The recently enacted Tax Cuts and Jobs Act (“Act”) signed into law December 22, 2017 has brought significant changes to the federal tax system. There are numerous unanswered questions involving the Act that are still being researched by tax professionals; technical corrects to the law are needed by Congress on some items, and the IRS needs to issue guidance in many others. The Act’s implementation uncertainties are not just limited to federal tax issues, however; it is also causing anxiety and concern with many states. Please click here to see Schneider Downs’ tax reform guide for a more comprehensive analysis of the new law.
Under the Act, bonus depreciation, Internal Revenue Code (“IRC”) Section 168(k), doubles from 50% to 100% for property purchased between September 27, 2017 and January 1, 2023, effectively allowing an immediate federal tax write-off for qualifying property for both new and used property. Many states however, including Pennsylvania, do not allow bonus depreciation and will not be allowing the immediate 100% bonus write-off under their own income tax rules; they “decouple” their state tax depreciation rules from federal tax depreciation rules.
In response to the federal changes in depreciation produced by the Act, Pennsylvania Department of Revenue (“PADOR”) issued Corporation Tax Bulletin 2017-02 (“the bulletin”) on December 22, 2017 (see SD article dated January 4, 2018). Unfortunately, the initial guidance from PADOR with respect to the new 100% bonus depreciation rules is particularly harsh for corporate taxpayers (i.e., not applicable to “S” corporations, partnerships, trusts and individuals).
The bulletin provided that “any deduction for depreciation of qualified property under Section 168(k) of the Internal Revenue Code (i.e., bonus depreciation) must be added back to Pennsylvania taxable income for corporate net income tax purposes.” It further indicated that there are no additional mechanisms for cost recovery with respect to the qualified property, effectively denying any current depreciation-related deduction with respect to property using 100% bonus depreciation for federal tax purposes. PADOR did concede, however, that a taxpayer could take an additional deduction when the qualified property is sold or otherwise disposed of in a later taxable year. This could substantially increase the cost of investment in Pennsylvania for corporate businesses.
Recently, on January 9, 2018, a Memorandum (the memo) was sent to all Pennsylvania House members by Representative Francis X. Ryan introducing a call for House Bill HB2017, which is designed to reverse the “draconian pronouncement” of Bulletin 2017-12 and restore depreciation deductions for machinery and equipment to match the federal statutory scheme. In the memo, Mr. Ryan notes he plans to introduce legislation in the near future and is requesting cosponsors to join him. However, at this time, legislation has not been introduced to reverse the provisions of Bulletin 2017-02.
As a side note, however, while bonus depreciation is not allowed for “S” corporations, partnerships, trusts or individuals, either, those taxpayer can at least claim depreciation on assets where 100% bonus depreciation is claimed for federal purposes. In those instances, depreciation can be claimed using other depreciation methods allowed for Pennsylvania purposes.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.