Pennsylvania Starting a Business in Pennsylvania - A Guide to Pennsylvania Taxes

Starting a Business in Pennsylvania - A Guide to Pennsylvania Taxes
Starting a Business in Pennsylvania - A Guide to Pennsylvania Taxes (REV-588)
REV-588 (TS) 08-23

STARTING a BUSINESS
in PENNSYLVANIA
A GUIDE to PENNSYLVANIA TAXES

Dear Taxpayer,
Welcome to Pennsylvania’s business community. We want to thank you for bringing
growth and innovation to our local economy. Whether you are starting a brand
new business or you are a new business owner purchasing an existing business, you
will need to know some basic information about Pennsylvania state tax laws and
regulations.
The Department of Revenue has created this guide to help business owners
understand their filing obligations. The guide outlines the procedures to follow and
the forms to file with the Pennsylvania Department of Revenue. Your responsibilities
as a new business owner will vary depending on the type of organization or entity
you operate. Certain types of businesses will need to immediately register for some
business taxes in Pennsylvania while others may only need to report Pennsylvania
income. Please review the information in this booklet to help determine which taxes
apply to your business.
This guide is not intended as a substitute for services of tax and legal professionals
nor is it intended to replace the Pennsylvania Business One-Stop Shop, located at
www.business.pa.gov. This helpful resource connects entrepreneurs with important
information on registering, operating, and growing a business. The website’s digital
library includes a link to the Entrepreneur’s Guide: Starting and Growing a Business
in Pennsylvania, which provides detailed information, instructions, and personalized
business checklists for entrepreneurs to help build a successful business.
For more information, visit our website at www.revenue.pa.gov or call our Customer
Experience Center at 717-787-1064.
The department wishes you success in your future endeavors.
Sincerely,
Department of Revenue

revenue.pa.gov
TABLE OF CONTENTS
IMPORTANT: This guide is published by the Pennsylvania Department of Revenue
to provide information to business owners on how to register their business. It
also provides an understanding of various tax obligations, as well as common
mistakes to avoid. The guide is for informational purposes only and is not
intended to constitute legal advice.

This guide will cover three general areas that apply to many businesses:
Business Taxes in Pennsylvania
Registering for Business Taxes  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Withholding Tax  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales Tax License . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business Use Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exemption Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1
3
5
6
7
9

2

Reporting Pennsylvania Income
Business Structure  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
• Sole Proprietorship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
• Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
• Limited Liability Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
• Corporation  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses and Deductions  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
• Business Start-up Costs  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
• Depreciation  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
• Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
• Vehicle Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
• Business Use of Your Home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11
11
11
12
13
15
15
16
17
17
20

3

Strategies for Success
Take Advantage of Electronic Services  . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Keep Good Records  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Open Accounts for Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Update Your Address Regularly  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obtain a Bulk Sales Clearance  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Know Who to Contact  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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1

To receive email notifications containing links to newly posted tax information,
including publications, important notices, and tax bulletins issued by the
department, visit www.revenue.pa.gov and click on the “PA Tax Update
Newsletter” link to register to receive this information.

BEFORE REGISTERING YOUR BUSINESS
WITH THE DEPARTMENT OF REVENUE:
	1.	 Confirm requirements with your financial
		 institution and insurance company.

	2.	 Check for special registrations, if applicable.

	3.	 Confirm your professional licensure is current.*
*Only applicable to Professional LLCs or Professional Corporations.
All other business structures, skip to the next step.

	 .	 Check with the local municipality concerning taxes,
4
		 zoning requirements, local licenses and permits,
		 and any other regulations.*
*It is important to complete this step before proceeding
with your business registration.

	5.	 Register your business structure.*
*Make sure you have verified the business name you wish to use is available.

	6.	 Register your Fictitious Name.*
*Only required if operating under a name that is not the
Legal Name of the business or sole proprietor.

	7.	 Apply for a Federal Employer Identification Number (FEIN).

For a more personalized checklist,
visit business.pa.gov/register.

SECTION 1

BUSINESS
TAXES
in PENNSYLVANIA

BUSINESS TAXES IN PENNSYLVANIA
Registering for PA Tax Accounts

Depending on your specific activities, your business may be required to report items such as sales
and use tax or withholding tax. To register your business for state tax and withholding accounts in
Pennsylvania, you will complete the Pennsylvania Online Business Tax Registration form available at
myPATH.pa.gov.

IMPORTANT: You cannot use the Online
Business Tax Registration to:
•	 Register your name with the Department
of State, Bureau of Corporations and
Charitable Organizations
•	 Apply for Sales Tax Exempt Status
(REV-72)
This registration is also used by new entities that are acquiring all
or part of an existing entity that has been assigned a new FEIN by
the Internal Revenue Service. If the business entity or individual

1

Starting a Business in Pennsylvania

is already registered to use myPATH, login to myPATH and use
the Register New Business Tax Accounts feature. This includes
individuals registered for myPATH for personal income tax
purposes looking to register a business as a sole proprietorship
for business taxes.
New customers are able to register for various taxes and services
without logging in to myPATH. Existing customers will need to
log into myPATH to register for additional taxes or services. Taxes
and services include:
•	 Alternative Fuels Tax
•	 Business Use Tax
•	 Corporation Taxes
•	 Fuel Transporter Permits

revenue.pa.gov
•	 Motor Carrier Road Tax (MCRT)
•	 Motor Fuels Tax
•	 International Fuel Tax Agreement (IFTA)
•	 Promoter License
•	 Public Transportation Assistance Taxes and Fees
•	 Sales, Use, and Hotel Occupancy Tax
•	 Tobacco Products License
•	 Transient Vendor Certificate
•	 Unemployment Compensation
•	 Vehicle Rental Tax
•	 Withholding Taxes:
‫ 	ڤ‬Employer Withholding,
‫ 	ڤ‬Other Income Withholding (1099 MISC and NEC), or
‫ 	ڤ‬Retirement Withholding (1099R)
•	 Workers’ Compensation Coverage
•	 Wholesaler Certificate

•	 The Federal Employer Identification number (FEIN) issued
by the Internal Revenue Service, if applicable. Additional
information on obtaining an FEIN can be found at IRS.gov
•	 Department of State entity number, if applicable
•	 The business addresses and contact information
•	 Banking information for Tobacco Products License fees, if
applicable
•	 The name(s), home address(es), and Social Security Number
or Individual Taxpayer Identification Number of the owners/
officers/other responsible parties.
If you’ve received a Registration Required letter from the
department, make sure to have the Letter ID readily available.
New registrants can complete the PA Online Business Registration
directly from the myPATH homepage.
Registered enterprises should create a myPATH profile and log in
to select the Register New Business Tax Accounts hyperlink from
their logged in profile.
You will receive your account number(s) via e-mail.

