealth of Pennsylvania located within the United States, but does not include foreign countries, for purposes of crediting provisions.

“Succeeding Year” The calendar year following the current year.

“Taxing District” or “District” The political subdivisions, including school districts, levying and assessing an earned income and net profits tax, which have appointed or commissioned Berkheimer Associates to collect and administer the tax on earned income and net profits.

“Taxpayer” A person, partnership, association, or other entity required hereunder to file a return of earned income or net profits, or to pay a tax thereon.

COMMENT: These definitions are taken verbatim from the definitions set forth in Act 511, 53 P.S. '6913(I). The definition of “domicile” was reworded slightly in amendments to Act 511. The definition of “state” comes from the case of O'Reilly v. Fox Chapel Area School District, 106 Pa.Cmwlth. 516, 527 A.2d 581, appeal granted 517 Pa. 619, 538 A.2d 501 (1989).

ARTICLE II

IMPOSITION AND RATE OF TAX

Section 2.01 Tax on Earnings and Net Profits of Residents and/or Non-Residents.

A. By virtue of the Resolutions and/or Ordinances adopted by the various taxing districts, a tax for general revenue purposes of any fraction of one percent (1%) has been imposed on the following:

1. The earned income, as defined herein, of residents and non-residents, where applicable, of the various taxing jurisdictions during the calendar year.

2. The net profits, as defined herein, of residents and/or non-residents of the various taxing districts during the calendar year.

B. The tax levied under (A)(1) above shall relate to and be imposed upon salaries, wages, commissions, and other compensation paid by an employer, or on his behalf, to a person who is employed by him.

The tax levied under (A)(2) above shall relate to and be imposed on the net profits of any business, profession or other activity carried on by a person or owner or proprietors, either individually or in association with some other person or persons.

C. The entire taxable earnings of resident employees and the total net profits of residents from businesses, professions and other activities are subject to this tax. The above item referring to residents would also apply to a taxing jurisdiction which levied these taxes on the non-residents as well as residents. Neither the source of the earnings or net profits, nor the place or places where the services were rendered exempt a resident from the tax.

Section 2.02 Exemption of Corporations.

Every corporation, including sub-chapter S corporations, shall be exempt from this tax.

COMMENT: “Pass-through” income received by a shareholder of an S corporation is not subject to local earned income tax under Scott v. Hempfield School District, Pa.Cmwlth. , 643 A.2d 1140 (1994). Only wages, salaries or other compensation paid by the S corporation to a shareholder for services rendered by the shareholder may be taxed.

Section 2.03 Exemption of Non-Profit Organizations.

A. The net profits of any institution or organization operated for public, religious, educational, or charitable purposes, organization of institutions not organized or private profit, and trusts or foundations established for any of these purposes shall be exempt from the tax on net profits.

B. This section shall not be construed to exempt any person who is an employer from the duty of withholding the tax at source from his employees and paying the amount withheld to the Income Tax Officer.

COMMENT: See, the definition of “Net Profits” in 53 P.S. '6913(I) and 53 P.S. '6913(III)(A)(1) pertaining to the imposition of a net profits tax.

Section 2.04 Registration of Taxpayers.

Every resident of a taxing jurisdiction who received, or anticipates that he will receive, taxable earned income in the form of earnings or net profits during the calendar year must register his name and residence address, his social security number, and the name and address of his place of employment or business with the Earned Income Tax Administrator. All residents will thereafter be responsible for reporting changes in their name, place of residence, or place of employment or business to the Earned Income Tax Administrator. In the districts which levy the non-resident factor, the above would also apply to these persons.

COMMENT: This section merely requires a taxpayer to register himself as such with the tax collector for administration purposes. Where a taxpayer believes that he will not receive taxable earned income for any given year, he must apply to and receive from the local taxing body a written exoneration from registering and filing subsequent returns.

ARTICLE III

DECLARATION AND PAYMENT OF TAX

NET PROFITS

Section 3.01 Annual 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 of the current year to December 31 of the current year, 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 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.

A. 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. These net profits shall be determined either on a cash or accrual basis, in accordance with accepted accounting principles and practices. Net profits do not include income which is not paid for services provided and which is in the nature of earnings from an investment. Ordinarily no business deduction which is not permitted by the Pennsylvania State Government, for income tax purposes will be allowed.

