ARTICLE II

IMPOSITION AND RATE OF TAX


SECTION 201. EARNINGS OF EMPLOYEES

A tax for general revenue purposes of one (1%) percent is imposed by the Approving Subdivision on the following:

A. Salaries, wages, commissions and other compensation earned by residents of the Approving Subdivision from January 1 to December 31 of the current year inclusive, no matter where earned.

B. Salaries, wages, commissions and other compensation earned by nonresidents from January 1 to December 31 of the current year inclusive, for work done or for services performed or rendered in the Approving Subdivision as provided in Section 206 of these regulations.


SECTION 202. NET PROFITS OF BUSINESSES, PROFESSIONS AND OTHER ACTIVITIES.

A tax for general revenue purposes of one (1%) percent is imposed on the following:

A. Net profits earned from January 1 to December 31 of the current year inclusive, of businesses, professions and other activities conducted by residents of the Approving Subdivision. The tax applies no matter where such business, professions or other activities are conducted.

B. Net profits earned from January 1 to December 31 of the current year inclusive, or businesses, professions, and other activities conducted in the Approving Subdivision of Harrisburg by nonresidents, as set forth in Section 206A., B., and C. of these regulations.

C. Income received from rental or sale of real estate by individuals licensed as realtors by the Commonwealth of Pennsylvania, or from those conducting real estate business.


SECTION 203. TAXABLE EARNINGS OF EMPLOYEES

The items of compensation listed below are taxable. They are subject to the tax whether an employee receives them directly or through an agent. Moreover, neither the kind or rate of payment nor the manner of employment exempts an employee from the tax.

A. Salaries.

B. Wages.

C. Commissions.

D. Bonuses.

E. Drawing [A]accounts. If amounts received as a drawing account exceed the salaries or commissions earned, the tax is payable on the amounts received. If the employee subsequently repays to the employer any amounts not in fact earned, the tax shall be adjusted accordingly.

F. Incentive payments.

G. Tips received.

H. Fees.

I. Benefits accruing from the employment, such as: annual leave, vacation, holiday, separation and privately financed unemployment benefits. Such payments are fully taxed to a resident employee and to a nonresident employee if his employment is entirely within Approving Subdivision. With respect to a nonresident employee working partly within and partly outside of Approving Subdivision, the tax is pro-rated on the same basis as that used in computing the tax on wages and compensation received during a representative period prior to vacation, holiday, or separation from employment.

J. Taxes assumed by the employer.

K. Fellowships. The portion, if any, of payments to a graduate student in a college or university as a fellowship or scholarship grant which represents compensation for services required to be performed by him, is taxable.

L. Compensation received in the form of property shall be taxed at its fair market value at the time of receipt.

SECTION 204. RESIDENT EMPLOYEES

The entire earnings received by a resident employee for services rendered are subject to this tax. Neither the source of the earnings, nor the place or places where the services were rendered exempt an employee from the tax.


SECTION 205. WHO IS A RESIDENT?

For the purpose of this tax, a resident of the Approving Subdivision is a person who is domiciled in that political subdivision.


SECTION 206. NONRESIDENT EMPLOYEES
(Applicable to Cities, Boroughs, Towns and Townships)

A nonresident of the Approving Subdivision is subject to a one (1%) percent tax on all of his earnings for work done or services performed or rendered in the Approving Subdivision.

A. If a nonresident of the Approving Subdivision is subject to an earned income tax in his political subdivision of residence, the Approving Subdivision will assume the burden of refunding to that political subdivision the tax which was collected by the Approving Subdivision from that nonresident, or that portion of the tax which is due his political subdivision.

B. Where the political subdivision in which the nonresident is domiciled imposes a tax of less than one (1%) percent on earned income, the earnings of an employee subject to the Approving Subdivision's Earned Income Tax are taxable at a rate which equals the difference between one (1%) percent and the rate of the tax imposed by the political subdivision of which the employee is a resident.

C. Where the political subdivision of which the employee is a resident imposes a tax of one (1%) percent on earned income and the effective date of such tax is later than the effective date of the Ordinance of the Approving Subdivision, the earnings of such employee are taxable by the Approving Subdivision during the period in which he was not liable to the tax imposed by the political subdivision of which he is a resident.