NOTE: Registering corporations must also
contact the PA Department of State to
secure a corporate name clearance and
register for corporation tax purposes. You
must provide a FEIN to the Department
of State during registration in order to be
registered to file and pay corporate taxes.
Associations and individuals desiring to do
business in Pennsylvania may have to apply
to the Secretary of the Commonwealth for
authority to conduct business, incorporate,
organize, or file an assumed or fictitious
name through the Bureau of Corporations
and Charitable Organizations of the
Department of State. For more information,
visit the Department of State at dos.pa.gov.

How to Avoid Delays in Processing
•	 Review the registration form and accompanying sections to
be sure that every item is complete.

NOTE: It is your responsibility to notify the
department in writing within 30 days of any
change to the information provided on the
registration form.

How to Check the Status
To check the status of your registration, you will need your
Confirmation Code and email address. Visit myPATH.pa.gov and
select What’s the Status of my Registration from the Registration
panel on the myPATH homepage.

Tips to Complete the PA Online Business Tax Registration

Before you begin the registration process, you will need the
following:
•	 The legal name of the business
•	 The name by which the business is doing business as
(commonly known as, trading as, also known as), if applicable

myPATH.pa.gov
2

BUSINESS TAXES IN PENNSYLVANIA
Withholding Tax
Employee Compensation
If you employ one or more persons, your business needs to
register for an Employer Withholding Account. Pennsylvania law
requires employers to withhold and remit PA personal income
tax from employees’ compensation in two common cases:
•	 When resident employees perform services within or
outside PA; and
•	 When nonresident employees (other than residents of
Indiana, Maryland, New Jersey, Ohio, Virginia, and West
Virginia, and from whose wages you withhold at the
reciprocal state’s tax rate) perform services within PA.
An employer is any individual, partnership, association,
corporation, government body or other entity that employs one
or more persons and is required under the Internal Revenue Code
to withhold federal income tax from wages paid to an employee.

Please review the Employer Withholding
Information Guide (REV-415) for more
information on withholding PA personal
income tax.
NOTE: Employers are also required to register
for unemployment compensation insurance
tax, imposed on employers and employees
to help support employees for loss of wages
should they become unemployed through
no fault of their own. The rate is based on
the employment history of the company.
This tax is administered through the PA
Department of Labor & Industry.

Filing & Payment Requirements
Employers should withhold taxes from each paycheck and
remit to the department according to the Withholding Payment
Schedule as follows:
•	 Semi-Weekly – If total withholding is $5,000 or greater
per quarter ($20,000 per year), the taxes are due on the
Wednesday following the pay dates for employers whose
paydays fall on a Wednesday, Thursday, or Friday; and on the
Friday following the pay dates for employers whose paydays
fall on Saturday, Sunday, Monday, or Tuesday.

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Starting a Business in Pennsylvania

•	 Semi-Monthly - If total withholding is $1,000 to $4,999.99
per quarter, the taxes are due within 3 banking days of the
close of the semi-monthly period.
•	 Monthly – If total withholding is $300 to $999 per quarter,
the taxes are due the 15th day of the following month.
•	 Quarterly – If total withholding is under $300 per quarter,
the taxes are due the last day of April, July, October, and
January.
Filing a Quarterly Withholding Return (W-3)
The Employer Withholding Return (W-3) is required to be
electronically filed every quarter even when no wages were paid
during that period. Each W-3 should reconcile the total amount
of withholding remitted within each quarter.
Filing an Annual Withholding Reconciliation Statement (REV-1667)
Employers are also required to electronically file annual
reconciliation returns (REV-1667) by January 31 along with the
W-2 forms for each employee. The REV-1667 should reconcile
the total amount of withholding remitted for the entire tax year
according to the W-3s filed.
Non-Employee Compensation
If you make payments to a nonresident who is not your employee
for services in the course of your trade or business, you may be
required to withhold PA personal income tax.

NOTE: Withholding is optional for payments
less than $5,000 annually. However, if you
are unsure of the total amount of payments
that will be made during the year, the
department encourages you to withhold and
remit income tax from all payments made.
Governmental payors, including the Pennsylvania State System
of Higher Education and its institutions, are exempt from the
requirement of withholding on non-employee compensation
and business income.
For more information on non-employee compensation, please
visit our website at www.revenue.pa.gov.

How to File
Employers can file and pay business taxes online using myPATH.
myPATH is an online portal that offers a suite of features and
services, which allows taxpayers to fulfill their tax filing obligations.
Sign up for a username and password for the following:
•	 View, file, and pay taxes
•	 Add new accounts to an existing business
•	 Update names and addresses
•	 Maintain officers/responsible parties
•	 View correspondence
•	 Request statements of account

1

NOTE: Tax payments of $1,000 or more
must be remitted electronically through
electronic funds transfer or by credit/debit
card, or they may be paid with certified or
cashier’s checks.

2

Starting at revenue.pa.gov, click the
icon labeled “myPATH”

You are now ready to enter myPATH
to either sign-in or create an account

4

BUSINESS TAXES IN PENNSYLVANIA
Sales Tax
If your business sells taxable items or performs taxable services,
you are required to obtain a sales tax license. Taxable items are
subject to a 6% sales tax. Additionally, retailers in Allegheny
County are required to collect an additional 1% local sales tax
and retailers in Philadelphia are required to collect an additional
2% local sales tax. All three sales taxes are reported on the same
tax return and under the same sales tax Account ID.
To determine if your business is required
to collect and remit sales tax, review the
Retailer’s Information Guide (REV-717) or visit
our website at www.revenue.pa.gov for more
information on sales tax.

Filing & Payment Requirements
Sales tax must be collected at the time of sale, unless the sale
is on credit. Taxes due on credit sales must be remitted within
30 days of the date of sale. A seller is liable for reporting and
remitting taxes and fees with the tax return covering the period
in which either a taxable sale was made or the tax, or fee, should
have been collected.
The filing frequency may vary. When you are a new sales tax filer,
you are set up as a quarterly filer, meaning that your returns are
due in April, July, October, and January. But your filing frequency
can change. Every year the department reviews each business
that files returns to determine whether or not the filing frequency
should be changed. If such a change is made by the department,
the business is notified in writing.
Payments and reports are required from sales tax licensees as
follows:
•	 Monthly returns with pre-payment obligations –
Businesses that have an actual sales/use tax liability for
the third calendar quarter of the previous year totaling at
least $25,000 but less than $100,000 have two prepayment
calculation options. They can either remit payment equal to
50% of the actual tax liability from the same month of the
previous year or at least 50% of the actual tax liability for the
current period.
	 Businesses remitting more than $100,000 for the third
calendar quarter of the previous year must remit 50% of the
actual tax liability due from the same month of the previous
year. Prepayments are due by the 20th of the current month
and returns for the period are due on or by the 20th of the
following month.

