Pa Schedule M, Reconciliation Of Federal Taxable Income To Pa Taxable Income Instructions (Page 3 of 5) in pdf

Revised February 4, 2002

Line 4. Other PA Exempt Income

Enter the amounts for any PA exempt income items not listed above. Submit a schedule, with supporting

documentation, describing each income item entered.

Line C. Add Line 1 through 4

Part D - Adjusted Income for PA PIT purposes

Enter the total of Parts A, B and C.

Part E – Add deductions that PA PIT law does not allow, but Federal Income Tax law allows and other

adjustments for PA PIT purposes

Specific Line Instructions

Line 1 - Contributions for Keogh, IRA, health insurance plans for partners

Such amounts are never deductible under PA law against any class of income. In the past, DOR has

determined that these amounts have been commingled with other deductions on the prior PA-65.

By specifically keeping this line in it is intended that no amounts are deducted for PIT for partners regardless of

whether partner’s contribution is deductible under federal law on the form 1040. Since the partnership is the

entity required to establish a retirement plan, the contributions made and deducted on behalf of its employees

(not partners) are deducted on Form 1065. For Federal Income Tax purposes, the partnership’s contribution

on behalf of a partner is passed through to the partner on Schedule K-1 (“Other deductions”) and then

deducted on the partner’s Form 1040.

Line 2 - Federal tax credits for employee tips

Social security taxes are deductible for PA PIT. There is no credit for PA PIT purposes. Although there is no

credit, there is a deduction for wages. Other lines were provided for decreases on the Schedule M.

For PA PIT purposes, the amount of the employer’s income tax deduction for employer social security and

Medicare taxes, which are not allowed under federal law because the employer took a tax credit, are permitted

to be added back as a deduction under PA PIT law. (Provided the federal credit is not taken.)

Line 3 – Taxes based on gross or net income, Federal Income tax, one half of self-employment tax

This line removes all taxes based upon gross income as well as net income. For the treatment of business

privilege and/or gross receipt tax, see instructions on Line 8.

Reference is also made to Federal Income Tax and one half of self-employment tax. In the past PA has

determined that these amounts have been commingled with other reductions on the prior PA-65.

Line 5 – Life Insurance Premiums

A life insurance premium may be either deductible or non-deductible for federal purposes pursuant to Internal

Revenue Code Section 264. Life insurance premiums are deductible or non-deductible for PA purposes.

The deductibility of life insurance premiums under federal law are governed by Section 264 which provides that

if the S corporation or partnership is a beneficiary of a life insurance contract, then no deduction is allowed.

Conversely, if the S corporation or partnership is NOT the beneficiary of the life insurance contract, under

federal law, the premiums may be deductible.

Under PA PIT law, if the life insurance premiums are for “keyman” life insurance and the S corporation or

partnership is the beneficiary of the policy, then a deduction is permitted. For PA PIT purposes the funds must

go to the entity for business purposes. Conversely, if the beneficiary of the policy is a partner or shareholder

individually, then a deduction is not permitted.

Line 8 - Contributions to partners’ retirement plans

Revised February 4, 2002

Pa Schedule M, Reconciliation Of Federal Taxable Income To Pa Taxable Income Instructions Page 3