The Pennsylvania Department of Revenue (DOR) recently revised Corporation Tax Bulletin 2019-03 so that it applies only to tax years beginning before January 1, 2025. The update creates uncertainty for corporate taxpayers that previously relied on the federal consolidated-group approach to avoid a Pennsylvania-specific Section 163(j) limitation.
For tax years beginning in 2025 and thereafter, affected taxpayers should be prepared to calculate the limitation on a separate-company basis unless the DOR provides additional relief or clarification.
Taxpayers also should evaluate the effect of Pennsylvania’s decoupling from the federal calculation based on earnings before interest, taxes, depreciation, and amortization (EBITDA) and consider available filing positions before completing affected returns.
Guidance Narrowed for 2025 and Later Tax Years
Passed as part of the One Big Beautiful Bill Act (OBBBA), beginning in 2018, Internal Revenue Code Section 163(j) generally limited 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, while also recognizing a significant exception for members of federal consolidated groups.
As originally issued, Bulletin 2019-03 provided that a corporation included in a federal consolidated return did not have to perform a separate Pennsylvania Section 163(j) calculation unless the federal consolidated group reported a limitation on its consolidated Form 1120. In practice, that approach often prevented a Pennsylvania-only limitation from applying, even when a standalone computation might have produced a limitation.
The DOR changed course on July 30, 2026, when it issued a revised version of Bulletin 2019-03 limiting the bulletin to tax years beginning before January 1, 2025. For calendar-year taxpayers, that change means the prior consolidated-group exception might no longer be available beginning with 2025 returns, and a separate-entity Section 163(j) analysis could be required.
To date, the DOR has not indicated whether it will provide additional information on the availability of the consolidated-group exception for tax years beginning on or after January 1, 2025. Absent further guidance preserving or modifying the prior approach, taxpayers should proceed on the assumption that the exception no longer applies.
Pennsylvania Decouples From the More Favorable EBITDA Calculation
For 2025, Congress amended Section 163(j) to restore a more favorable EBITDA-based limitation calculation. Under that approach, adjusted taxable income generally is increased by depreciation, amortization, and depletion, which can increase the amount of business interest expense that may be deducted.
Pennsylvania has decoupled from that federal amendment and limited use of the EBITDA-based method through legislation enacted in 2025. Accordingly, Pennsylvania taxpayers generally must compute Pennsylvania taxable income by applying Section 163(j) as it existed on December 31, 2024, before the federal change took effect. That approach generally results in the less favorable pre-amendment calculation, which does not add back depreciation, amortization, or depletion.