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Starting a Business in Pennsylvania

•	 Monthly returns – Licensees whose actual tax liability is less
than $25,000, but greater than $600 per quarter, must file
monthly. Monthly returns are due the 20th day of the month
that follows the month in which the tax was collected.
•	 Quarterly returns – Licensees whose total tax liability is less
than $600 in the third calendar quarter, but greater than
$300 annually, must file quarterly.
	 The report for January, February, and March is due by April
20; the report for April, May, and June, is due by July 20; the
report for July, August, and September is due by Oct. 20; and
the report for October, November, and December is due by
Jan. 20.
•	 Semi-annual returns – Licensees whose total tax liability is
$300 or less annually must file semi- annually. The report for
January through June is due on Aug. 20, and the report for
July through December is due Feb. 20 of the following year.

NOTE: Tax payments of $1,000 or more
must be remitted electronically through
electronic funds transfer or by credit/debit
card, or they may be paid with certified or
cashier’s checks.

NOTE: It is important to know your filing
and payment frequency. The Department of
Revenue offers a vendor discount for timely
filed returns and payments. This discount is
limited to a flat rate or 1% of tax collected,
whichever is lesser.
•	Monthly Filers: $25 or 1% of tax
•	Quarterly Filers: $75 or 1% of tax
•	Semi-Annual Filers: $150 or 1% of tax

How to File
The department offers two electronic filing options: myPATH and
third party vendors.
The department also has third party vendors who will provide
e-filing software for those taxpayers who do not wish to
use the department’s e-filing options. A list of approved
software vendors is available on the department’s website at
www.revenue.pa.gov.

revenue.pa.gov
Sales Tax License

Displaying Sales Tax Licenses
All businesses selling products and services subject to sales tax are required to prominently display
the license at the business. Sales tax licenses are issued free of charge and are renewable every five
years. The Department of Revenue is authorized to issue citations to anyone who operates a business
without a valid and current sales tax license. Convictions could result in fines of $300 to $1,500 per
offense and/or imprisonment. A sales tax license may be suspended or revoked for failing to file tax
reports or make payments.

EXAMPLE
SALES TAX LICENSE

6

BUSINESS TAXES IN PENNSYLVANIA
Business Use Tax
If your business purchases items subject to sales tax for which
the seller does not charge and collect sales tax on the invoice or
receipt, your business is responsible for remitting the tax to the
Department of Revenue. This is called use tax.
Use tax exposure occurs most often when a business buys taxable
goods online, over the phone, or by mail, and the vendor does
not charge Pennsylvania sales tax. This is also true for purchases
a business makes while out of state where no sales tax is charged.
The items become taxable upon delivery into Pennsylvania.
Many businesses believe they save money by making “taxfree” purchases from out-of-state vendors, unaware that these
transactions are often assessed upon audit by the department.
Since assessments include interest and penalty on top of tax,
businesses actually increase operational costs by not voluntarily
addressing use tax obligations. The department’s audit
experience shows that most businesses owe use tax but many
do not pay use tax.
The use tax rate is the same as the sales tax rate: 6% state tax,
plus an additional 1% local tax for items purchased in delivered
to or used in Allegheny County and 2% local tax for Philadelphia.

Why is Use Tax Important?
Uniform collection and enforcement of use tax
provides fairness. Pennsylvania businesses - those
who employ our residents, pay state and local taxes
and support our communities - are put at a 6%
disadvantage against out of state businesses when
sales or use tax is not paid on taxable items and
services.
As online shopping becomes more popular among
Pennsylvania businesses, use tax compliance helps
to level the playing field among e-commerce
retailers and Pennsylvania’s brick and mortar stores.
Use tax is an important source of revenue for the
Pennsylvania General Fund. Every dollar collected
is a dollar available for government and public
services.
From an enforcement standpoint, when the
Department of Revenue receives information on
purchases where use tax is owed but was not paid,
it will assess the purchaser for not only the tax but
also penalty and interest for late payment.

7

Starting a Business in Pennsylvania

Is There a Credit for Tax Paid on an Item
in Another State?
Yes. Pennsylvania grants a credit for sales tax paid to another state,
provided the tax is legally due and paid, and that state offers
reciprocal credit to PA. For example, if a PA business purchases
and takes delivery of a taxable item in another state and pays a
5% sales tax there, the purchaser is responsible for reporting and
remitting the 1% difference (use tax) due to PA upon the use of
the property in PA. Credit against use tax is not granted for valueadded taxes or sales taxes paid to foreign countries. Also, taxes
paid to the federal government, such as customs duties, cannot
be claimed as a credit against use tax.
How do I Pay Use Tax?
Any business that incurs Business Use tax liabilities on a regular
basis is encouraged to register for a sales/use tax account number
by completing the PA Online Business Tax Registration.
If you are already registered for sales tax, then you can file any
use tax due with your sales tax return. If the sales tax return is
filed timely, then the use tax is considered timely no matter the
filing frequency of your business.
If you are not required to be registered for sales tax and you
have a use tax liability that needs to be paid, you may still file the
use tax return and pay electronically by selecting “File a Use Tax
Return” on the Returns panel. This return is due along with the
payment of tax on or before the 20th day of the month after the
month in which the purchase was made.
What if Use Tax is not Paid?
The department identifies businesses that owe use tax
through routine audits, self-assessment programs, complaints,
investigations, and lists of out-of-state purchases from vendors
and other states. The department can also identify businesses
that report minimal amounts of use tax. Underreporting of use
tax can trigger an audit by the department. The Department
of Revenue may issue an assessment for a use tax liability, on
which both penalty and interest charges may be imposed. These
additional charges can exceed 30% of the tax amount.

Pennsylvania Exemption Certificate
Purchaser Information
Some businesses may purchase an item with the intent to use
it in a manner that has been deemed exempt from one of the
following taxes:
•	 State and Local Sales/ Use Tax
•	 State 6% and Local 1% Hotel Occupancy Tax
•	 Public Transportation Assistance Taxes (PTA) and Fees
•	 Vehicle Rental Tax (VRT)
•	 Additional Local, City, County Hotel Tax
Depending on how you use the item or the type of business you
conduct, you may not have to pay these taxes when making a
purchase.
In order to claim a tax exemption, you must complete the REV1220, Pennsylvania Exemption Certificate and give the completed
form to the seller. A properly completed exemption certificate
that provides a valid reason for exemption and is accepted in
good faith will relieve the seller from the duty to collect tax.
The seller has the right to deny the certificate at any time. In
these situations, the purchaser would need to pay the sales tax
and petition the Board of Appeals for a refund.
Exemption Reasons
Businesses can use the REV-1220 to claim an exemption on
certain property and services for the following reasons (See
REV-1220 for more details):
•	 The property or service is being directly and predominantly
used in manufacturing, mining, dairying, processing, farming,
and/or shipbuilding.
•	 The purchaser is a government entity, instrumentality, or
political subdivision; municipal authority; cooperative
Agricultural Association; electric cooperative or credit union.
•	 The property or service will be resold or rented in the
ordinary course of business. Business owners who buy an
item with the intention of resale at a later time do not need
to pay sales tax. However, they will collect and remit the
sales tax from the ultimate consumer. In most cases, these
businesses should have already obtained a Sales Tax License
Number when they registered with the department. For
more information on wholesalers, please visit our website at
www.revenue.pa.gov.
•	 The purchaser is a religious organization, volunteer fireman’s
organization, non-profit educational institution, charitable
organization, or school district. Institutions of purely public

