Pennsylvania Reacts to Federal Tax Law’s Full Expensing

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Che Odom

Pennsylvania officials are already responding to a provision in the new federal tax law that allows full, immediate expensing for machinery that would cost most states revenue.

A revised Internal Revenue Code Section 168(k), one provision under the new 2017 federal tax law (Pub. L. No. 115-97), will allow businesses to fully and immediately deduct the cost of certain equipment purchased after Sept. 27, 2017, and before Jan. 1, 2023. After that, the percentage of cost that could be immediately deducted would gradually decrease.

Signing the tax bill Dec. 22, President Donald Trump said companies would go “wild” about being able to immediately write off the full cost of equipment purchased. States, however, would see a revenue loss and may not conform to the provision, Joseph Bishop-Henchman, executive vice president of the Tax Foundation, told Bloomberg Tax. Many states have already decoupled from Section 168(k)'s 50 percent bonus depreciation, which is being replaced by full expensing, because linking to that provision would cost states money.

Pennsylvania, which conforms only to certain parts of the federal tax code, immediately reacted to the change in Section 168(k). The state Department of Revenue released a Dec. 22 bulletin informing businesses that “any deduction for depreciation of qualified property under section 168(k) of the Internal Revenue Code of 1986 must be added back to Pennsylvania taxable income for corporate net income tax purposes.”

Those taxpayers wouldn’t be permitted to deduct any of the disallowed depreciation until the property is sold or otherwise disposed of, Kenneth R. Levine, a partner and member of Reed Smith LLP’s State Tax Group, told Bloomberg Tax.

“We think the legislative intent is already clear” that the original enactment of Pennsylvania’s bonus decoupling statute was to “put taxpayers in the same position they would have been in if federal bonus depreciation had never been enacted by Congress,” Levine said. However, the revenue department’s new position, which delays all depreciation on 100 percent bonus property until the property is disposed of, is inconsistent with that legislative intent, he said.

Not Automatically Conforming

Pennsylvania is somewhat unique among states because it doesn’t automatically conform to the federal tax code.

States conform to the federal code to make administering their tax systems easier, as well as to make compliance easier for taxpayers. The vast majority of states conform as soon as a change occurs to the federal code or on a specific date.

Pennsylvania’s approach to the full-expensing provision wouldn’t be possible in a conforming state that hasn’t statutorily decoupled from bonus depreciation, Levine said.

To contact the reporter on this story: Che Odom in Washington at codom@bloombergtax.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

For More Information

Text of the Pennsylvania Department of Revenue bulletin is at http://src.bna.com/vl4.

Copyright © 2018 Tax Management Inc. All Rights Reserved.

Request Daily Tax Report: State