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By Altus Group | May 10, 2018

Read an update on coverage from July 2018:
Pennsylvania Governor Signs Law Overturning DOR’s Depreciation Rule

Original coverage published May 10, 2018

By Karen T. Syrylo, CPA

The Pennsylvania legislature has enacted legislation that will allow taxpayers depreciation deductions in place of the federal bonus depreciation of Internal Revenue Code section 168(k), thus overturning the instruction provided by the Department of Revenue in its Corporation Tax Bulletin 2017-02 which had disallowed all depreciation on those properties.  Senate Bill 1056  passed on April 24, 2018 and noted as “Legislation to Allow Long-Standing Deductions for Depreciation in Determining Taxable Income,” amends the Pennsylvania Tax Reform Code of 1971.  The Department had been interpreting the state statute as requiring an add back of the bonus depreciation claimed on the federal return with no offsetting state depreciation deduction.  The change in SB1056 is effective immediately and applies to tax years beginning on or after January 1, 2017.

The Department’s Tax Bulletin position went like this:

In accordance with section 401(3)1(q) of the Tax Reform Code of 1971 (“TRC”) any deduction for depreciation of qualified property under section 168(k) of the Internal Revenue Code of 1986 (“IRC”) must be added back to Pennsylvania taxable income for corporate net income tax purposes.

Section 401(3)1(r) of the TRC provides for the recovery of the disallowed depreciation of qualified property that was claimed and allowable under section 168(k) of the IRC by providing for an additional deduction in certain circumstances. The additional deduction is equal to three-sevenths of the remaining depreciation amount, not including the depreciation claimed under IRC 168(k). The additional deduction is permitted “if a deduction for depreciation of qualified property was included in taxable income in accordance with paragraph (q).”

In the case of 100% depreciation claimed for qualified property under IRC 168(k), this additional deduction is not applicable because there is no deduction for depreciation of qualified property included in taxable income in accordance with paragraph (q). Furthermore, if the additional deduction were allowed, the amount would be zero because there is no remaining depreciation amount after the 100% depreciation deduction.

As a result, Pennsylvania law requires the amount of a 100% deduction under IRC 168(k) to be added back to taxable income, and provides no additional mechanism for cost recovery with respect to the qualified property. Under Section 401(3)1(s), the taxpayer may take an additional deduction when the qualified property is sold or otherwise disposed of during a taxable year to the extent the amount of depreciation claimed has not been fully recovered.

The new law provides, at sections 401(3)1(r) and 401(3)1(s):

For property placed in service before September 28, 2017, if an addback to state taxable income was made for the federal bonus depreciation, three sevenths of depreciation expense calculated under IRC section 167 is allowed until the entire bonus depreciation addition modification has been offset.  Then in the year the property on which federal bonus depreciation had been claimed is either disposed of or fully depreciated for federal purposes, an additional state deduction is allowed to the extent that the state depreciation deductions had not resulted in the property being fully depreciated.

For property placed in service after September 27, 2017, bonus depreciation under IRC 168(k) is not allowed, but for state taxable income purposes the taxpayer is allowed a depreciation deduction as determined in accordance with sections 167 and 168 of the IRC except for 168(k).

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