The Pennsylvania Department of Revenue (DOR) recently issued guidance in Tax Bulletin 2011-01 regarding a change in the calculation for bonus depreciation.
The Federal Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 increased the bonus depreciation to 100% for qualified property acquired after September 8, 2010 and before January 1, 2012. Pennsylvania, along with many other states, historically does not allow the bonus depreciation deduction and requires taxpayers to prepare a separate state depreciation computation. However, the Pennsylvania statute does provide for the recovery of the bonus depreciation that was disallowed for Pennsylvania corporate net income tax purposes to be recovered in subsequent years. The DOR’s interpretation of this provision is to permit recovery of any disallowed and unrecovered bonus depreciation in the taxable year in which such qualified property is fully depreciated for federal tax purposes. As a result, the DOR will permit full recovery of 100% bonus depreciation for qualified property in the year claimed and deducted for federal purposes.
Property that qualifies for 30% or 50% bonus depreciation will continue to require an adjustment on the Pennsylvania Corporate Tax Report (Form RCT-101). For example, property acquired in 2010 prior to September 9, 2010 qualifies for 50% bonus depreciation.
It is important to note, since the 100% bonus depreciation deduction is permitted for Pennsylvania corporate net income tax purposes, the deduction is only applicable to C corporations. Pass-through entities (S corporations, partnerships) follow the personal income tax statutes and regulations, not corporate net income tax statutes and regulations. Pass-through entities are permitted to compute depreciation using accelerated methods, but cannot use any of the bonus depreciation elections enacted for federal purposes
(72 PS §7303(a.2)).
For C corporations completing the Pennsylvania Corporate Tax Report, Line 1 of Section B, Current-Year Federal Depreciation of 168(k) property, and Column B of Schedule C-3, Federal Depreciation Section 168(k) Property, will not include the 100% bonus depreciation. The 100% bonus depreciation is also not included in Column C of Schedule C-3, Current-Year Bonus Depreciation.
Accounting Method Change
Consistent with the above interpretation the DOR will also permit recovery of disallowed and unrecovered 30% and 50% bonus depreciation property in which there is complete write-off of the remaining basis of qualified property pursuant to a consent agreement between the IRS and the taxpayer, which permitted an accounting method change and required the write-off pursuant to Section 481(a) of the Internal Revenue Code.
The additional deduction relating to 30% and 50% depreciation would be reported on Schedule C-4, Adjustment for Disposition of Section 168(k) Property & Recapture of Depreciation on Listed Property.
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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.