charity obtain a sales tax exemption number (75 or 76
number) by completing the REV-72, Sales Tax Exemption
Application.
•	 The purchaser is a direct pay permit holder, individual holding
a diplomatic identification card, or tourist promotion agency.
These entities do not receive account numbers. Direct pay
permit holders can obtain their numbers from the Revenue
website. Individuals with a diplomatic ID card can furnish
their card as proof of eligibility for the exemption. Tourist
promotion agencies must contact the department to receive
a letter stating they are exempt. They will provide this letter
to the seller when purchasing promotional materials for
distribution to the public.
•	 The property or service will be used directly and
predominately by purchaser performing a public utility
service.
•	 The purchaser is located in Keystone Opportunity Zone or
Expanded Zone (KOZ/KOEZ) and has been approved under
the KOZ regulations. These entities should include their KOZ
number which begins with 72, on Line 2.

NOTE: Applications for a KOZ/KOEZ status
are made through the Department of
Community and Economic Development
(DCED).
•	 The purchaser is providing goods and services under a
construction contract with an exempt entity: a charitable
organization, government entity, or a firm in designated KOZ.

NOTE: The REV-1220 cannot be used to
claim an exemption on the registration of a
vehicle.
To claim an exemption from tax for a motor
vehicle, trailer, semi-trailer, or tractor with
the PA Department of Transportation,
Bureau of Motor Vehicles and Licensing, use:
•	 Form MV-1, Application for Certificate of
Title for “first time” registrations.
•	 Form MV-4ST, Vehicle Sales and Use Tax
Return/Application for Registration for
all other registrations.

8

BUSINESS TAXES IN PENNSYLVANIA
Seller Information
If you are the seller and your customer provides you with a
Pennsylvania Exemption Certificate, you are responsible for
ensuring that the form is properly completed. An incomplete
certificate may subject the seller to the tax. You have the right
to deny the certificate at any time. In these situations, the
purchaser would need to pay the sales tax and petition the Board
of Appeals for a refund.

As the seller, you must be in possession of the certificate within
60 days of the date of sale/lease. It is best practice to collect the
certificate at time of purchase.
Although the REV-1220 does not expire, the seller is only required
to retain an exemption certificate for four years from the date
of the exempt sale. However, the seller may periodically request
another certificate.

Please review the exemption reasons listed under “Purchaser
Information” and type of property or service to ensure it is
consistent with the type of business or organization that you are
selling to.

IMPORTANT: Certificates should not be
returned to the Department of Revenue.

PENNSYLVANIA EXEMPTION
CERTIFICATE

REV-1220 (TR) 07-23

STATE AND LOCAL SALES AND USE TAX
STATE 6% AND LOCAL 1% HOTEL OCCUPANCY TAX

This form cannot be used to
obtain a Sales Tax License ID,
PTA License ID or Exempt
Status.

PUBLIC TRANSPORTATION ASSISTANCE TAXES AND FEES (PTA)

REV-1220
PENNSYLVANIA
EXEMPTION
CERTIFICATE

(Please Print or Type)

Read Instructions
On Reverse Carefully

VEHICLE RENTAL TAX (VRT)
ADDITIONAL LOCAL, CITY, COUNTY HOTEL TAX *

THIS FORM MAY BE PHOTOCOPIED – VOID UNLESS COMPLETE INFORMATION IS SUPPLIED
CHECK ONE:

PENNSYLVANIA TAX UNIT EXEMPTION CERTIFICATE (USE FOR ONE TRANSACTION)
PENNSYLVANIA TAX BLANKET EXEMPTION CERTIFICATE (USE FOR MULTIPLE TRANSACTIONS)

Name of Seller, Vendor or Lessor
Street

City

State

ZIP Code

NOTE: Do not use this form for claiming an exemption on the registration of a vehicle. To claim an exemption from tax for a motor vehicle, trailer, semi-trailer or tractor with the PA Department of Transportation, Bureau of Motor Vehicles, use one of the following forms:
FORM MV-1, Application for Certificate of Title (first-time registrations)
FORM MV-4ST, Vehicle Sales and Use Tax Return/Application for Registration (other registrations)
Property and services purchased or leased using this certificate are exempt from tax because: (Select the appropriate paragraph
from the back of this form, check the corresponding block below and insert information requested).
1. Property or services will be used directly and predominately by purchaser in performing purchaser's operation of:
2. Purchaser is a/an:

holding Sales Tax Exemption Number

3. Property will be resold under License ID
statement under Number 8 explaining why a number is not required).

(If purchaser does not have a PA Sales Tax License ID, include a

4. Property or services will be used directly and predominately by purchaser performing a public utility service.
PA Public Utility Commission PUC Number
and/or
U.S. Department of Transportation MC/MX
5. Exempt wrapping supplies, License ID
a statement under Number 8 explaining why a number is not required).

Businesses can use
the REV-1220 to
claim an exemption
on certain property
and services...

(If purchaser does not have a PA Sales Tax License ID, include

6. Canned computer software purchased by a financial institution subject to the Bank and Trust Company Shares Tax (Article VII) or the Mutual Thrift
Institutions Tax (Article XV).
7. Canned computer software licenses that are billed to a PA address but used outside of PA. The total number of software licenses purchased for
invoice #
is
. The total number of users accessing and using the software outside PA is
.
8. Other
(Explain in detail. Additional space on reverse side).
I am authorized to execute this certificate and claim this exemption. Misuse of this certificate by seller, lessor, buyer, lessee or their
representative is punishable by fine and imprisonment.
Name of Purchaser or Lessee
Street

Signature
City

EIN

Date
State

ZIP Code

1. ACCEPTANCE AND VALIDITY:
For this certificate to be valid, the seller/lessor shall exercise good faith in accepting this certificate, which includes: (1) the certificate shall be completed
properly; (2) the certificate shall be in the seller/lessor's possession within 60 days from the date of sale/lease; (3) the certificate does not contain information which is knowingly false; and (4) the property or service is consistent with the exemption to which the customer is entitled. For more information,
refer to Exemption Certificates, Title 61 PA Code §32.2. An invalid certificate may subject the seller/lessor to the tax.
2. REPRODUCTION OF FORM:
This form may be reproduced but shall contain the same information as appears on this form.
3. RETENTION:
The seller or lessor must retain this certificate for at least four years from the date of the exempt sale to which the certificate applies.
IMPORTANT: DO NOT RETURN THIS FORM TO THE PA DEPARTMENT OF REVENUE.
4. NONPROFIT EXEMPT ORGANIZATIONS:
This form may be used in conjunction with form REV-1715, Exempt Organization Declaration of Sales Tax Exemption, when a purchase of $200 or more
is made by an organization which is registered with the PA Department of Revenue as an exempt organization. These organizations are assigned an
exemption number, beginning with the two digits 75 (example: 75000000).

