NOTE: This material was updated on Feb. 12 to correct an error in the information about the Philadelphia Net Income Tax.
For those of you that saw my post on why ModSolar is moving into Center City and wanted details about the tax side, here’s some more details:
- City Wage Tax – no getting around that. ~3.75% of gross wages, paid by the employee (NOTE: we knew this would be an issue for our folks – so we grossed-up the salaries of anyone living outside the city at the time of the move – to account for city wage tax and make the move take-home neutral for them)
- U&O tax – use and occupancy – generally calculated by your landlord and added to your rent (or you remit separately), but a portion of what you pay in rent every year – generally about 10%. Given the low-cost of space in the city, not really an issue
- BIRT – Gross – so this was where the fear came from – a tax on gross revenue – but it was so low – 1.45 mils – that it became a non-issue (figure $14,500 per $1mm in revenue)
- BIRT – Net – this was where we thought we could be in real trouble. If you’re a fast-growing start-up whose VC’s want you burning cash to grow – you don’t have to worry about this one until you’re heavily in the money. But, if you’re growing-but-not-on-fire business, this is a concern. It’s 6.45% of your Net Profit – yes, you read that right! But it’s on your taxable net income.
And here’s where I think Philly gets tech start-up friendly in a hurry. This tax is on your “taxable” income. Ok, so it turns out that prior to 2015, there were 4 criteria for what qualifies for taxable net income in the city. in 2015, they reduced that to one – the only one that we cared about – where your income is earned.
As of tax year 2015, your Philadelphia Net Income Tax liability is a percentage of the taxable net income you generate. It is based on the percentage of your sales that occur in Philadelphia. That percentage, multiplied by 6.45%, is your tax rate. So if 100% of your sales are in Philadelphia, the tax is 6.45% of net income. But if only 10% of your sales are in Philadelphia, the tax rate is 0.645% (10% x 6.45%).
Since less than 10% of ModSolar’s sales are in Philadelphia, our tax liability will be a fraction of one percent of our net income. (That’s not zero–as we erroneously implied in an earlier version of this blog post–but it’s still a good deal for us, we think.)
Now here’s the kicker – there’s also a credit right now for new job creation within the city. $5,000 for each job you create – and you can carry it forward. We’re moving 20 jobs into the city, and plan to hire another 10-20 folks by the end of this year. So by the end of the year, we could have tax credits worth $200,000 to apply to any BIRT we would otherwise have to pay – and you can carry it forward (for 5 years I think – but check on that)! ModSolar will effectively not be paying any BIRT for several years! Cha-ching! And there’s one last piece – don’t forget that if you offer transit benefits to your folks, there are pre-tax savings for your employees, and a payroll tax incentive for the employer (we’re still looking into this one).