What small business owners need to know about the major changes coming to Philly’s tax code
The city has eliminated a tax break that allowed companies to exclude their first $100,000 from liability under the business income and receipts tax, or BIRT.
Philadelphia officials are reaching out to help the tens of thousands of companies that will have to start paying the city’s business tax after a legal challenge led Mayor Cherelle L. Parker’s administration to eliminate a tax break that primarily benefited smaller firms.
“Our goal is to make sure that small businesses can adjust … while also thriving," Revenue Commissioner Kathleen McColgan said in an interview Tuesday. “We want businesses to succeed here, and we’re doing our part to make that transition.”
Parker and City Council this year eliminated a tax break that allowed companies to exclude their first $100,000 in income from business in Philadelphia from liability under the business income and receipts tax, or BIRT.
That tax break had effectively allowed thousands of small Philadelphia businesses to forgo paying the tax. Now that all firms will have to pay the BIRT, McColgan wants business owners to know that the city will be treating companies newly subject to the tax as if they were new companies, making them eligible to benefit from a city policy that helps ease the transition into paying the BIRT.
For help navigating that policy and finding other opportunities to reduce their tax bills, owners can call the Mayors’ Business Action Teams by emailing business@phila.gov or calling (215) 683-2100.
Here’s what you need to know about why the BIRT tax break went away and what the city is doing to ease the transition:
Why did the tax break go away?
For the last decade, companies that did business in Philadelphia were able to exclude their first $100,000 in income when calculating their BIRT liability. Beginning during the coronavirus pandemic, the city even stopped requiring firms with no liability to file BIRT tax returns, an additional benefit to small companies with limited technical abilities that struggled to comply with the complex tax.
But in 2024, the Massachusetts-based medical device manufacturer Zoll Medical Corp., which does business in Philadelphia, sued the city, contending that the $100,000 exclusion violated the Pennsylvania constitution’s “uniformity” clause because it effectively created different classes of taxpayers based on whether they made at least that amount from transactions in the city.
In her budget proposal in March, Parker announced the administration was begrudgingly moving to eliminate the exclusion, saying the Law Department had determined the city was unlikely to prevail in court.
» READ MORE: Why a popular tax break that helped Philadelphia’s small businesses may be going away
The administration this spring settled the lawsuit, which also included claims unrelated to the exemption regarding the city’s formula for determining Zoll’s tax liability. The city agreed to pay Zoll about $387,000 to end the case.
An attorney for Zoll declined to comment.
City Council in June approved the repeal of the tax break, despite some members questioning whether Parker gave up on defending it prematurely.
The city set aside $38.5 million to help companies deal with the transition and boost programs meant to help small businesses more generally.
When do small businesses have to pay the BIRT?
The next deadline for companies to file a BIRT return and pay the tax is April 15, 2026.
Council in 2018 adopted a change to the BIRT that was meant to ease the process for new businesses filing and paying the tax for the first time. McColgan wants owners to know the city will be treating existing companies that are now subject to the BIRT as new businesses, allowing them to take advantage of that change.
To understand how the change can help firms newly subject to the tax, one first must understand the timeline for when businesses report their income under BIRT.
Unlike the federal income tax, which individuals pay based on their earnings in the prior year, businesses subject to the BIRT pay a tax bill in April that represents an estimate of their sales and tax liability in the current year. (Their actual sales for the year are then reported the following April, and their balances are adjusted if they differed from the projections.)
Prior to the 2018 law, new companies filing in April of a given year had to pay the taxes from their first year in business at the same time they paid their estimated tax liability for their second year of operation.
To make things easier for new companies, the 2018 law allows them to initially pay taxes for only their first year in business. The following April, they are then given the option to pay for their second year’s tax liability in quarterly installments.
There are thousands of existing companies that have not had to pay the BIRT because they made less than $100,000 per year. Those companies, McColgan said, will be treated as new businesses.
That means they will only have to pay the BIRT tax in April 2026 based on their 2025 sales. Then in April 2027, they will have to pay taxes for 2026 as well as an estimate of their tax liabilities in 2027. But at that time, they will be able to break up the 2026 tax bill into quarterly installments.
The policy will apply to any firm that did not have to pay the BIRT tax from 2022 to 2024. It’s a complex policy, but McColgan is hopeful it’ll help existing firms being hit with the tax for the first time.
“We’re easing the transition for businesses that have been operating in Philadelphia but previously did not have a filing or payment requirement,” McColgan said. “This support will make a meaningful difference.”
What else is the city doing?
The Commerce Department this fall will offer free business tax assistance, and companies that make less than $250,000 per year can sign up for the program now on the city website.
“We will be having a process where we are matching vetted accountants with small business,” said Karen Fegley, the acting commerce director. “Some of this stuff is complicated. We want to make sure they’re getting all the benefits they can.”
Small firms can work with the city-provided accountants to get advice on provisions of the city tax code that could help with lowering their tax bills.
For instance, companies that are newly subject to the BIRT but lost money in any year from 2022 to 2024 will be able to report those losses against their 2025 business income, McColgan said. The accountants will be able to help them record the previous loss with an amended BIRT return.
The city is also encouraging firms to apply for the Commerce Department’s Small Business Catalyst Fund, which can provide strategic guidance as well as grants of up to $50,000 “based on demonstrated need, growth potential, and economic impact.”
What are the BIRT tax rates?
The BIRT includes two taxes. Businesses currently pay 0.1415% of their gross revenue, or total sales in the city, as well as 5.81% of their net income, or profits.
This year, Parker and Council adopted a long-term schedule for lowering the rates.
The initial cuts are minuscule, with the gross revenue rate falling to 0.141% and the net income rate falling to 5.71% for tax bills due in April 2026.
But by 2039, the city plans to completely eliminate the gross revenue levy and to cut the net income portion to 2.8%.