At a Glance…
As states begin to grapple with the implications of federal tax reform, the Reed Smith State Tax Group will be authoring a series of alerts discussing the state tax impacts of federal tax reform. In the first in the series, we will discuss the Pennsylvania Department of Revenue’s guidance on the application of the new federal 100% bonus depreciation rules in computing Pennsylvania’s corporate net income tax. This guidance appears to be inconsistent with legislative intent and prior Department policy.
On December 22, 2017––the Friday before Christmas––the Pennsylvania Department of Revenue put a huge lump of coal in taxpayers’ stockings—Corporation Tax Bulletin 2017-02. That bulletin announced the Department’s new position regarding 100% bonus depreciation, presumably to address the 100% bonus depreciation deduction that will be allowed under the federal Tax Cuts and Jobs Act for property placed in service after September 27, 2017.1 Reversing its six-year-old policy allowing taxpayers to claim a full 100% bonus depreciation deduction for Pennsylvania purposes, the Department now asserts that taxpayers who take advantage of the 100% bonus deduction for federal purposes must, when computing the Pennsylvania corporate net income tax, add the 100% bonus deduction to income. The bulletin goes on to announce that the Department will not allow any depreciation deduction with respect to property for which the 100% bonus deduction was claimed until such property is disposed of.
In our view, this new position is inconsistent with the legislative intent in decoupling from bonus depreciation. The Pennsylvania Legislature, when it originally decoupled from federal bonus depreciation, intended to allow taxpayers an alternative depreciation deduction, computed as if federal bonus depreciation had never been enacted. Thus, when 30% federal bonus depreciation was first enacted, the Pennsylvania Legislature amended the definition of “taxable income” for purposes of the corporate net income tax to add back any bonus depreciation claimed under IRC § 168(k), while allowing taxpayers subject to this add-back an additional deduction equal to three-sevenths of the regular (non-bonus) depreciation allowable with respect to the bonus property. This additional deduction had the effect, when coupled with the add-back, of placing taxpayers claiming the 30% federal bonus depreciation in the same place they would have been if the federal bonus depreciation had never been enacted. True, the Legislature didn’t update the statute through the various iterations of 50% bonus and 100% bonus, but the legislative intent was always the same––that taxpayers should compute their depreciation for Pennsylvania purposes as if federal bonus depreciation had never been enacted. Despite this clear legislative intent, the Department is now taking the position that no Pennsylvania depreciation is allowed with respect to 100% bonus property under the “three-sevenths” method, because such property is fully depreciated in the year it is placed in service for federal purposes.
In the past, the Department has recognized that the mismatch between the ”three sevenths” method and 100% bonus depreciation makes the statutory language decoupling from bonus depreciation “ambiguous.”2 As a result, in 2011, when 100% bonus depreciation was first enacted at the federal level, the Department published Bulletin 2011-01. That bulletin announced a taxpayer-friendly policy choice to allow full 100% bonus depreciation in the year the property was placed in service. Reed Smith put out an alert at that time3 that said that, because of the bulletin, taxpayers had a choice:
- Follow Bulletin 2011-01 for 2011 property and take the 100% bonus; or
- Follow the legislative intent and take the depreciation deduction that would have been allowed if federal bonus depreciation had never been enacted.
Now, in Bulletin 2017-02, the Department is taking the first option away. We continue to believe, however, that the best option––the option most in line with legislative intent––is to allow taxpayers claiming federal bonus depreciation to compute depreciation on their bonus property for Pennsylvania purposes as if bonus depreciation had never been enacted at the federal level.
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