9

Starting a Business in Pennsylvania

SECTION 2

REPORTING
PENNSYLVANIA
INCOME

REPORTING PENNSYLVANIA INCOME
Business Structure
There are four principal kinds of business structures: sole
proprietorships, partnerships (general or limited), limited liability
companies, and corporations (S corporation or C corporation).
Regardless of your business structure, every business has an
income tax filing requirement in one form or another. How you
report this income and how it is taxed can be different depending
on the type of business structure you choose.
Sole Proprietorship
Many small businesses operate as sole proprietorships. This
allows the single owner to have sole control and responsibility.
How to Report: Sole proprietors report income and expenses
using PA Schedule C (Profit or Loss from Business or Profession)
for each business. The sole proprietor then reports the profit or
loss on a PA-40, PA Income Tax Return and pays tax at the state
income tax rate of 3.07%. A taxpayer and spouse who jointly own
a sole proprietorship must separately report their portion of the
income or loss for the business.
If you expect to owe PA personal income tax, you may be
required to make estimated tax payments during the year.
If your income is expected to be over $8,000 annually and
is not subject to withholding by a PA employer, you must
file and remit estimated payments by the 15th day of
April, June, September, and January.

partnership agreement should at least cover the contributions of
each partner, the distribution of profits or losses, and the terms
for dissolution. Without a written agreement, the profits and
losses are presumed to be distributed equally. The department
reserves the right to ask for a copy of this agreement at any time.
General Partnership
A general partnership is formed by an
agreement entered into by each partner. This
agreement may be informal, but it is advisable
to have a written, legal agreement among all
parties.

Limited Partnership
A limited partnership is a partnership having
one or more general partners and one or
more limited partners. The limited partners
have limited exposure to liability and are not
involved in the day-to-day management of the
limited partnership.

Limited Liability Partnership
IMPORTANT: PIT Estimates/Payment over
$15k must be made electronic or will be
subject to an EFT penalty.
Individuals can remit estimated, extension,
and tax due payments through the
department’s
myPATH
portal.
Visit
mypath.pa.gov and select Make a Payment
to pay via electronic funds transfer.

Partnership
Partnerships are separate legal entities in which two or
more parties are typically involved. Regardless of the type of
partnership, it is important to have a partnership agreement. The

11

Starting a Business in Pennsylvania

Limited liability partnerships (LLPs) are existing
general or limited partnerships that file elections
with the with the PA Department of State, Bureau
of Corporations and Charitable Organizations,
claiming LLP status. Limited liability partnership
status provides the general partners with
limitations and additional protection on their
personal liabilities as general partners.

How to Report: When preparing Pennsylvania tax documents, it
is best to start with the completed Federal Form 1065, U.S. Return
of Partnership Income, and then proceed to the PA schedules,
forms, and returns. Partnerships must use PA personal income
tax rules for determining income.

revenue.pa.gov
Partnerships, general and limited, are required to file a PA-20S/PA65, PA S Corporation/Partnership Information Return, to report
the adjustments to the federal income, deductions, gains, losses,
etc. from their operations for PA personal income tax purposes.
The partnership then passes any profits or losses through to
their partners. They report this income or loss to their partners
by providing each PA resident partner with PA Schedule RK-1,
Resident Schedule of Shareholder/Partner/Beneficiary PassThrough Income, Loss and Credits, and each nonresident partner
with PA Schedule NRK-1, Nonresident Schedule of Shareholder/
Partner/Beneficiary Pass-Through Income, Loss and Credits.
“Non-individuals”, i.e., trusts, S corporations, partnerships, LLCs,
etc. should receive both a RK-1 and NRK-1. These schedules
show the partners what their share of the income or loss is by
PA class of income and any other items required to be reported.
Copies of all PA Schedules RK-1 and NRK-1 should be included
with the PA-20S/PA-65. Also of note:
1.	 A partner that is an individual, estate, or trust must
include their share of income from a partnership on
their personal income tax return or fiduciary income
tax return.
2.	 A partner that is a partnership or an S corporation will
include its share of income from a partnership on its
PA-20S/PA-65 return.
3.	 A partner that is a C corporation will include its share
of income from a partnership on its corporation tax
return.

NOTE: A partnership may file a PA-40
NRC, Nonresident Consolidated Income
Tax Return, on behalf of its qualifying
electing nonresident individual owners. The
PA-40 NRC must be filed separately from all
other PA tax returns and must include more
than one nonresident member electing to
be included on the PA-40 NRC. For more
information, please review the PA-40 NRC
Instructions.
Partnerships that elect to be classified as corporations for
federal income tax purposes are subject to corporate net income
tax. For the current corporate net income tax rate, please visit
www.revenue.pa.gov. This income is reported on the Corporate
Net Income Tax Report (RCT-101).

Limited Liability Company
Limited liability companies (LLCs) are popular because, similar
to corporations, owners have limited personal liabilities for the
debts and actions of the LLC. Other features of LLCs are more like
a partnership, providing management flexibility and the benefit
of pass-through taxation.
Owners of an LLC are called members. Since most states do
not restrict ownership, members may include individuals,
corporations, other LLCs, and foreign entities. There is no
maximum number of members. Most states also permit singlemember LLCs and LLCs jointly owned by husband and wife.

NOTE: A few types of businesses cannot be
LLCs, such as banks, insurance companies,
and nonprofit organizations.

