Pennsylvania "Fixes" Bonus Depreciation Disallowance

Pennsylvania enacted legislation (Act 72 of 2018) that allows depreciation deductions for corporate taxpayers that take 100 percent bonus depreciation for federal income tax purposes. By statute, Pennsylvania does not allow federal bonus depreciation that is provided for under Internal Revenue Code § 168(k).

The new federal tax legislation adopted at the end of 2017 changed the bonus depreciation rules to allow 100 percent depreciation on qualifying property expenditures made after September 27, 2017 and before January 1, 2023. Under Corporation Tax Bulletin 2017-02, the Pennsylvania Department of Revenue concluded that a corporate taxpayer must add back the 100 percent bonus depreciation amount to its Pennsylvania taxable income. The Bulletin further provided that no depreciation deductions are allowed against Pennsylvania taxable income with respect to those expenditures. The effect of this Bulletin was that qualifying property expenditures subject to 100 percent federal bonus depreciation cannot be recovered for Pennsylvania corporate net income tax purposes until the property is sold or otherwise disposed of.

Act 72 eliminates this adverse Pennsylvania tax treatment for corporations that take advantage of the new 100 percent bonus depreciation rules for federal tax purposes. Pennsylvania still does not allow bonus depreciation for corporate net income tax purposes, but under Act 72, Pennsylvania taxpayers may now depreciate those assets under the provisions of Internal Revenue Code §§ 167 and 168 (excluding the bonus depreciation rules of § 168(k)). These new rules apply to property placed in service after September 27, 2017.