Does Pennsylvania Allow Federal Bonus Depreciation?

Depreciation is an accounting method that allocates the cost of a tangible asset over its useful life, allowing businesses to recover costs over time. Federal tax law includes bonus depreciation, an accelerated method allowing businesses to deduct a larger portion of an asset’s cost in the year it is placed in service. This article explores Pennsylvania’s alignment with federal bonus depreciation rules for state-level taxes.

Understanding Federal Bonus Depreciation

Federal bonus depreciation is a tax incentive allowing businesses to immediately deduct a significant percentage of eligible property’s cost in the year it is placed in service. This provision aims to stimulate economic growth by encouraging investment in new and used qualified property, such as machinery, equipment, and software. This accelerated deduction reduces a company’s taxable income in the year of purchase.

The bonus depreciation percentage has varied, initially increasing to 100% for eligible property under the Tax Cuts and Jobs Act of 2017. This percentage is currently phasing down. For property placed in service in 2023, the rate was 80%, decreasing to 60% for 2024. The rate is scheduled to decline by 20% each year until it reaches 0% in 2027. Businesses report bonus depreciation on IRS Form 4562.

Pennsylvania’s Stance on Bonus Depreciation

Pennsylvania does not conform to federal bonus depreciation for its state-level corporate net income tax (CNIT) and personal income tax (PIT) purposes. This non-conformity is called “decoupling,” meaning Pennsylvania’s tax laws operate independently of certain federal tax provisions. When a business claims federal bonus depreciation, it must add back that deduction when calculating its taxable income for Pennsylvania state taxes.

This decoupling means the accelerated depreciation benefit available at the federal level is not automatically extended to the state level. Businesses cannot receive the same immediate tax reduction on their state returns as they do on their federal returns.

Depreciation Rules for Pennsylvania Businesses

Since Pennsylvania does not allow federal bonus depreciation, businesses must follow specific depreciation rules for their state tax filings. For Corporate Net Income Tax (CNIT) purposes, Pennsylvania largely aligns with the federal Modified Accelerated Cost Recovery System (MACRS) rules, but without the bonus depreciation component. Corporations must add back any federal bonus depreciation taken and then calculate depreciation for Pennsylvania CNIT using standard MACRS over the asset’s useful life. This approach allows for cost recovery over time, but at a less accelerated pace than federal bonus depreciation.

For Personal Income Tax (PIT) purposes, which applies to pass-through entities like S corporations, partnerships, and sole proprietorships, Pennsylvania’s depreciation rules also differ from federal law. While federal Section 179 expensing has seen significant increases, Pennsylvania’s PIT rules for depreciation do not permit federal bonus depreciation. Prior to 2023, the Section 179 deduction for PA PIT was capped at a significantly lower amount, such as $25,000 annually. However, for property placed in service on or after January 1, 2023, the Section 179 deduction for PA PIT increased to $1,000,000 annually, subject to inflation adjustments.

Businesses must often maintain separate depreciation schedules and records for federal and Pennsylvania tax purposes due to these differences. For instance, if the federal basis of an asset differs from the Pennsylvania personal income tax basis, straight-line depreciation may be required for Pennsylvania purposes.