April 15th is the deadline for filing taxes and reporting earnings for the last fiscal year, and in Philadelphia, businesses must consider several additional variables and regulations to file their taxes correctly. To avoid unnecessary complications during tax time, it is imperative that you maintain proper documentation throughout the year and understand what may affect your business as you proceed with the tax filing process.
“It’s important for businesses to understand their taxes and plan for them, especially when it comes to regional regulations,” says Michael Kline, a tax partner with more than 30 years of experience at Citrin Cooperman, one of the nation’s largest professional services firms with a strong presence in Philadelphia.
“Not only do we have our office here in the city, but we also built our foundation here from the ground up,” Kline says. “We know Philadelphia like the back of our hand, and our goal is to help our clients do the legwork in the months leading up to that April deadline to make sure it pays off when it’s time to file.”
Here are a few suggestions from Kline on what to consider when filing your business’ taxes in Philadelphia in 2022 and beyond:
Know What You Owe
Businesses, partnerships, and corporations based in Philadelphia are subject to a Business Income & Receipts Tax (BIRT), which means that the city takes a portion of their gross receipts and net income. In Philadelphia, taxes are placed on both profits and sales, which makes this tax one of the more notable payments for a business each year.
The BIRT is set up in a way that requires companies to pay it twice — what they owe for the year, as well as a 100 percent estimate for the next year. However, there is a silver lining to this arrangement. Over the past few years, because companies’ estimates were much higher than what they took in due to the pandemic, they often got large refunds.
For companies that are not incorporated entities, it becomes more complicated. A net profits tax comes into play, where tax rates are shaped around whether a business’ owners are residents or nonresidents of Philadelphia. As such, there are many different considerations to think about when it comes to the type of taxes you owe.
For example, a first-year business isn’t required to pay the BIRT for the first two years of its existence, but as Kline notes, many owners aren’t aware of this fact and end up paying unnecessary taxes. Being properly informed is extremely important to ensure you understand Philadelphia’s tax rules and ask the right questions. Consulting with a tax professional can help ease that burden.
Location, Location, Location
The largest factor that comes into play regarding the taxes your company owes is location. If you’re based entirely in Philadelphia and do all of your business inside the city, then you’re going to be subject to higher taxes. However, if a portion of your sales are outside of the city, then the rules are slightly different. In this situation, you can utilize apportionment to lower the amount of income that’s subject to taxes.
Essentially, Philadelphia collects taxes by taking the sales earned within city limits, dividing that by total sales, and then multiplying that percentage by net income. If you have fewer sales within city limits, it stands to reason that your city tax rate will be lower.
It goes without saying that this situation does not apply to every type of business. A standalone Philadelphia restaurant, for instance, only makes sales to customers within the city. Other businesses might decide that the value of operating in the city outweighs the potentially higher taxes it might incur from doing business only within its limits. In these cases, it’s important to be prepared for when that tax bill comes.
“A lot of successful businesses in Philadelphia are often surprised by the tax that they owe,” Kline says. “When they’ve had a good year, it can be a shock. We try to give them a heads up that by operating in the city, they’re going to owe a significant amount, so they know in advance what they’re getting themselves into.”
Communication is Key
Maintaining open communication channels between management and employees is a cornerstone of effective business practices, and it is especially helpful for a company when arranging its taxes. If your employees understand how you conduct your business, they will be better informed about how to help a company maximize its tax savings.
For instance, if a company is based in Philadelphia, but an employee decides to work from home for a day and makes a sale remotely outside city limits, that still counts as an in-city sale. These are the tiny details that can be the difference between your business saving money and paying more than it needs to when that tax filing deadline approaches.
“If you know how much it will cost your employees to work in the city, and explain the reasoning behind your decision making, you can create better strategies for setting yourself up for success,” Kline says. “Our goal is to let people know what they owe before they owe it and to teach businesses to chart and better understand where their sales are coming from.”
A general understanding of your specific tax situation, your business structure and the impact of local regulations on your business goes a long way in helping you file and save during tax season. For more information on Citrin Cooperman’s tax consultant offerings and how you can receive advice on your tax planning, contact Michael Kline at [email protected].
Citrin Cooperman” is the brand under which Citrin Cooperman & Company, LLP, a licensed independent CPA firm, and Citrin Cooperman Advisors LLC serve clients’ business needs. The two firms operate as separate legal entities in an alternative practice structure. Citrin Cooperman is an independent member of Moore North America, which is itself a regional member of Moore Global Network Limited (MGNL).