Archives: Posts

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.

As you plan year-end appreciation for your team, remember that the IRS still distinguishes between taxable and non-taxable gifts.

• Gift cards remain taxable income, no matter the amount.
• De minimis gifts–the small, infrequent, low-value items like a mug or snack box–are generally non-taxable, as long as they aren’t cash or cash equivalents.
• Bonuses continue to be fully taxable wages and must be processed with appropriate withholding.
• Holiday parties and employee celebrations are typically non-taxable when held occasionally and primarily for staff.

As you plan ways to celebrate your team, our tax and accounting professionals can help you navigate the IRS guidelines and make informed choices that show appreciation without creating unexpected tax issues.

Secure Act 2.0 became law at the end of 2022, and it continues to reshape how retirement plans work. The overall intent is positive, to help more people actually save enough for retirement, but the changes aren’t landing all at once. Different pieces phase in over several years, which means employers need to keep one eye on what’s active now and another on what is coming next.

One of those “coming next” rules is going to matter quite a bit for employers with higher-earning employees over age 50. Beginning January 1, 2026, certain catch-up contributions can no longer be made pre-tax. Those dollars must be Roth (after-tax). It’s a single rule change but the ripple effect touches payroll, plan elections, communication to employees, and how recordkeepers and payroll systems exchange data.

Who Does This Apply To?

This Roth-only requirement will apply to employees who:

• are age 50 or older
• made more than $145,000 in FICA wages in the prior year (the wage number will adjust over time)

It covers 401(k), 403(b), and governmental 457(b) plans where catch-up contributions already exist.

And What If Someone Makes Less Than $145,000?

In that case, nothing changes for them. If the plan allows it, those employees can continue to choose between pre-tax catch-up contributions or Roth catch-up contributions.

Why Employers Need to Start Looking at This Soon

Even though 2026 sounds comfortably far away, this is a change that will require coordination, updates, and testing. It’s not a “flip a switch and it’s done” type of change.

Some things that will need review:

• does your plan document even allow Roth catch-up contributions today?
• have you talked with your recordkeeper about timing for updates?
• how will payroll identify which employees cross the wage threshold each year?
• what does employee education need to look like so this isn’t confusing or disruptive?

If Roth catch-up contributions are not currently permitted under your plan and you do have employees who qualify, you’ll want to start the plan amendment conversation early.

Why This Change Isn’t Just Payroll or Just Compliance

This rule hits three worlds at once.

• The CPA side helps interpret the change and confirms the plan stays compliant.
• Payroll is responsible for coding these contributions the right way and tracking who is subject to the Roth rule each year.
• Technologies makes sure the data flow between systems is accurate, secure, and functioning the way it needs to.

This is where having those three functions working together matters more than ever, especially for small and mid-sized businesses who outsource these disciplines by design.

Don’t Wait to Scramble

Regulatory updates are always easier to manage when you give yourself time, especially when the change affects plan administration, payroll setup, and employee behavior all at once.

We’re Here to Help You Prepare

Our CPA, Payroll, and Technologies teams work together every day to help businesses stay ahead of changes just like this. If you’d like help making a plan for the 2026 Roth catch-up requirement or want to make sure your systems are ready, we’d be happy to talk through next steps with you.