Reed Smith Client Alerts

Pennsylvania’s labored history with its treatment of federal bonus depreciation continues. Beginning in 2023, Pennsylvania’s statute requires a new method of accelerated depreciation—which could benefit taxpayers in the current year, but at the cost of additional compliance headaches, and with the risk of lost depreciation.

Pennsylvania’s Bonus Depreciation Decoupling History

Most states disallow federal bonus depreciation, then provide an adjustment to put the taxpayer in the same position it would have been if bonus depreciation did not exist.1

Pennsylvania always intended to decouple from federal bonus depreciation, but, as many taxpayers are aware, it chose a different (and much more complicated) method—by enacting a mathematical formula. That method worked when first introduced in 2002, when federal bonus was 30%.2

But as soon as federal bonus increased to 50%, the statutory formula no longer worked and left taxpayers with less depreciation throughout the property’s useful life than if Pennsylvania had simply decoupled in the same manner as almost every other state.3 Statutorily, this issue was a mere timing difference, but caused a major headache for taxpayers.4

In 2017 after the federal government enacted 100% bonus depreciation, the Pennsylvania Department of Revenue concluded that the existing statutory mathematical formula did not allow taxpayers to take any depreciation on bonus property until the year the property was sold.5 This not only frustrated taxpayers, but was contrary to the legislature’s original intent. Thus, the General Assembly stepped in to fix the mathematical formula, so that, once again, the statute put taxpayers in the same position they would have been if federal bonus did not exist.6