Pennsylvania enacts legislation addressing depreciation

Matthew Melinson
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Drew VandenBrul 
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Jamie C. Yesnowitz 
Washington, DC
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Chuck Jones 
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Lori Stolly
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On June 28, 2018, Pennsylvania Gov. Tom Wolf signed legislation, S.B. 1056,1 to address bonus depreciation issues raised by the federal tax reform provisions contained in H.R. 1, commonly referred to as the Tax Cuts and Jobs Act (TCJA).2 In December 2017, the Pennsylvania Department of Revenue issued guidance disallowing all depreciation on property subject to 100% federal bonus depreciation. This legislation, which applies to tax years beginning on or after Jan. 1, 2017, was enacted in direct response to this guidance and allows accelerated depreciation on this property, without a deduction for bonus depreciation.

Background Bonus depreciation is a method of accelerated depreciation, first dating back to Sept. 11, 2001. Corporations may immediately deduct an additional (“bonus”) percentage of the purchase price of eligible business assets in the year in which the assets are placed in service.3 The bonus depreciation percentages afforded to taxpayers have varied, but bonus depreciation was set at 50% prior to the federal tax reform legislation. The TCJA expanded bonus depreciation to 100% for assets placed in service between Sept. 28, 2017 and Dec. 31, 2022.4 Bonus depreciation is claimed as a deduction in the year the eligible assets are placed in service, with the remaining (non-bonus) portion of the assets being depreciated under Internal Revenue Code (IRC) Secs. 167 and 168 until the basis of the asset is reduced to zero, or the asset is sold or otherwise disposed of.

Pennsylvania historically has required an addback of federal bonus depreciation for purposes of calculating the corporation net income tax. However, Pennsylvania allowed an additional depreciation deduction equal to 3/7 of the federal depreciation not including bonus depreciation.5 Following enactment of the TCJA, on Dec. 22, 2017, the Pennsylvania Department of Revenue issued administrative guidance, Corporation Tax Bulletin 2017-02 (Bulletin), concerning the disallowance and recovery of bonus depreciation under IRC Sec. 168(k).6 The Bulletin disallowed all depreciation on property subject to 100% federal bonus depreciation placed in service between Sept. 28, 2017, and Dec. 31, 2022, and delayed cost recovery until the time the property was sold or otherwise disposed of.

Legislation reverses departmental guidance Under S.B. 1056, Pennsylvania continues to disallow federal bonus depreciation under IRC Sec. 168(k). However, for property placed in service after September 27, 2017, S.B. 1056 allows a deduction equal to federal depreciation determined under IRC Secs. 167 and 168, without regard to IRC Sec. 168(k) – generally MACRS depreciation.7 For property placed in service before Sept. 28, 2017, Pennsylvania continues to allow an additional deduction equal to 3/7 of the federal depreciation, without regard to IRC Sec. 168(k).8 Further, S.B. 1056 codifies the Department’s longstanding position that remaining unrecovered bonus depreciation may be deducted in the year the property is fully depreciated for federal income tax purposes, or is sold, or otherwise disposed of.9

Future administrative guidance on tax return filings The Pennsylvania Department of Revenue is currently developing administrative guidance on the application of S.B. 1056 to corporate net income tax filings (Form RCT-101) beginning with tax year 2017.

On May 2, 2018, the Philadelphia Department of Revenue issued an advisory notice indicating that it would follow the Bulletin for its Business Income and Receipts Tax (BIRT) and Net Profits Tax (NPT).10 As required by Pennsylvania law,11 Philadelphia follows Pennsylvania’s treatment of bonus depreciation. Therefore, the Philadelphia Department of Revenue has indicated it will update its bonus depreciation guidance following S.B. 1056.

Commentary As a result of the Bulletin, Pennsylvania was the only state to disallow all depreciation on 100% bonus depreciation assets under the federal tax reform legislation without a mechanism to recapture the disallowed amounts on property that may be held indefinitely. Thus, S.B. 1056 provides welcome relief to taxpayers and moves Pennsylvania back in line with other states. The legislation allows for the recovery of the disallowed deduction over the property’s life. There may be initial reductions in Pennsylvania’s tax revenue due to the timing of the depreciation deductions, but the legislation is revenue-neutral over the life of the property.12 In general, taxpayers will receive greater deductions annually under MACRS than they received under the previous 3/7 deduction approach. The impact of S.B. 1056 should be considered as a second quarter event for financial statement purposes because it was enacted on June 28, 2018. 2017 tax year returns should be filed or amended based on the revised bonus depreciation treatment in S.B. 1056 and remaining 2018 estimated payments should be adjusted to take into account this legislation. 

1 Act 72 (S.B. 1056), Laws 2018.
2 P.L. 115-97. For a discussion of this Act, see GT Alert: Tax Reform Law Transforming Business and Tax Planning.
3 IRC § 168(k).
4 After Dec. 31, 2022, the bonus depreciation percentage is reduced by 20% increments annually, until it is completely phased out for the 2027 tax year and beyond.
5 72 PA. STAT. § 7401(3)1.(r).
6 For further discussion of this Bulletin and the history of Pennsylvania’s treatment of bonus depreciation, see GT SALT Alert: Pennsylvania Disallows Bonus Depreciation on Certain Assets. In the case of 100% bonus depreciation claimed under IRC Sec. 168(k), the additional deduction was not applicable because there was no bonus depreciation deduction amount included in taxable income.
7 72 PA. STAT. § 7401(3)1.(r)(2).
8 72 PA. STAT. § 7401(3)1.(r)(1).
9 72 PA. STAT. § 7401(3)1.(s)(1).
10 Advisory Notice: City of Philadelphia Will Follow Commonwealth of Pennsylvania on Bonus Depreciation, City of Philadelphia Department of Revenue, May 2, 2018.
11 Act 89 (H.B. 1848), Laws 2002, § 31.1.
12 Fiscal Note for S.B. 1056, Pennsylvania House Committee on Appropriations, June 22, 2018.

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