SECTION 207. NONRESIDENTS EMPLOYED FULL TIME IN APPROVING SUBDIVISION
(Applicable to Cities, Boroughs, Towns and Townships)

The entire earnings of a nonresident shall be fully taxed if he works or performs services exclusively within the Approving Subdivision.


SECTION 208. NONRESIDENTS EMPLOYED PART TIME WITHIN THE APPROVING SUBDIVISION
(Applicable to Cities, Boroughs, Towns and Townships)

Where a nonresident receives compensation for work done or for services rendered or performed partly within and partly outside the Approving Subdivision, the tax shall apply to that portion of the compensation which is earned within the Subdivision in accordance with the rules of apportionment or allocation set forth below:

A. If the nonresident is paid on a straight salary or wage basis, the tax shall be based on that portion of his compensation which the total number of working days within the Approving Subdivision bears to the total number of working days both within and outside of the Approving Subdivision.

Illustration: Mr. X, a resident of New Jersey, was employed on a five-day-week as a radio repairman at a weekly salary of $60.00. His job required the servicing of customers in Approving Subdivision and Millersburg, Pa. He worked within the Approving Subdivision approximately three (3) days each week. The tax on his weekly earnings is 36 cents, computed as follows:

3 days within the Approving Subdivision x $60.00
5 working days = $36.00

times 1% = $0.36

The claim for an apportionment of allocation, to be allowed by the Income Tax Officer, must be supported by a written statement, such as travel orders signed by the employer, setting forth the date or dates the employee was assigned within the Approved Subdivision.

B. If the nonresident is paid commissions, based on the volume of business transacted by him, the tax is computed on that portion of his entire commissions which the volume of business transacted by the employee within the Approving Subdivision bears to the volume of business transacted by him both within and outside of the Approving Subdivision.

Illustration: Mr. F, a resident of Bangor, Pennsylvania, was employed as a traveling salesman, receiving $10,000 in commissions based on volume of sales made by him. He solicited business within the Approving Subdivision and Allentown during the year totaling $100,000, of which $60,000 was attributable to Approving Subdivision. The tax is $60.00, computed as follows:

$60,000 within the A.S. x $10,000
$100,000 total sales = $6,000 x 1% = $60

A.S. = Approving Subdivision

The place of solicitation shall generally determine whether the business transacted was within or outside of Approving Subdivision. An exception to this principle is the case of nonresident, full time insurance agents. The test of taxable commissions received shall be the location of the risk at the time the policy was issued.

C. If the employee receives both salary and commissions, the tax shall be allocated on the basis of working days and volume of business transacted, in accordance with A. and B. above.

D. A nonresident who is employed entirely outside the Approving Subdivision but who enters the Approving Subdivision for the purpose of reporting, receiving instruction, entirely incidental to his duties outside the city, shall not be subject to the Approving Subdivision Earned Income Tax.

E. Where it is impractical to apportion or allocate the compensation at the end of each month, the apportionment or allocation may be made at the end of the year and the tax adjusted accordingly.

F. Any apportionment or allocation of tax for purposes of withholding of tax by the employer shall be supported by appropriate records of the employer.

SECTION 209. ILLUSTRATIONS OF TYPES OF EMPLOYMENT INVOLVING NONRESIDENTS WHO WORK PART TIME IN THE APPROVING SUBDIVISION
(Applicable to Cities, Boroughs, Towns and Townships.)

A. Nonresident Auditors - Where an auditor travels several times a year from a main office not located in the Approving Subdivision to the Approving Subdivision office to make audits of records in that office, each audit requiring several days work, the remainder of his time being spent in other cities (where such conduct is an established procedure), the tax must be on a prorata basis.

B. Nonresident Officers of Businesses, Corporations, and All Types of Organizations - A nonresident officer of a corporation, performing services outside of the Approving Subdivision who visits the Approving Subdivision office, is not subject to the tax provided such visit is entirely incidental to his duties outside of the Approving Subdivision.

C. Nonresident Commercial Transportation Employees - Where it is impracticable to apportion the earnings of nonresident Commercial Transportation, Motor Freight, Railroad Train and Engine Service employees, the following rules of allocation are prescribed:

(1) Services performed while passing through the Approving Subdivision - The services performed within the Approving Subdivision are considered merely incidental to the services performed outside the Approving Subdivision. Therefore, such nonresident employee shall not be deemed to be engaged in a taxable activity within the Approving Subdivision.