B. To constitute net profits, all of the following must apply:

(1) The gross profits shall be derived from either, the marketing of a product or service to customers on a commercial basis, or from securities employed as working capital in the business operations or, from accounts and notes receivable from sales of products or services sold in the ordinary course of the business operations, or, from assets which serve an operational function in the ordinary course of business operations.

(2) The marketing activity shall be conducted with the manifest objective of achieving profitable operations.

(3) The marketing activity shall be conducted with regularity and continuity and may not be limited or exclusive.

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 therefrom.

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 Township Area School District, 643 A.2d 1140 (Pa. Cmwlth. 1994). Compensation paid by an S corporation to an individual for services rendered to the corporation is taxable.

“Partnership” income, received by a Limited Liability Company member, where a Limited Liability Company has elected to be taxed as a “partnership” at the state level, is taxable for purposes of net profits. This is deemed to be ordinary income, received by an LLC member. Also the income received as an “individual,” in a single member LLC, is taxable for purposes of net profits.

Any losses may not be deducted, or offset, from the profits of a separate business, see, O'Reilly v. Fox Chapel, 538 A.2d 581, 1989. However, any loses would be deductible against the taxpayer’s W2 income only, see, Aronson v. City of Pittsburgh, 485 A.2d 890, 1985.

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, 538 A.2d 581, 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, 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).

H. The ownership or disposition of assets that are held for investment purposes or otherwise serve an investment function.

I. The trading in securities for personal purposes and not for the accounts of customers.

J. The sale, discontinuation or abandonment of a business or segment thereof.

K. Any tax imposed on, or measured by, gross or net earned or unearned income.

L. An isolated or nonrecurring transaction, not a normal or routine business activity.

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 Sale of Real Estate / Rentals of Tangible Property

A. The income received from the sale of real estate by licensed Realtors in the Commonwealth of Pennsylvania shall be subject to the tax imposed herein.

B. The income received from the rental of any tangible property, is generally not subject to the

tax imposed herein,

C. However, the leasing of tangible property would constitute operating a business and be

subject to the tax imposed, only if: the taxpayer offers the use of his or her property on a

commercial basis to others in a marketplace and at least one of the following applies:

      1.    The average period of customer use is 30 days or less; or
      2.    The property is customarily made available for use only during defined business hours; or
      3.   In addition to renting the property, the taxpayer also provides "significant

services as defined below.

4. The taxpayer incurs significant operating expenses in making the property available for

lease; or
5. The leasing activity is incidental to a real estate sales business; and

- the taxpayer offers the use of his or her property with the intention of realizing a

profit; and

- the leasing of the property is characterized by regularity and continuity of activities.

COMMENT:

Examples of services that DO NOT Constitute Significant Services include, providing heat, lighting, electric service, elevators, cleaning public access and exit areas, collecting trash and maintenance of the property in a usable rentable condition are not usually significant services.

Examples of Services That DO constitute significant services are: Services that are provided with rooms in hotels, boarding houses, apartment houses furnishing hotel services, tourist homes, motor courts, or motels and assisted living facilities. Additionally, providing maid service, room service, valet parking, decorating assistance, delivery services, transportation services, and concierge services are significant. Providing food and nursing care are also significant.

Also, payments for parking cars usually are not rents. Payments for warehousing of goods or the use of personal property are not rents if significant services are provided in connection with the payments.

EARNED INCOME

Section 3.09 Annual Tax Returns.

A. On or before April 15of the succeeding year, 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.

O. Payments made pursuant to a cafeteria plan qualifying under section 125 of the internal revenue code of 1986” are excluded from compensation and are not taxable.

P. “Employees’ personal use of employer-owned or leased property” and /or services, at no cost or at a reduced cost. Including company automobile, airplane, or other employer-owned or leased property, are not taxable fringe benefits.

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, welfare benefit programs, and stock options.

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. Stock options shall be considered to be received when the option is exercised, exchanged, sold or otherwise disposed

ARTICLE IV

COLLECTION AT SOURCE

Section 4.01 Registration of Employers.

A. Every person within a taxing jurisdiction who employs one or more persons, other than domestic servants, on a salary, wage, commission or other compensation basis shall, within fifteen (15) days after becoming an employer, register with the Earned Income Tax Administrator his name and address and such other information as the Administrator may require.