The Pennsylvania Department of Revenue (the Department) announced in Corporation Tax Bulletin 2017-02 (the Bulletin; available here) that taxpayers subject to corporate net income tax (CNIT) must add back all bonus depreciation when calculating CNIT income, including 100% expensing under the new federal law. Remarkably, the Department also concluded that CNIT taxpayers that take advantage of immediate expensing for federal income tax purposes get no depreciation for CNIT purposes. That is correct: - 0 -.
This approach to the new federal expensing rule is inconsistent with the Department's approach to the temporary 100% federal bonus depreciation that was allowed for qualified property acquired during parts of 2010 and 2011. In 2011, the Department announced that taxpayers eligible for the temporary 100% bonus depreciation were not required to add any amount back when calculating CNIT income because it determined that the year the asset was placed in service also was the last year for which the taxpayer claimed a federal depreciation deduction.
For CNIT purposes, except for the 2010 and 2011 bonus depreciation, Pennsylvania historically decoupled from federal bonus depreciation and generally required CNIT taxpayers to add back bonus depreciation allowed for federal purposes. Generally, in the tax year that the taxpayer disposed of the asset or the last year the taxpayer took a federal depreciation deduction with respect to the asset, the taxpayer was entitled to deduct any remaining basis.
Under the new federal tax law, effective for eligible property placed into service after September 27, 2017, taxpayers will be able to claim bonus depreciation equal to 100% of the cost basis of the eligible property. In the Bulletin, the Department concluded that all bonus depreciation must be added back to income for CNIT purposes. Moreover, the Bulletin provides that CNIT taxpayers will not be allowed to claim any depreciation with respect to such assets during the period the taxpayer owns the property. A CNIT taxpayer's only relief will be to reduce its CNIT income by the total amount of the disallowed depreciation (potentially resulting in CNIT loss for some assets) when it sells or otherwise disposes of the asset for which no depreciation was allowed.
As a result of the Department's position, because the CNIT rate of 9.9% is almost half of the new federal corporate tax rate of 21%, CNIT taxpayers that expense assets for federal tax purposes could lose more than 40% of their tax benefit.
This is the first announcement from the Department regarding the federal tax changes, and it is notable that the Department chose to address only the immediate expensing provision, which is merely one of many federal changes—including a limitation on interest deductions and other changes that could increase, as opposed to decrease, the federal tax base. Thus, the Department may be cherry-picking those changes that increase CNIT while ignoring changes that could decrease the CNIT base.
It remains to be seen whether the General Assembly will change Pennsylvania tax laws to address the federal changes and/or whether the Department will issue any other guidance addressing the impact of the many important federal changes on CNIT. We understand that, in response to pressure from businesses, members of the General Assembly already are considering proposing legislation that would overrule the Bulletin and allow CNIT taxpayers to, at the very least, depreciate the cost of purchased assets for CNIT purposes.
