Pennsylvania Governor Tom Wolf signed Act 72 of 2018 (available here) into law yesterday. Act 72 will allow Pennsylvania corporate net income tax (CNIT) taxpayers to use the federal Modified Accelerated Cost Recovery System (MACRS), but not federal bonus depreciation. Act 72 overrules Pennsylvania Corporation Tax Bulletin 2017-02 (the Bulletin), in which the Department of Revenue (the Department) concluded that, not only was immediate expensing unavailable for CNIT purposes, Pennsylvania would be the only state to completely disallow all depreciation.
As we described in our alert earlier this year (available here), under the new federal law known as the Tax Cuts and Jobs Act, effective for eligible property placed in service after September 27, 2017, taxpayers will be able to claim bonus depreciation equal to 100% of the cost of eligible property, phasing down beginning in 2023.
In the Bulletin, the Department concluded that all bonus depreciation must be added back to income for CNIT purposes. Moreover, the Department concluded that CNIT taxpayers could not claim any depreciation with respect to such assets during the period the taxpayer owns the property, thereby disallowing all cost recovery.
Act 72 fixes this problem by adopting the federal depreciation rules, other than bonus depreciation, for CNIT purposes. Thus, Pennsylvania taxpayers will be able to use MACRS to calculate depreciation allowances for CNIT purposes for eligible property placed in service after September 27, 2017.
Act 72 is a positive change for CNIT taxpayers and reverses the Department’s much-criticized conclusion in the Bulletin. Like other states, Pennsylvania is still in the process of interpreting the Tax Cuts and Jobs Act to decide how its provisions affect Pennsylvania taxation and whether legislative responses like Act 72 are warranted.Ballard Spahr's Tax Group will continue to monitor responses by Pennsylvania and other states to the Tax Cuts and Jobs Act and can assist with any questions about sales taxes and other state and local tax issues. For more information, please contact Wendi L. Kotzen, co-Leader of the Tax Group, at (215) 864-8305, or Christopher A. Jones at (215) 864-8424.
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