Pennsylvania recently made a significant change to the treatment of bonus depreciation, which should create a great benefit for businesses. Here is an excellent summary, which was posted on our firm’s McKonomics blog.
The federal government has provided for the acceleration of depreciation expense on qualified assets for various periods of time since 2001. The main purpose for providing the acceleration of depreciation was to encourage businesses to make investments in their company in an effort to stimulate the economy.
The initial bonus depreciation deduction provided for a 30% deduction to income of eligible assets purchased between September 10, 2001 and September 10, 2004. The bonus depreciation amount was increased from 30% to 50% for assets purchased between May 5, 2003 and January 1, 2005. The second provision of bonus depreciation provided for a 50% deduction to taxable income for assets placed in service after December 31, 2007 and before January 1, 2011. In both instances, the depreciation deduction can be taken on the remaining 50% of the assets value over the useful life of the asset.
Finally, the Tax Relief Act of 2010 expanded bonus depreciation to allow for a 100% deduction of qualified assets purchased from September 8, 2010 through December 31, 2011. The 100% bonus depreciation preempts the previous 50% depreciation for assets placed in service from September 8, 2010 through December 31, 2010 as previously provided.
States have dealt with issues regarding how they wished to treat the bonus depreciation in calculating their taxable income. The reason the federal bonus depreciation is having an impact on various states' taxable income is the fact that many states use federal taxable income as their starting point in calculating state taxable income. In order to avoid reducing state taxable income by the bonus depreciation, many states have decoupled from bonus depreciation or have specifically added back bonus depreciation.
Pennsylvania is one state that previously decided against allowing federal bonus depreciation. Originally Pennsylvania determined that they would add back the additional bonus depreciation and then take 3/7 of the amount of allowable depreciation not including those assets subject to federal bonus depreciation until the full amount of disallowed bonus depreciation has been recovered by the taxpayer. Pennsylvania allowed that any unrealized bonus depreciation would be realized when the asset was disposed of. The 3/7 calculation worked well enough for assets subject to the 30% bonus depreciation. The calculation became more burdensome with the 50% bonus depreciation and especially now with the 100% bonus depreciation. The 50% add-back calculation resulted in unused bonus depreciation at the end of the assets useful life.
In this scenario, Pennsylvania provided that any unused bonus depreciation would be used in the taxable year in which the asset was fully depreciated for federal purposes. Based on this calculation, those assets subject to 100% bonus depreciation would not provide for any Pennsylvania depreciation until the time those assets are disposed. It is important to note that the bonus depreciation issue for Pennsylvania is only for C Corporations. S Corporations are still required to follow depreciation as calculated under MACRS.
Pennsylvania's Department of Revenue issued a Corporation Tax Bulletin 2011-01 on February 24, 2011. The Bulletin was issued to provide taxpayers and tax preparers guidance with regards to handling the 100% federal bonus depreciation for Pennsylvania Corporate Net Income Tax. Pennsylvania is informing taxpayers that they will take the position that assets subject to the federal 100% bonus depreciation will be allowed to deduct these amounts for Pennsylvania purposes in the same year as federal. Those assets subject to 100% bonus depreciation will not be included in Pennsylvania's RCT-101, Schedule C – Adjustment for Bonus Depreciation. The schedule will still be used for assets subject to the 30% and 50% bonus depreciation. In addition, Pennsylvania also provided guidance that they allow the full recovery of 30% and 50% depreciation disallowed in previous years in the year in which a complete write-off of the assets occur for federal purposes.
We will continue to provide updates on this issue as we move forward with tax season. If you have any questions or concerns, please feel free to contact Jason Skrinak, Principal of our State and Local Tax Group.