On February 24, 2011, the Pennsylvania Department of Revenue (Department) announced a very business-friendly interpretation to the application of 100 percent bonus depreciation for corporate net income tax purposes. In Corporation Tax Bulletin 2011-01, the Department advised that for corporate net income tax purposes, no adjustment of the federal 100 percent bonus depreciation will be required. Taxpayers will be able to take the full benefit of 100 percent bonus depreciation.

Before this announcement, Pennsylvania decoupled the federal bonus depreciation system from its corporate net income tax base. For Pennsylvania corporate net income tax purposes, a taxpayer generally has been required to add back bonus depreciation allowed for federal purposes. Then, in subsequent tax years, the taxpayer has been allowed an additional Pennsylvania depreciation deduction, based on a formula prescribed by statute. In the year the taxpayer disposes of the asset or the last year the taxpayer takes a federal depreciation deduction with respect to the asset, the taxpayer deducts any remaining basis. The statutory formula has effectively back loaded the depreciation deductions, placing a taxpayer in a worse position for Pennsylvania corporate net income tax purposes than it would have been in had depreciation deductions been taken for federal income tax purposes under the regular Modified Accelerated Cost Recovery System (MACRS) and had no bonus depreciation been claimed.

However, because the last year that a taxpayer takes any federal depreciation deduction with respect to an asset for which there is 100 percent bonus depreciation is the year the asset is placed in service, the Department determined that the full 100 percent bonus depreciation deduction is permitted for corporate net income tax purposes in the year the property is placed in service. This Corporate Tax Bulletin advised that the Department’s position with respect to bonus depreciation other than 100 percent bonus depreciation remains the same—the taxpayer may deduct only the statutory formula amount, with the remainder becoming deductible in the year the taxpayer disposes of the asset or the last year the taxpayer takes a federal depreciation deduction with respect to the asset.

Importantly, the 100 percent bonus depreciation deduction is available only for Pennsylvania corporate net income tax. For Pennsylvania personal income tax purposes, individuals (including individuals who own an interest in a partnership or an S corporation that does business in Pennsylvania) who are able to take the federal 100 percent bonus depreciation must use the MACRS.

The Tax Group of Ballard Spahr regularly advises clients on all Pennsylvania state and local tax matters. Please contact Wendi L. Kotzen, 215.864.8305 or kotzenw@ballardspahr.com; Wayne R. Strasbaugh, 215.864.8328 or strasbaugh@ballardspahr.com; for further information and assistance.


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