Corporate Close-Up: Pennsylvania ‘Fixes’ Bonus Depreciation Glitch

Last month Pennsylvania passed S.B. 1056 (Act 72 of 2018), which, while decoupling the state from federal bonus depreciation, provides a mechanism for taxpayers to take an additional deduction for depreciation on bonus depreciation property.

Pennsylvania’s Response to Federal Tax Reform

Following the reinstatement of 100 percent bonus depreciation by the Tax Cuts and Jobs Act, the Commonwealth issued guidance in December 2017 mandating any bonus depreciation deducted for federal purposes to be added back to the taxpayers’ Pennsylvania taxable income. However, the addback provided no additional mechanism for cost recovery until the taxpayer sold, transferred, or otherwise disposed of the property. Luckily for taxpayers, the state legislature passed Act 72 fixing the contradictory guidance offered late last year. 

Property placed in service on or after Sept. 28, 2017, is now eligible for an additional deduction limited to federal depreciation amounts under the Modified Accelerated Cost Recovery System (MACRS). For property placed into service before Sept. 27, 2017, taxpayers may take the remainder depreciation deduction in the taxable year in which the property is fully depreciated or disposed, whichever is earlier.

Guidance for 2017 Taxpayers

The Commonwealth issued guidance noting that taxpayers who have already filed their 2017 returns with property placed in service on or after Sept. 28, 2017, may amend their returns to disallow bonus depreciation for eligible assets subject to Act 72, and claim an additional deduction for the amount allowed under MACRS. Taxpayers who choose to amend their returns should be aware that a change could result in the extension of the statute of limitations for the Pennsylvania Department of Revenue’s authority to adjust the taxpayer’s liability.

Pennsylvania’s Complicated History with Bonus Depreciation

Pennsylvania traditionally required an addback of the bonus depreciation amount for state tax purposes, but allowed a deduction equal to three-sevenths of the annual I.R.C. § 168 depreciation amount until the disallowed federal bonus depreciation was recovered. This formula provided a deduction for each year the asset was federally depreciated.

Pennsylvania did not change its three-sevenths formula when federal bonus depreciation increased to 50 percent, and then again to 100 percent. This resulted in assets that were partly depreciated for state tax purposes, but fully depreciated for federal tax purposes. To address this disconnect, the Commonwealth issued guidance allowing the remainder depreciation to be deducted in the year fully depreciated for federal purposes.

Act 72 repairs the disconnect with federal bonus depreciation, and brings Pennsylvania in line with many other states that require an addback while also providing a corresponding MACRS depreciation deduction.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: How does Pennsylvania’s addback for bonus depreciation under Act 72 compare to other states? Is the deduction more equitable for taxpayers after Act 72?

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