Tax code update: The depreciation debate
In late December, the Pennsylvania Department of Revenue released Corporation Tax Bulletin 2017-02 that spelled out how the state would handle the depreciation provision of the new federal tax code.
The federal government in many circumstances will now allow 100 percent depreciation of a capital purchase in the year the purchase was made. Supporters of the change say it will nudge businesses to invest in equipment, which would help the economy overall.
The state, however, determined that Pennsylvania businesses taking advantage of the federal provision must add the deduction back to their income when doing Pennsylvania taxes. In addition, a business cannot take a state deduction for depreciation until the equipment is disposed of in the future.
In a blog post Jan. 4, law firm Reed Smith said the ruling reverses a six-year-old state policy allowing businesses to take 100 percent depreciation.
The state’s recurring budget shortfall may be one reason for the change.
“This action was taken to avoid the loss of hundreds of millions of dollars in current year tax receipts that would have suddenly put our budget out of balance,” Jeffrey A. Johnson, a state Department of Revenue spokesman, said in a written statement. “The department restored prior policy and is merely applying Pennsylvania law exactly as it is written, rather than creating a solution that is not available in the law. Businesses will still be able to deduct the depreciation and apply that against taxable income when the property is sold or otherwise disposed of.”
Critics of the state move, including David N. Taylor, president and CEO of the Pennsylvania Manufacturers’ Association, say the state’s interpretation is making Pennsylvania less competitive at a time when it should be looking at ways to use the new federal tax code to promote business development.
Instead, Taylor added, officials in the Wolf administration keep acting “stupidly” and that its decisions are often “boneheaded.”
Taylor said a legislative fix that would override the department’s interpretation is in the works.