On June 22, 2018––in advance of the budget deadline––the Pennsylvania Legislature passed its budget, which notably did not include a Tax Reform Code bill. However, the Legislature did include in its negotiations, and ultimately passed, legislation “fixing” the depreciation computation for federal 100% bonus depreciation property—an expected $27.5 million cost to the Commonwealth over two years1 and a direct rebuke to the Department of Revenue’s policy announced back in December of delaying all depreciation on 100% bonus property until the year of disposal. On June 28, Governor Wolf signed this legislation into law as Act 72 of 2018.
Background on Pennsylvania decoupling
By statute, Pennsylvania does not conform to federal bonus depreciation under IRC § 168(k). Rather, Pennsylvania “decouples” from federal bonus depreciation by making additions to and subtractions from taxable income.2 As originally enacted, Pennsylvania “decoupled” by requiring taxpayers to add-back to income any bonus depreciation claimed under IRC § 168(k), while simultaneously allowing taxpayers an additional deduction for property subject to this add-back—ultimately placing taxpayers claiming the federal bonus depreciation in the same place they would have been if there was no federal bonus depreciation.3 However, Pennsylvania’s original decoupling statute and computation was drafted when the federal bonus depreciation was 30%—once federal bonus depreciation increased to 50%, and ultimately to 100%, Pennsylvania’s decoupling computation, if applied literally, ceased to accomplish the Legislature’s goal of putting a taxpayer in the same place they would have been without federal bonus depreciation.
Federal tax reform and Department of Revenue Bulletin
On December 22, 2017, the Pennsylvania Department of Revenue (Department) published Corporation Tax Bulletin 2017-02—announcing its new position regarding 100% bonus depreciation. The Department’s bulletin was issued to address the 100% bonus depreciation deduction allowed under the federal Tax Cuts and Jobs Act (TCJA) for property placed in service after September 27, 2017.4 Reversing its six-year old policy allowing taxpayers to claim a full 100% bonus depreciation deduction for Pennsylvania purposes, the Department’s bulletin asserted that taxpayers who take advantage of the 100% bonus deduction for federal purposes must add the 100% bonus deduction to income, when computing the Pennsylvania corporate net income tax. The bulletin went 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 the taxpayer disposes of such property.
We previously reported in an alert that, in our view, the Department’s new position was inconsistent with the legislative intent in decoupling from bonus depreciation. Act 72 shows that the Legislature agrees and has now enacted legislation to “fix” the statute and avoid the result advocated by the Department.
Legislature fixes depreciation computation and overrides Department policy
After six months in which competing bills have been circulating in both the House and Senate to correct the Department’s new policy, on June 28, Governor Wolf signed into law legislation that fixes the computation method with respect to 100% bonus depreciation property placed in service after September 27, 2017.
Specifically, Act 72 continues to decouple from federal bonus depreciation by requiring a taxpayer to add-back any 100% bonus depreciation permitted under the TCJA. However, in direct rejection of the Department’s policy, Act 72 allows taxpayers a depreciation deduction equal to the depreciation as determined under IRC § 167 and IRC § 168 (without regard to bonus depreciation under IRC § 168(k)). Act 72 aligns the literal statutory text with the Legislature’s original intent in decoupling—placing taxpayers in the same place they would have been if there was no federal bonus depreciation.
This legislation was likely ultimately included in the budget negotiations as a result of the fiscal impact—the Fiscal Note attached to the legislation notes a $27.5 million revenue impact to the Commonwealth over two years; however, the Fiscal Note also states that “[t]he timing differences of these depreciation deductions are temporary, so [Act 72] is revenue neutral over the life of the depreciation property in this regard.”5 Interestingly, the Fiscal Note also includes the Department’s estimates, which indicate that the Department anticipated additional revenues of $147.6 million as a result of its policy denying any deduction on 100% bonus depreciation property.
- Senate Appropriations Committee, Fiscal Note, Senate Bill 1056, P.N. 1657 (April 20, 2018).
- 72 P.S. § 7401(3)1.(q) or (r).
- Id.
- P.L. 15-97, § 13201 (amending IRC § 168(k) to allow for 100% depreciation).
- Senate Appropriations Committee, Fiscal Note, Senate Bill 1056, P.N. 1657 (April 20, 2018).
Client Alert 2018-146