(2) Services performed in connection with commercial transportation which either beings or terminates in the Approving Subdivision - Where such service is preponderantly outside the Approving Subdivision, the nonresident employee is not engaged in a taxable activity within the Approving Subdivision. "preponderantly" shall mean in excess of ninety (90%) percent.

(3) Services performed in connection with commercial transportation both within and outside of the Approving Subdivision - The tax upon the compensation earned within Approving Subdivision shall be determined on the basis of the mileage within the Approving Subdivision. It shall be computed in accordance with the basic mileage or other rate of pay of such nonresident employee.

FORMULA

Mileage in A. S.
---------------------- X amount of pay X 1% = tax
Total Mileage

A.S. = Approving Subdivision

(4) Services performed entirely within the Approving Subdivision. The gross earnings of nonresident commercial transportation employees who work entirely within the Approving Subdivision are taxable.

D. Insurance Agents -

(1) Full Time Agents - The term "full time agent" means a person required by the terms of his agency contract, either to devote all of his time to the solicitation of business for one company, or to offer all of his business to one company and to place with other companies only such business as is not accepted by his full time company.

(a) Basic Commissions - The basic commissions of nonresident full time agents resulting from services performed in the Approving Subdivision are taxable. The principle shall be the location of the risk at the time of the policy's issuance. For life, accident and health insurance, the location of the risk shall be the residence of the insured; for casualty and fire insurance, it shall be the physical location of the property insured.

Commissions received by a nonresident on policies sold to residents are taxable whether they result from policies placed with his full time company, from surplus business placed with other companies, or from types of insurance.

Commissions received by a nonresident full time agent, on policies sold to nonresidents are not subject to this tax unless the agent has a place of business within the Approving Subdivision other than the space provided by the company with which he has his full time contract. In such case, the commissions on all policies, other than those placed with his full time company are subject to this tax as the profits or earnings of an independent business.

(b) Group Insurance Commissions - Commissions paid on the sale of contracts of group insurance are taxable: (1) if the agent negotiating the same is a resident of the Approving Subdivision, without regard to the location of the group, (2) if the group is located within the Approving Subdivision, as a unit without regard to the resident of the writing agent.

(c) Bonuses and Incentive Payments - Bonuses and Incentive payments received by nonresident agents are taxable. The tax is computed as follows:

FORMULA

Commission on sales to residents
---------------------------------------------- X bonus X 1% = tax
Total Commissions

(d) Collection of Tax at Source -

(i) Companies doing business in the Approving Subdivision (or general agents in the cases of companies whose contracts are with a general agent alone and to whom payment is made by general agent out of funds of general agent) shall deduct and withhold the tax on all compensation paid to resident and nonresident full time agents who are employees, in accordance with Section 206.

(ii) The term "general insurance agent" means a person who conducts his own independent insurance business, soliciting applications for more than one type of insurance and placing his business with more than one company, and who is not a full time representative of any company.

(iii) Commissions received by a nonresident part time agent, or a nonresident general insurance agent, on policies sold to residents of the Approving Subdivision are subject to this tax.

(2) General Agents and Manager - The term "general agent" means a person who is engaged by a company to develop and manage one of its agencies as his own independent business and whose compensation ordinarily (but not necessarily) is in the nature of commissions and allowances, rather than a salary.

The term "manager" means a person who is engaged by a company as an employee to develop and manage on of its agencies and who ordinarily (but not necessarily) receives a salary rather than overriding commissions as compensation for his managerial services.

(a) Commissions on Policies Sold by General Agents and Managers Personally - Commissions received by general agents and managers who are nonresidents on policies sold by them personally are taxable in the same manner as nonresident full time agents.


SECTION 210. NURSES

A. Registered Nurses - Registered nurses who offer services as independent contractors are in the same status as other professional persons. They shall file a Declaration of Estimated Tax upon earnings.

B. Practical Nurses - The regulation pertaining to registered nurses applies also to practical nurses who offer services as independent contractors.

C. Hospital Nurses - Nurses in the permanent or part time employ of hospitals, clinics, schools and institutions shall have their earned income tax withheld by their employers.


