Reed Smith Client Alerts

Philadelphia has elected to follow Pennsylvania’s lead and effectively deny taxpayers any depreciation deduction with respect to property for which the federal 100% bonus depreciation deduction is claimed. This position is contrary to legislative intent and taxpayers should consider preparing returns computing their Pennsylvania and Philadelphia income tax liability as if federal bonus depreciation had never been enacted.

Background – Pennsylvania disallows depreciation. In December 2017, the Pennsylvania Department of Revenue (Department) announced that it will abandon its six-year-old policy allowing taxpayers to claim 100 percent bonus depreciation deduction for Pennsylvania purposes if that deduction is allowed at the federal level. Instead, the Department now asserts that taxpayers who take advantage of the 100 percent bonus deduction for federal purposes must, when computing the Pennsylvania corporate net income tax, add the 100 percent bonus deduction to income. Further, the Department will not allow any depreciation deduction with respect to property for which the 100 percent bonus deduction was claimed until such property is disposed of, effectively denying taxpayers any depreciation deduction until disposing of the property.

As we discussed in our January 3, 2018 alert, the Department’s new bonus depreciation position is, in our view, inconsistent with the legislative intent to decouple from federal bonus depreciation. When the Pennsylvania Legislature originally decoupled from federal bonus depreciation in 2002, it intended to allow taxpayers to take depreciation deductions, computed as if federal bonus depreciation was never enacted. We continue to believe that Pennsylvania law authorizes a taxpayer to claim depreciation deductions during the time property is in service and to compute that depreciation as if bonus depreciation was never enacted at the federal level.