Key Takeaways:
- Pennsylvania has limited its existing Section 163(j) guidance to tax years beginning before January 1, 2025.
- Some taxpayers may now need to calculate the Section 163(j) limitation on a separate-company basis for Pennsylvania purposes.
- Pennsylvania has also decoupled from the more favorable federal EBITDA-based calculation for 2025.
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The Pennsylvania Department of Revenue (DOR) recently revised Corporation Tax Bulletin 2019-03, limiting its application to tax years beginning before January 1, 2025. The change creates uncertainty for corporate taxpayers that previously relied on Pennsylvania’s federal consolidated-group approach to avoid a separate state-specific Section 163(j) limitation.
For tax years beginning in 2025 and later, affected taxpayers should be prepared to calculate the limitation on a separate-company basis unless the DOR issues additional guidance providing relief or clarification.
You should also evaluate the effect of Pennsylvania’s decision to decouple from the federal calculation based on earnings before interest, taxes, depreciation, and amortization (EBITDA) and consider available filing positions before completing affected returns.
Pennsylvania Narrows Section 163(j) Guidance for 2025 and Beyond
Internal Revenue Code Section 163(j) generally limits a taxpayer’s deduction for net business interest expense to 30% of adjusted taxable income. In 2019, the Pennsylvania DOR indicated that Pennsylvania corporate net income taxpayers were required to apply the Section 163(j) limitation but recognized a significant exception for members of federal consolidated groups.
Under the original Bulletin 2019-03, a corporation included in a federal consolidated return was not required to perform a separate Pennsylvania Section 163(j) calculation unless the federal consolidated group reported a limitation on its consolidated Form 1120.
In practice, this approach often prevented a Pennsylvania-specific limitation from applying, even in situations where a standalone calculation could have resulted in a limitation.
On July 30, 2026, however, the DOR revised Bulletin 2019-03 to specify that it applies only to tax years beginning before January 1, 2025. For calendar-year taxpayers, the revision means the previous consolidated-group exception might no longer be available for 2025 returns, potentially requiring a separate-entity Section 163(j) analysis.
The DOR has not indicated whether it will issue additional guidance addressing the availability of the consolidated-group exception for tax years beginning on or after January 1, 2025. Unless further guidance preserves or modifies the previous approach, taxpayers should proceed on the assumption that the exception no longer applies.
Pennsylvania Decouples From the Federal EBITDA-Based Calculation
For 2025, Congress amended Section 163(j) to restore a more favorable EBITDA-based limitation calculation. Under this approach, adjusted taxable income generally is increased by depreciation, amortization, and depletion, potentially increasing the amount of business interest expense a taxpayer can deduct.
Pennsylvania has decoupled from this federal amendment through legislation enacted in 2025, limiting the use of the EBITDA-based calculation for Pennsylvania purposes.
As a result, Pennsylvania taxpayers generally must calculate Pennsylvania taxable income by applying Section 163(j) as it existed on December 31, 2024, before the federal change took effect. This generally results in the less favorable pre-amendment calculation, which does not add back depreciation, amortization, or depletion.
What This Means for Pennsylvania Taxpayers
Corporate taxpayers should review how these changes could affect Pennsylvania corporate net income tax returns for tax years beginning on or after January 1, 2025.
In particular, taxpayers that previously relied on the federal consolidated-group exception should quantify the potential effect of performing a separate-company Section 163(j) calculation. Taxpayers should also consider the impact of Pennsylvania’s continued use of the pre-amendment calculation when evaluating their 2025 filing positions.
How MGO Can Help
Pennsylvania’s revised Section 163(j) guidance could create new filing considerations for businesses, particularly those that previously relied on the consolidated-group exception.
MGO’s State and Local Tax team can help you evaluate how the changes may affect your company’s Pennsylvania corporate net income tax filings, quantify the impact of a separate-company Section 163(j) calculation, and assess available filing positions. Our team can also help businesses evaluate the implications of Pennsylvania’s decoupling from the federal EBITDA-based calculation as they prepare affected returns.