SECTION 211. MUSICIANS, ENTERTAINERS AND SPEAKERS

A. In the field of professional music there has arisen the practice of engaging musicians exclusively through a so-called "contractor". The practice, which arose by prescription of the American Federation of Musicians and of local union regulations, enables the purchaser of music to deal with only one of the number of musicians required for a particular occasion.

(1) Contractor - The term "contractor" means that individual musician through whom the purchaser and the musician negotiate the contract of service and the performance thereof.

The contractor may or may not perform actual musical service under a contract which he has negotiated.

(2) Purchaser of Music - The person, partnership, organization or association, for whom or which the musical services are to be performed or furnished, and who exercises an employer's control over the conduct of the musicians.

(3) Name Bands and Orchestras - A name band or orchestra is one which is identified or known by a name and which holds itself out to the public as a permanent organization, and in addition has either (a) fixed personnel or (b) the individual member musician has contracted for his services with the leader or owner of the band at a fixed salary, by term or by individual engagement, and over whom the purchaser has no direct control.

(4) When a contract for the purchase of music has been executed between a purchaser and a contractor, then the musician shall be deemed to be the employee of the purchaser.

The purchaser shall be the person responsible for withholding the tax from the wages paid to musicians.

B. Entertainers Other Than Musicians - An entertainer other than a musician is usually engaged by a purchaser through a booking agent. The booking agent, once the contract of employment has been executed, does not exercise an employer's control over the entertainer.

The owner of a club, cafe, taproom, theatre or of any place which furnishes entertainment to the public or to its patrons, shall be deemed the person liable as an employer of entertainers. Such employer must deduct the tax from the compensation paid to the entertainer.

Promoters of boxing exhibitions and other sporting events are required to withhold the tax from the compensation paid to the contestants engaged in the particular sporting event.

C. Lecturers and Speakers - The fees received by lecturers and speakers for services performed in the Approving Subdivision are subject to the earned income tax; the responsibility for the collection of the tax lies with the purchaser.


SECTION 212. MINISTERS, RABBIS AND CLERGYMEN

Salaries paid by organized religious bodies to ministers, rabbis, clergyman, evangelists or religious workers are taxable. The organized religious body shall withhold the tax upon such salaries and make remittance to the Income Tax Officer.

Voluntary offerings by individuals made to clergymen at marriages, baptisms, funeral services, Masses and prayers for the dead are taxable.


SECTION 213. DOMESTICS

The compensation received by domestics is taxable. The employer may, with the consent of the domestic, withhold the tax. Where such consent is not obtained, it is the duty of the domestic to file a declaration of estimated earnings as provided in Article III of these regulations.

Where the duties of domestics require them to live at their places of employment, board and lodging shall not be considered as wages or salary earned.


SECTION 214. OFFICERS AND EMPLOYEES OF THE UNITED STATES, THE COMMONWEALTH OF PENNSYLVANIA, OR OF ANY POLITICAL SUBDIVISION THEREOF

Officers and employees of the United States, the Commonwealth of Pennsylvania, or of any political subdivision thereof, whose earned income tax is not subject to withholding, shall file a Declaration of Estimated Tax and make quarterly payments as prescribed.


SECTION 215. PERSONS AND ACTIVITIES SUBJECT TO TAX ON NET PROFITS

A. Individuals - Any individual engaged in a business, trade, profession or other activity, carried on for profit, shall pay a tax on the net profits therefrom.

B. Partnerships, Associations and Other Entities - Each partner or member of a partnership, association or other entity owned by two or more persons and carrying on a business, trade, profession or other activity, wholly or partly within the Approving Subdivision shall be required to pay the tax on net profits of their partnership, association or other entity, proportionately to the extent of each partner or member's tax liability on their distributive share of net profits, whether or not the net profits are actually distributed to the partner or members. The liability of any nonresident partner or member for the tax shall be determined in accordance with Sections 206 and 217 of these regulations.

C. Rental Income - The rental income received from the regular operation of real estate under license by the Commonwealth of Pennsylvania or as a business is subject to the tax.


SECTION 216. ACTIVITIES NOT SUBJECT TO TAX ON NET PROFITS

The following are exempt from the tax on net profits:

A. The net profits of any institution or organization operated for public, religious, educational or charitable purposes; organizations or institutions not organized for private profit; and trusts or foundations established for any of these purposes.

