In response to the recently enacted federal Tax Cuts and Jobs Act of 2017 (“The Act”), the Pennsylvania Department of Revenue (“Department”) issued Corporation Tax Bulletin 2017-02 to assist taxpayers with understanding The Act’s impact on depreciation expense for Pennsylvania corporate net income tax purposes.
Under The Act, corporate taxpayers are permitted to currently expense 100% of the costs of qualified property placed in service after September 27, 2017. When the federal expense was increased to 100% in 2011, the Department followed suit and permitted the deduction. However, taxpayers are not being afforded such latitude this time around and will be required to add back the amount deducted under the 100% expensing for federal tax purposes when calculating their Pennsylvania taxable income. Furthermore, Pennsylvania provides taxpayers with no mechanism for recovering the cost of the underlying property unless the property is disposed of. For example:
If a taxpayer places in service $1million of qualified property, the taxpayer will receive a deduction of $1 million for federal income tax purposes. This $1 million must be added back when calculating the taxpayer’s Pennsylvania taxable income, and the taxpayer is not permitted a deduction for depreciation of the property while it is being used in the ordinary course of business. Rather, the taxpayer will adjust its income in the year the property is disposed of for any difference in depreciation expense taken for federal and Pennsylvania purposes (i.e., the $1 million).
This could create a significant unanticipated tax liability for Pennsylvania corporate net income taxpayers given Pennsylvania’s onerous 9.99% tax rate (which is surpassed only by Iowa’s top rate of 12%).