Single-Members/How to Report: The individual owner of a single
member LLC that receives net profit income reports its income
and expenses using PA Schedule C (Profit or Loss from Business
or Profession). The individual owner of a single-member LLC
that owns and operates a rental property reports its income and
expenses using PA Schedule E (Rents and Royalty Income (Loss).
An entity owner of a single member LLC reports its income
and expenses on the appropriate Pennsylvania tax return
(PA-20s/PA-65 Information Return or RCT-101).
Multi-Members/How to Report: Multi-member LLCs classified
as partnerships or S corporations for federal income tax purposes
are required to file the PA-20S/PA-65, PA S Corporation/
Partnership Information Return, and provide each PA resident
partner with a PA Schedule RK-1 and each nonresident partner
with a PA Schedule NRK-1. “Non-individuals”, i.e., trusts,
S corporations, partnerships, LLCs, etc. should receive both a
RK-1 and NRK-1.
Multi-member LLCs that elect to be classified as C corporations
for federal income tax purposes are subject to corporate net
income tax reported on the Corporate Net Income Tax Report
(RCT-101).

continued on next page

12

REPORTING PENNSYLVANIA INCOME
Business Structure cont.
Corporation
A corporation is the most complex form of business organization
primarily due to the paperwork required to establish a corporation.
Business activities are restricted to those listed in the corporate
charter. However, most corporations define business activities in
very broad terms within the charter.
There are two types of corporations in Pennsylvania: S
corporations and C corporations. The letters S and C represent
subchapters in the Internal Revenue Code and relate to the
different types of taxation. S corporations must use PA personal
income tax rules for determining income. C corporations follow
federal income tax rules for determining income with some
adjustments.
Pennsylvania S Corporation
An S corporation is a closely held corporation which has elected,
with the consent of all shareholders, a taxation status which
permits shareholders to pay taxes on the individual level and
at the individual tax rates, similar to a partnership with “passthrough taxation” rather than at the corporate level. Shareholders
of PA S corporations include their shares of income, loss,or credit
on PA personal income tax returns and pay tax at the personal
income tax rate of 3.07%. S corporation status is limited to
corporations that have a limited number of shareholders. Unless
the shareholders of a PA S corporation are members of the same
family, the maximum number of shareholders an S corporation
may have is 100.
For tax periods beginning after Dec. 31, 2005, entities considered
to be federal S corporations are automatically considered to be
PA S corporations (IRC 1361-1379). A federal S corporation may
elect not to be taxed as a PA S corporation by filing the REV-976,
Election not to be Taxed as a PA S corporation, on or before the
due date or extended due date of the PA Corporate Net Income
Tax Report for the first year in which the election is to take effect.
Once this election is made, it cannot be revoked for five years.

13

Starting a Business in Pennsylvania

Pennsylvania S Corporation
Status Revocations
As stated above, the election to not be taxed
as a PA S corporation may not be revoked for
five years from the date it went into effect. A
revocation received within this five year period
will be effective for the first tax period for
which the taxpayer is eligible to revoke the
election.
To revoke the election, the corporation must
send a letter signed by the shareholders holding
more than one-half of the shares of stock
of the corporation on the day on which the
revocation is made. This letter must contain the
name of the corporation, the federal employer
identification number (FEIN), the Pennsylvania
Department of State Entity Number, and the
effective date of the revocation. If no effective
date is provided, the revocation will be
effective for the first tax period for which the
revocation was timely submitted. In the case
of a corporation with qualified subchapter
S subsidiaries, the letter must include the
names and the federal employer identification
numbers (FEIN)s of all qualified subchapter S
subsidiaries doing business in PA.
Fax the letter to:
717-787-3708
Email the letter to:
[email protected]
The deadline for revocation of an election not
to be taxed as a PA S corporation is the 15th
day of the third month of the year in which
the revocation is to be in effect. A revocation
submitted after the due date will be in effect
for the next tax period.

Qualified Subchapter S subsidiaries
Since 1997, Pennsylvania has recognized qualified subchapter
S subsidiaries when corporations are recognized as such by
the federal government. For income tax purposes, all income
is considered as earned by the parent corporation and passed
through from the parent corporation to the shareholders. If
the only Pennsylvania activity of the parent corporation is
the investment in the qualified subchapter S subsidiary, the
parent corporation does not need to register to do business in
Pennsylvania to make this election.

C Corporation
All corporations are C corporations unless they opt to take
advantage of a provision in both federal and state tax laws to be
treated as S corporations.
A corporation pays taxes on profits and shareholders pay taxes
when profits are received as dividends. However, shareholders
cannot deduct any losses posted by a corporation.

How to Report: A PA S corporation is not subject to corporate
net income tax; rather, the income is passed through to the
shareholders to claim on their personal income tax returns.
The income passed through to a shareholder from a PA S
corporation is calculated based on personal income tax law and
not corporation tax law. The determination of income for personal
income tax purposes differs from the income determined for
corporate net income purposes. For example, there are no
provisions to allow a net operating loss carry-forward in the
calculation of income for personal income tax purposes.
PA S corporations are required to file a PA-20S/PA-65, S
Corporation/Partnership Information Return, provide each
PA resident shareholder with a PA Schedule RK-1 and provide
each nonresident shareholder with a PA Schedule NRK-1.
“Non-individuals”, i.e., trusts, S corporations, partnerships, LLCs,
etc. should receive both a RK-1 and NRK-1. These schedules
show the shareholder’s portion of the income or loss by PA class
of income and determine which other items are required to be
reported. Copies of all PA Schedules RK-1s and NRK-1s should be
included with the PA-20S/PA-65.

NOTE: If an S corporation has taxable builtin gains, it will be subject to corporate net
income tax. In such a case, the S corporation
must file an RCT-101, to report and pay
corporate net income tax on the built-in
gains.

For years beginning after December 31, 2012, income is
apportioned to Pennsylvania based solely on the sales
factor. Corporations required to apportion income must
use 100% of sales when calculating PA income tax liabilities
or PA net operating losses.
Pennsylvania’s net operating loss (NOL) carry-forward provisions
permit C corporations to offset current-year income with net
operating losses carried forward from a prior year. This is subject
to a 20 year carry-forward limitation, as well as, a limitation to
the total amount of taxable income that can be offset. Please
reference the chart below for NOL Cap.
Net Operating Losses Cap
	

Taxable Year	

Net Operating Loss Cap

	

2017	

30% of PA taxable income

	

2018	

35% of PA taxable income

	

2019+	

40% of PA taxable income

How to Report: All corporations must file an RCT-101, PA
Corporate Tax Report and include copies of appropriate federal
forms (1120 or 1120-REIT) and supporting schedules.

14

REPORTING PENNSYLVANIA INCOME
Withholding Requirements
Corporate Net Income Tax Withholding: Partnerships with one
or more partners that are C corporations subject to corporate
net income tax are required to make withholding payments on
behalf of nonfiling corporate partners. Calculate the withholding
for each non-filing corporate partner on the PA Schedule CP,
Corporate Partner CNI Withholding. You then list each non-filing
corporate partner on the PA-65 Corp, Directory of Corporate
Partners, and send in the withholding with this form.
Personal Income Tax Withholding for Nonresidents: Partnerships
and PA S corporations with one or more nonresident partner(s)
and shareholder(s) (owners) that are individuals, estates, and

trusts are required to make withholding payments on behalf of
nonresident owners.
Estimated and extension payments made are reported on
PA Schedule NW, Nonresident Withholding Payments for PA
S corporations and Partnerships. If additional nonresident
withholding is due, you should send the payment with the
PA-20S/PA-65, PA S Corporation/Partnership Information Return,
the PA-40 NRC, Nonresident Consolidated Income Tax Return, or
both, depending upon your situation. See instructions for both
forms for details.