B. The net profits of all corporations which are subject to or exempt from the Pennsylvania Corporate Net Income Tax or the Pennsylvania Franchise Tax.


SECTION 217. NET PROFITS OF NONRESIDENTS
(Applicable to Cities, Boroughs, Towns and Townships)

A. Where Entire Business is Transacted in the Approving Subdivision - A nonresident individual, partnership, association or other entity, conducting or carrying on any business, profession, enterprise, or other activity, is required to pay the tax on the entire net profits thereof, earned on and after January 1, if the entire business is conducted or carried on in the Approving Subdivision, even though such nonresident may not maintain a store or office in the Approving Subdivision.

Nonresidents are considered to be "conducting" a business in the Approving Subdivision if they do any one or more of the following within the Approving Subdivision (1) solicit orders, or (2) render services or execute or perform contracts, or (3) make sales.

Thus, for example, a dairy not located in the Approving Subdivision is liable for the tax where it sells products from its trucks within the Approving Subdivision.

Where the nonresident has a branch office, store, or office located in the Approving Subdivision, he shall be considered to be conducting a business to the full extent of all transactions originating or consummated in, by or through, such Approving Subdivision branch, office, or store.

B. Where Sole Store or Office is in the Approving Subdivision - A nonresident who maintains his sole store or office in the Approving Subdivision and transacts business both within and outside of the Approving Subdivision is entitled to an allocation of his net profits. The net profits of such business conducted in the Approving Subdivision shall be subject to the Approving Subdivision Earned Income Tax. The net profits of such business conducted outside the Approving Subdivision shall not be subject to the Approving Subdivision Earned Income Tax.

A nonresident surgeon, for example, who maintains an office in the Approving Subdivision and none outside of the Approving Subdivision, would be permitted to allocate the tax as to fees received for operations actually performed outside of the Approving Subdivision. The same applies to a nonresident attorney as to fees received for trial of cases outside of the Approving Subdivision. Likewise, a nonresident general insurance agent would allocate on policies of insurance sold by him in accordance with Section (D)(2)(A).

C. Allocation Where Taxpayer Has Places of Business Inside and Outside of the Approving Subdivision - A nonresident, who in addition to having a place of business or office outside the Approving Subdivision also maintains a store or office in the Approving Subdivision, and transacts business both within and outside of the Approving Subdivision, shall be entitled to an apportionment or allocation of his net profits.

If such nonresident claims an allocation on the basis of a store or office outside the city, he must be prepared to prove that it is an established, self-sustaining, bona fide office.

Whether or not a taxpayer has a place of business or office in a particular location is a question of fact, depending upon the particular circumstances in each case. Certain factors, however, are helpful, e.g., personnel, office equipment, stationery, where records are kept, "holding out" to the public (telephone listing), etc.

D. Special Allocation Formula - In some instances it may be impossible to allocate with certainty the net profits subject to tax. This may occur because the taxpayer has no office or store in the Approving Subdivision or because his records do not show the actual net profits where he does have an Approving Subdivision branch. In such cases, the use of the so-called "Massachusetts Formula" of allocation is permitted.

The factors in this special formula are:

(1) Real and Tangible Personal Property - The taxpayer computes a percentage on the basis of a fraction using the total average value of all real and tangible personal property located in the Approving Subdivision as the numerator, and the total average value of all such property located within and outside of Harrisburg Approving Subdivision as the denominator.

(2) Wages and Salaries - A percentage is computed on the basis of a fraction using the total amount of wages, salaries paid to the employees who work in, or from, or attached to places of business located in the Approving Subdivision as the numerator, and the total amount of such wages and salaries paid to all employees both within and outside of the Approving Subdivision as the denominator.

(3) Gross Receipts - A percentage is computed on the basis of a fraction using as the numerator gross receipts from sales or services within the Approving Subdivision and as the denominator all gross receipts from sales or services made both within and outside the Approving Subdivision.

Averaging - The percentages thus obtained are to be added together and the total divided by three (3) to obtain the average of the three percentages.

