On June 28, 2018, Pennsylvania Governor Tom Wolf signed into law SB 1056 to address the bonus depreciation issues raised by the federal Tax Cuts and Jobs Act (P.L. 115-97) (TCJA) and certain controversial guidance issued by the Pennsylvania Department of Revenue earlier this year. Under IRC Section 168(k) as amended by the TCJA, a 100% depreciation deduction (i.e., bonus depreciation) is allowed for "qualified property" placed in service after September 27, 2017, and before 2023. The increased expensing is gradually phased down starting in 2023 by 20 percentage points for each of the five following years. At one point, the Pennsylvania Department of Revenue (PA DOR) issued guidance in Corporation Tax Bulletin 2017-02 (the 2017 Bulletin) that, for Pennsylvania corporate income tax purposes, no recovery would be allowed with respect to 100% bonus depreciation added back to taxable income until the asset to which it relates is sold or otherwise disposed. (See Tax Alert 2018–0046).

Pennsylvania law as amended by SB 1056 continues to disallow federal bonus depreciation under IRC Section 168(k). For property placed in service after September 27, 2017, Pennsylvania allows a deduction equal to depreciation under the Modified Accelerated Cost Recovery System (MACRS). Further, SB 1056 codifies the PA DOR's policy of allowing the remaining unrecovered bonus deprecation to be deducted in the year the property is fully depreciated for federal income tax purposes, is sold or disposed of.

For property placed in service before September 28, 2017, Pennsylvania continues to allow an additional deduction equal to 3/7th of the federal depreciation. For such property, taxpayers are directed to follow the guidance set forth Corporation Tax Bulletin 2011-01 issued by the PA DOR.

In response to enactment of SB 1056, the PA DOR also issued Corporation Tax Bulletin 2018-03 (July 6, 2018), in which it acknowledged that some taxpayers may have already filed their 2017 Corporate Net Income Tax returns with assets placed in service on or after September 28, 2017, that are subject to bonus depreciation. Accordingly, that bulletin recommends that those taxpayers file amended returns eliminating that bonus depreciation and instead claim the additional deduction allowed under MACRS.

Lastly, Bulletin 2018-03 supersedes Bulletin 2017-02.

Implications

The new law's enactment clarifies the uncertainty regarding Pennsylvania's conformity to the accelerated depreciation provisions enacted in the TCJA. Taxpayers that have filed their 2017 Corporate Net Income Tax returns and followed the prior guidance should consider filing amended returns in response to the relief provided under the new law as well as the PA DOR's most recent guidance.

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