August 10, 2020

Volume X, Number 223

August 10, 2020

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Good News: Pennsylvania Allows Federal Depreciation for Corporate Net Income Tax (But Not Bonus Depreciation)

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.

Christopher Jones assisted with this post.

Copyright © by Ballard Spahr LLPNational Law Review, Volume VIII, Number 180

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About this Author

Wendi Kotzen, Ballard Spahr Law Firm, Philadelphia, Tax Law Attorney
Partner

Wendi L. Kotzen is the Co-Practice Leader of Ballard Spahr's Tax Group. She advises clients on the taxation of all types of real estate transactions, has an extensive background in Pennsylvania and Philadelphia realty transfer tax planning, and advises clients on mergers and acquisitions. Ms. Kotzen is also experienced working with REITs; real estate partnerships (both for developers and investors); leasing transactions, including sale-leasebacks; Pennsylvania state tax incentives; and structuring like-kind exchanges (forward, reverse, and TIC exchanges).

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