It's been discussed for years (decades?) and the subject of numerous mayoral campaign debates, but it looks like major changes to Philadelphia business taxes may be in the works. The Philadelphia Inquirer is reporting that a majority of City Council has signed onto a plan to shift the business tax burden away from profits towards gross receipts. All at first blush this seems to be a counterintuitive move since our firm, like many others, has for years advised clients who located their businesses outside of the city because of the onerous gross receipts tax. However, there are provisions which may make this shift not only palatable, but beneficial to small businesses in the city.
The Inquirer is reporting that the first $100,000 of sales will be exempt from the gross receipts tax. Further, certain industries such as manufacturing and retail will be taxed at preferential gross receipts tax rates, some as low as 0.10%. for other businesses, the proposed 0.53% tax, on receipts over $100,000, is targeted to hit out of town operations harder than local mom-and-pop's. Whether that holds true or not, or if Mayor Nutter even goes along with the plan, is something that remains to be seen.
One thing the does seem to be certain is that we're going to see a major shift in the compensation packages paid to owners and principles of small businesses in Philadelphia. For years the business privilege tax pushed owners to take their income as salary and bonus, rather than profits and distribution, unlike their colleagues in the rest of the country. With the abolishment of the Business Privilege Tax we're nearly certain to see small business owners in Philadelphia making a change to pay themselves a distribution, subject to the lower capital gains tax rate, rather than the higher taxed bonuses we've seen over the past few years.
If this bill goes through, savvy business owners will start to think about establishing secondary entities outside the city limits to reduce the gross receipts subject Philadelphia taxes.