Illustration:
(i)
Real & Tangible Pers. Prop. In A. S. = $25,000
---------------------------------------------------------------- = 25%
All Real & Tangible Pers. Prop. = $100,000

(ii)
Wages, Salaries in A. S. = $10,000
------------------------------------------------ = 20%
All Wages, Salaries = $50,000

(iii)
Gross Receipts in Harrisburg = $75,000
------------------------------------------------------ = 25%
All Gross Receipts = $300,000

(iv)
Total of above percentages = 70%

(v)
Average of percentages = 23-1/3%

A.S. = Approving Subdivision

Thus, twenty-three and one-third (23-1/3% percent of the net profits is allocatable to the Approving Subdivision's Earned Income Tax of one (1%) percent.

However, if the numerator and the denominator of any of the above fractions are both zero, that factor shall be omitted in calculating the average of the percentages. In such event, the total of the remaining percentages shall be divided by the remaining number of factors. If, however, the numerator alone is zero and the denominator is represented by an amount, there is a resultant factor that is zero, which is to be included in the calculation of the average of the percentages.

The net profits of transportation and hauling companies shall be allocated upon the basis of the ratio of the number of miles operated, leased, and/or travelled over in the Approving Subdivision to the number of miles operated and leased everywhere as of the end of each calendar or fiscal year.

Allocation with Respect to Partnerships, Associations and Other Entities - If all partners or members are residents of the Approving Subdivision irrespective of where the activities of the partnership, association or other entity are conducted or if all the activities of the partnership, association or other entity are conducted in Approving Subdivision, irrespective of the residence of the partners or members all of the net profits of the partnership, association or other entity shall be taxable to the individual partners or members proportionately into their distributional share of the net profits of the partnership, association or other entity. If all or any of the partners or members are nonresidents, then the nonresident partners or members are only liable for the tax on their distributional share of the net profits derived from business actually conducted in the Approving Subdivision, and resident partners or members are liable for the tax on their entire distributional share of the net profits.

For example: One partner (a resident of the Approving Subdivision) has a 10% distributional share, second partner (a nonresident of the Approving Subdivision) has a 30% distributional share, third partner (a nonresident of the Approving Subdivision) has a 60% distributional share, net profits $100,000.00, 45% of business conducted in the Approving Subdivision, 55% outside the Approving Subdivision. As to the $45,000 net profit derived from business inside the subdivision, $4,500 or 10% is taxable to the first partner, $13,500 or 30% is taxable to the second partner, $27,000 or 60% is taxable to the third partner. As to the net profits from business outside of the Approving Subdivision, $5,500 or 10% is taxable to the first partner.

F. Alternative Allocation Formula - The Income Tax Officer may provide for a different method of allocation with due regard to the nature of the business concerned, where it appears that any of the prescribed allocation formulae work unfairly or inequitably as to a particular taxpayer or class of taxpayers.


SECTION 218. COMPUTATION OF NET PROFITS

The net profits of a business, trade, profession or other activity shall be computed by subtracting from gross receipts the cost of goods sold and all ordinary and necessary expenses of doing business. Ordinarily no business deduction which is not permitted by the Federal Government for income tax purposes will be allowed. All persons are presumed to be on a cash basis, but when the books of a taxpayer are kept on an accrual or other basis, which is used for Federal Income Tax purposes, such basis must be used for the purpose of computing the Earned Income Tax on net profits.


SECTION 219. ILLUSTRATION OF COMPUTATION OF NET PROFITS

In amplification of the definition contained in Section 218, above, but not in limitation thereof, the following additional information and requirements for the determination of net business profits are furnished:

A. Where necessary to properly reflect income, inventories must be used. The basis of pricing used for the purpose of the Federal Income Tax must be used in each instance.

B. Where the books and records are kept on an "accrual basis," whichever is used in the filing of Federal Income Tax returns must be used for the purpose of this tax.

C. Explanation of "Cash Basis" and "Accrual Basis" - No uniform method of accounting is prescribed. Each taxpayer shall adopt such forms and methods of accounting as in his judgment are best suited for his purposes. The two principal methods of accounting are: (1) the cash receipts and disbursement method, generally called the "cash basis" method; and (2) the "accrual basis" method.

Generally speaking, under the cash basis, income is taken into account when actually received and expenses are deducted when amounts are actually paid out. Under the accrual method, income is taken into account when it is earned and expenses deducted as soon as incurred.

A combination of accounting methods, is permitted, provided it clearly reflects income. Thus, for example, small retail stores may accrue items of gross income such as purchasers, sales of goods, accounts receivable and accounts payable, and take a cash deduction for such items as rent, interest, salaries and insurance.