Expenses & Deductions
You may deduct ordinary and necessary business expenses from
your business income. An ordinary expense is one that is common
and accepted in your field of business, trade, or profession. A
necessary expense is one that is helpful and appropriate for your
business, trade, or profession. An expense does not have to be
indispensable to be necessary.
Following are examples of deductible business expenses:
•	 Amortization of business start-up costs
•	 Depreciation
•	 Cost of goods sold
•	 Vehicle expenses
•	 Cost of using your home for business
Many other expenses may be deductible for income tax purposes.
Visit www.revenue.pa.gov for more information.
Business Start-Up Costs
Business start-up costs are expenses your business incurs before
beginning business operations. They may include advertising,
travel, surveys, and training. You must capitalize these initial
costs as an asset of the business. Capitalized expenses are
combined expenses and you gradually deduct the total over a
number of months or years. The gradual expense of these costs
is amortization expense. However, you may not deduct start-up
costs if business operations never begin.

15

Starting a Business in Pennsylvania

For PA personal income tax purposes, you may directly expense
(deduct) up to $5,000 of business start-up costs in the first year
in which the business begins operations. You must amortize
all start-up costs greater than $5,000 over 180 months. If total
start-up costs exceed $50,000, you must reduce the amount of
the direct expense by a dollar-for-dollar reduction of the direct
expense amount for each dollar over $50,000.
Sole Proprietorships/ How to Report: Report business startup costs using PA Schedule C (Profit or Loss from Business or
Profession). Record only the direct expense amount of start-up
costs on Line 36 and report the amortization of any start-up costs
on Line 7.
Partnerships and PA S corporations/ How to Report: Report
business start-up costs on the federal Form 1065 or Form 1120-S.
Report only the directly expensed amount on Form 1065, Line 20
or Form 1120-S, Line 19.
Report the amortization of any start-up costs on Form 1065, Line
16a or Form 1120-S, Line 14. If you are amortizing start-up costs,
you will also need to complete federal Form 4562, Depreciation
and Amortization.
C corporations: Report business start-up costs on the federal
Form 1120. Report only the directly expensed amount on Form
1065, Line 26 and report any amortized costs on Line 20. If you
are amortizing start-up costs, you will also need to complete
federal Form 4562, Depreciation and Amortization.

revenue.pa.gov

NOTE: Usually costs for a particular asset
(such as machinery or office equipment)
are recovered through depreciation. Other
start-up costs can be recovered through
amortization, when the costs are deducted
in equal amounts over a period of 180
months or more. Business start-up costs
that are not amortized generally cannot
be recovered until assets are sold or the
business is discontinued.

code of 1986. If the basis of any asset differs from the federal basis,
you must use straight-line depreciation for PA personal income tax
purposes.
For tax years beginning prior to January 1, 2023, businesses may
also elect to expense up to $25,000 of the cost of certain assets as
an IRC Section 179 expense. There is a dollar-for-dollar reduction
of the PA Section 179 expense for each dollar of investment in new
assets that exceeds $200,000.
For tax years beginning January 1, 2023 and after, businesses
may elect to expense up to $1,000,000 (indexed for inflation) of
the cost of certain assets as an IRC Section 179 expense. There
is dollar-for-dollar reduction of the PA Section 179 expense for
each dollar of investment in new assets that exceeds $2,500,000
(indexed for inflation).

Depreciation
If property acquired for your business has a useful life exceeding
one year, you generally cannot deduct the entire cost as a business
expense in the year you acquire the property. Instead, you must
spread the deduction out over more than one tax year. This method
of deducting the cost of business property is depreciation. The key
difference between amortization and depreciation is that you use
amortization for intangible assets, while you use depreciation for
tangible assets.
Examples of depreciable property include the following:
•	 Office furniture
•	 Buildings and leasehold improvements
•	 Machinery and equipment
You may deduct a limited amount of the cost of certain depreciable
property in the year you place the property in service (and each
year thereafter throughout its useful life) as depreciation expense.
You usually maintain and keep track of depreciable assets and the
yearly depreciation expense via a depreciation schedule.
To set up a simple depreciation schedule, record the date of
purchase, the amount paid for an item and its useful life, then
decide upon a depreciation method. Straight-line depreciation
is the simplest method, where you deduct the cost of each item
equally over time.
For example, you can deduct the cost of an $1,800 computer with
a useful life of five years at $30 a month ($1,800 divided by 60
months).
You must track the depreciation expense claimed each taxable year
until you fully depreciate the item. You record the amount deducted
each year as a depreciation expense as accumulated depreciation.
For PA personal income tax purposes, the depreciation method
and useful life may follow the federal rules for determining the
depreciation expense as long as the basis of the asset is the same
for federal and Pennsylvania purposes and the method and useful
life for the asset for federal purposes follows the Internal Revenue

NOTE: PA income tax rules do not allow you
to immediately expense a percentage of
your assets (called “bonus depreciation”)
like federal does.

Businesses may elect to expense certain assets as an IRC Section
179 expense. Please review current guidance on the department’s
website for guidance.
Sole Proprietorships/ How to Report: Use the appropriate lines
on the PA Schedule C (Profit or Loss from Business or Profession)
to report depreciation expense on your assets and any Section 179
expense you elect to take.
Partnerships and PA S corporations/ How to Report: You report
depreciation expense on either the federal Form 1065, Line 16a
or Form 1120-S, Line 14. You will also need to complete federal
Form 4562, Depreciation and Amortization. Remembering that PA
personal income tax rules do not allow bonus depreciation and do
not follow federal IRC Section 179 expense limits for years prior
to January 1, 2023, you may need to make an adjustment to your
federal income. You make this adjustment on the PA Schedule
M for the PA-20S/PA-65. See the Instructions for Schedule M for
where to include your adjustment(s)
C corporations/ How to Report: You report depreciation expense
on the federal Form 1120. You will also need to complete
federal Form 4562, Depreciation and Amortization. Pennsylvania
corporate net income tax rules also do not allow federal bonus
depreciation. You would adjust your federal income using
Schedule C-8, Adjustment for Bonus Depreciation, or Schedule C-9,
Adjustment for Deduction for Property, which is Fully Depreciated,
Sold, or Otherwise Disposed.

continued on next page

16

REPORTING PENNSYLVANIA INCOME
Expenses & Deductions cont.
Costs of Goods Sold

Vehicle Expenses

Generally, when you engage in a trade or business in which
production, purchase, or sales of merchandise is an incomeproducing factor, you must value inventory at the beginning and
end of each tax year to determine your cost of goods sold. In
determining inventory value, use the cost, lower of cost or market
value, or other method allowable under generally accepted
accounting principles and practices. If you change your method
of valuing inventory, restate the value at the beginning of the
year based on the changed method and include an explanation.

