Pennsylvania’s 2025–26 state budget was signed into law on November 12, 2025. With it comes a series of tax, regulatory, and workforce changes that will directly affect businesses heading into the new year.
The budget includes several tax provisions that will influence corporate planning, investment decisions, and compliance.
Corporate Net Income Tax (CNI) Phase-Down Continues
Pennsylvania will stay on track with the planned Corporate Net Income Tax reductions, moving from 7.99% today to 7.49% in 2026. The broader phase-down, from 9.99% to 4.99%, remains scheduled to continue through 2031. For businesses, this provides continued predictability and long-term planning stability.
Net Operating Loss (NOL) Improvements Maintained
The more favorable NOL rules enacted last year remain in place. Losses incurred after January 1, 2025, may offset up to 80% of tax liability by 2029 (up from the old 40% cap). Pre-2025 NOLs remain capped at 40%. This is especially helpful for capital-intensive industries, early-stage companies, and businesses with irregular revenue cycles.
Pennsylvania Decouples from Several Federal Tax Provisions
Pennsylvania will not follow these recent federal changes:
- Immediate expensing of R&D costs
- Immediate expensing of certain production property
- Expanded interest expense deductions that factor in depreciation and amortization
For state tax purposes, companies must continue to amortize R&E costs over five years and follow older depreciation and interest-deduction rules.
Workforce-Related Tax Credits and Programs
The budget introduces several measures that may influence hiring and retention.
- Working Pennsylvania Tax Credit: A new state credit equal to 10% of the federal Earned Income Tax Credit will help lower-income workers and may encourage workforce participation.
- Child Care Worker Retention & Recruitment: The state is allocating $25 million to support child care workforce stability, an important move for employers struggling with childcare-driven absenteeism.
- New Affordable Housing Tax Credit: A new $10 million tax credit will be administered by the Pennsylvania Housing Finance Agency to encourage affordable housing development.
Business Implications of Education Funding
These changes may not impact tax planning directly, but they do influence long-term workforce development:
- $872 million in new K–12 public education funding
- Large increases in early literacy initiatives
- Increased tax credit funding for private-school scholarships
- No new spending for Career & Technical Education (CTE), though some hiring flexibility has been added for CTE leaders
- Targeted increases for certain higher-education institutions
What This Means for Your Business
The 2025–26 budget creates a mixed environment for Pennsylvania employers:
Positive Takeaways
- Continued CNI tax rate reductions
- Improved NOL flexibility
- Faster, more transparent permitting
- Reduced carbon-policy uncertainty with RGGI withdrawal
- New workforce-focused tax credits
Areas Requiring Attention
- Divergence from federal rules increases tax-filing complexity
- R&E expensing limitations may affect cash planning
- One-time revenue transfers raise questions about long-term fiscal stability
- Lack of increased CTE funding may continue talent shortages
How Canon Capital Can Help
Tax law changes, especially those that differ from federal rules, require careful planning. If you have questions about how the 2025–26 state budget may impact your company, we’re here to help. Call us today at 215-723-4881 or contact us online.