A taxpayer engaged in more than one business may, in computing taxable income, use a different method for each trade or business.

(1) "Cash Basis" Method - A taxpayer employing the cash basis of accounting includes in gross income all income subject to tax received during the year in cash or its equivalent. He deducts all disbursements made during the year in cash or its equivalent, provided deduction for such expenditures is authorized by law.

The use of the cash basis is mandatory where no books or records of account are maintained.

Items of income and expenditure which, as gross income and deduction, are elements in computing taxable income need not necessarily be in the form of cash. It is sufficient that such items, if otherwise properly included in the computation, can be valued in terms of money.

Example: A taxpayer on the cash basis receives shares of stock in payment of services. Assuming that the stock has a fair market value, the taxpayer has received the equivalent of cash to the extent of its value and that amount must be included as income.

If the return is made on a "cash basis," gross profit shall include receipts from commissions, fees and interest, as well as the gross profit or loss from sales of merchandise, chattels, goods, wares, securities, notes, choses-in-action and services.

(2) "Accrual Basis" - If income is taken into consideration when earned, even though not received in cash, and expenses are considered as soon as incurred, whether paid or not, the system of accounting is said to be on an "accrual basis." These are the basis rules: (1) the right to receive an item of income (as distinguished from actual receipt) determines its inclusion in gross income under the accrual method; and (2) a deduction cannot be accrued until an actual liability is incurred.

(a) Example: In September of the preceding year a contractor performed work for a customer. Payment for the work was not received until the current year. If the taxpayer reports on the accrual basis, the income will be included in his preceding year return (when earned). If he reports on the cash basis, the payment will be included in his current year (when received).

(b) A suggested form to be used in computing net profits on an accrual basis. If the return is made on an "accrual basis," gross profit shall include: (1) commissions, fees and interest earned, plus (2) the gross profit or loss from sales of merchandise, chattels, goods, wares, securities, notes, choses-in-action and services, computed as follows:

Gross Sales or Billings _____________________
Less: Returns & Allowances Actually
Made _____________________
Net Sales or Billings (A) _____________________
Opening Inventory _____________________
Purchases _____________________
Manufacturing Costs (Labor, etc.,
where applicable) _____________________
TOTAL _____________________
Less: Closing Inventory _____________________
Cost of Goods Sold _____________________
(B) _____________________
Gross Profit (or Loss) = A - B

(i) From gross profits subtract allowable expenses to arrive at the net profits subject to tax (See below).

(ii) All ordinary and necessary expenses of doing business, including reasonable compensation paid employees, shall be allowed. (No deduction may be claimed for "salary" or withdrawals of a sole proprietor or of the partners or members of an unincorporated business or enterprise.)

(iii) There may be claimed and allowed, a reasonable deduction for depreciation (or abandonment) of property used in the trade or business, and for depletion or obsolescence, but the amount may not exceed that recognized for the purpose of the Federal Income Tax.

(iv) Bad debts, in a reasonable amount, may be allowed in the year ascertained worthless and charged off, or, at the discretion of the Income Tax Officer (if the reserve method is used), a reasonable addition to the reserve may be claimed, but in no event shall the amount allowed exceed the amount recognized as a deduction for the purpose of the Federal Income Tax.

(v) Taxes. There may be claimed as a deduction all taxes directly connected with the operation of the business and on business property. In any event, the following taxes may not be deducted: (a) the tax under the Harrisburg Earned Income Tax Ordinance approved November 30, 1976; and (b) any federal, state or local taxes based upon income.

(vi) A taxpayer may set off a net loss from his business, profession, or other activity against a salary, wage, commission, or other compensation received from another. (Some Approving Subdivisions have elected not to include this provision in their Regulations.)

(vii) "Net Loss" in any year may not be carried to any other year.

D. Methods of Account Must Clearly Reflect Income - No method of accounting is allowed unless it clearly reflects income. Thus, even if the taxpayer's accounts are kept and the return made on a cash basis, unusual cases may arise in which a payment made during the year is not deductible.

Example: Commissions, fees and costs paid in one year by a taxpayer in securing a loan for ten or fifteen years covered by a mortgage on property to be leased are not deductible in full in the year of payment, but should be spread over the period of the loan, even though the taxpayer's accounts are kept and the return made on the "cash basis.".