If you use a vehicle for both business and personal reasons,
generally the business portion is deductible. Keeping good
records is key. You must determine what percent of the vehicle
you use for business purposes and what percent you use for
personal purposes. To do this, track the entire use of the vehicle
by keeping a usage log in order to allocate the usage between
the two.

Some of your expenses may be included in figuring the cost of
goods sold. You deduct the cost of goods sold from your gross
receipts to determine the amount of gross profit for the year.
If you include an expense in the cost of goods sold, you cannot
deduct it again as a business expense.
The following are types of expenses used to calculate the cost of
goods sold:
•	 The cost of products or raw materials, including freight
•	 Storage
•	 Direct labor costs (including contributions to pensions or
annuity plans) for workers who produce the products
•	 Factory overhead
Under the uniform capitalization rules, you must capitalize
direct costs and part of the indirect costs for certain production
or resale activities. Indirect costs include rent, interest, taxes,
storage, purchasing, processing, repackaging, handling, and
administrative costs.
Sole Proprietorships/ How to Report: Report costs of goods sold
using PA Schedule C (Profit or Loss from Business or Profession),
on Line 2 and on Schedule C-1.
Partnerships and PA S corporations/ How to Report: Cost of
goods sold is calculated on federal Form 1125-A and carried to
page 1 of the Federal tax return. For partnerships, it goes to Form
1065, Line 2 and for PA S corporations, it goes to Form 1120-S,
Line 2.
C corporations/ How to Report: Calculate cost of goods sold on
Federal Form 1125-A and carry it to page 1 of the federal Form
1120, Line 2.

17

Starting a Business in Pennsylvania

Example: A sole proprietor of a flower shop drives his van 20,000
miles during the year: 16,000 miles for delivering flowers to
customers and 4,000 miles for personal use. The sole proprietor
may claim 80% (16,000 divided by 20,000) of the costs of
operating the van as a business expense.
A business may use either the actual or the standard mileage
rate method for determining vehicle expenses. The method a
business uses depends on a few different factors such as the
amount of time and attention to detail the business wishes to
extend to keeping records for the expenses, whether the vehicle
is leased or owned, if the vehicle being used is a small or large
vehicle, or if the vehicle is an older, newer, or inexpensive model.
A business that uses the standard mileage rate method simply
needs to keep track of the business and personal mileage use
of the vehicle. A business that uses the actual method must
keep track of all the vehicle’s expenses as noted below and the
business and personal use mileage. Typically, a business that
chooses the standard mileage rate method can switch back
and forth between methods but only if the business used the
standard mileage rate in the first year of business use. However,
if the business used the standard mileage rate in the first year for
a leased vehicle, it must use that for the entire usage period for
that vehicle. A business that uses the actual method in the first
year must use the actual method for the life of the vehicle.
With a smaller or inexpensive vehicle, it is sometimes better to
use the mileage rate method than the actual expense method. A
business may also benefit from using the mileage rate method
versus the actual expense method with older vehicles. A business
with larger, more expensive or newer vehicles may benefit by
using the actual expense method over the standard mileage rate
method.
To determine which method is best for a vehicle, track both
expenses for the first year of business use for the vehicle and
decide which is best. The decision on what method to choose is
critical in the first year of business use as that method can lock a
business into the same method for the life of the vehicle.

Actual Expense Method
If the business chooses the actual expense method to calculate
its vehicle expenses, the following expenses would be allowable
up to the amount of the business use percentage for the vehicle:
• Depreciation

• Lease fees

• Rental fees

• Towing charges

• License fees

• Auto club dues

• Gas and oil

• Car repair tools

• Tires

• Insurance

• Car washes

• Registration fees

• Repairs and maintenance

• Business trip parking fees

You should keep dated receipts for each transaction. The
department will consider credit card statements and/or other
similar documentation in some situations. You must keep the
business purpose and description of the vehicle for all vehicle
expenses.
Standard Mileage Method
If you choose to deduct vehicle expenses using the standard
mileage method rather than deducting actual expenses, you
must use the standard mileage rate announced by the IRS to
claim deductible costs of operating the car, van, or truck for
business purposes.

NOTE: If you choose the standard mileage
method to calculate vehicle expenses, you
may not deduct actual expenses except for
business-related parking fees and tolls.
In order to track total mileage, the business
should maintain a detailed travel log to
verify the mileage claimed. The detailed
mileage log must contain the following
information:
•	 Date traveled
•	 Beginning destination
•	 Ending destination
•	 Total miles per trip
•	 Purpose of trip
•	 Business relationship

continued on next page

EXAMPLE
MILEAGE LOG

18

REPORTING PENNSYLVANIA INCOME
Expenses & Deductions cont.
Business miles are the number of miles actually driven for
business, such as visiting a customer or meeting a client.
Remember that any miles driven to the bank, office supply store,
or computer store to meet with an accountant or to meet with
a lawyer on business matters also counts as part of the business
use mileage.
Some travel is not business-related:
•	 Driving from home to work and back is commuting. It is not
deductible on either your business or individual income tax
return.
•	 If you make a stop at a store on the way home from a
business trip, the remaining miles from the store to home
are personal mileage, so they can’t be included.
You cannot use the standard mileage rate if:
•	 You used five or more vehicles at the same time (as in fleet
operations).
•	 You used the actual expense method for calculating vehicle
expenses in the first year you used the vehicle for business,
including situations where a Section 179 deduction was
claimed.
•	 You claimed the special depreciation allowance on the
vehicle.
The five or more vehicles restriction applies to vehicles used at
the same time. For example, a business owns three vans and two
cars. The three vans can be on the road together at the same
time, but only one person ever drives the cars, so only one will
ever be in use at any time. This scenario won’t break the four car
maximum.
Vehicle Owned by Employee
An employee (or a shareholder employee) who uses a personal
vehicle for business can submit a request for reimbursement
to the corporation, based on documented business miles.
The corporation can then reimburse the employee based
on the standard mileage rate for business. In this case, the
corporation gets a deduction for vehicle expenses paid, and
the reimbursement is not reportable as taxable income to the
employee. If the company paid the auto loan, insurance, gas,
repairs, etc. to the owners, these payments are not valid business
expenses. They will be either an auto allowance or distribution to
shareholder-employees.
Vehicle Owned by the Corporation
Corporations cannot use the standard mileage rate method. They
must determine the deduction for any vehicles owned based on
actual operating expenses. The corporation can deduct auto loan,
interest, insurance, repair, gas, etc. However, the business-use
percentage of the vehicle limits the deductions. The corporation

19

Starting a Business in Pennsylvania

can treat vehicles used by employees as being u