Pennsylvania Response to Bonus Depreciation
Pennsylvania Conforms to Phase-Out of Federal
by Judith Richardson-Dunkley, Esq.
In addition to increasing the personal income tax rate and making other changes (see State and Local Taxes Weekly, Vol. 15, No. 2, 1/5/2004), L. 2003, H200 (Act 46) also repealed the provisions that decoupled Pennsylvania from the phase-out of the state death tax credit made by the federal Economic Growth and Tax Relief Reconciliation Act of 2001. The repeal is effective for estates of decedents dying after June 30, 2002, which was when the original decoupling took effect. ( L. 2003, H200 (Act 46), eff. for decedents dying after 6/30/2002 .)
Federal changes. The federal Economic Growth and Tax Reconciliation Relief Act of 2001 (P.L. 107-16) gradually reduced the amount of federal estate tax due by increasing the “exemption equivalent” of the unified credit and gradually reducing the top estate tax rate for decedents dying after 2001 until the federal estate tax is totally repealed effective for decedents dying after 2009. Pennsylvania, like many other states, bases its estate tax on the maximum credit for state death taxes allowed under Internal Revenue Code Sec. 2011 , with the Pennsylvania estate tax being equal to the difference between the maximum IRC credit and the actual inheritance taxes paid by the estate. A phase out of the federal estate tax would therefore result in phase out of the state tax as well.
Decoupling. Act 89 of 2002 decoupled from federal estate tax amendments made under the federal Economic Growth and Tax Reconciliation Relief Act by providing that all references to the Internal Revenue Code (IRC) are to the IRC as amended to June 1, 2001, except when otherwise indicated. A definition for “federal estate tax” was added that defined the term as the tax imposed under Ch. 11 of the Internal Revenue Code of 1986 and regulations promulgated thereunder. The change applied to estates of decedents dying after June 30, 2002.
Recoupling. L. 2003, H200 (Act 46) repeals the decoupling effective from its inception by deleting the definition of “federal estate tax” that was added by Act 89 effective for decedents dying after June 30 2002. The result is that the Pennsylvania estate tax will remain equal to the difference between the maximum IRC credit and the actual inheritance taxes paid by the estate. This also means that the Pennsylvania tax will also be phased out along with the federal estate tax unless phase out of the federal tax is repealed.
Additional amendment. An additional amendment under the 2003 Act also clarifies that a surviving spouse may dispose of the decedent's property using testamentary powers of appointment without accelerating the inheritance tax. This change is also effective for decedents dying after June 30, 2002.
Any taxpayer that claimed the 30% bonus depreciation deduction allowed under the federal Job Creation and Worker Assistance Act (P.L. 107-146) (JCWAA) on its federal income tax return must file an amended Pennsylvania corporate net income or personal income tax return by November 1, 2002. Under Act 89, signed June 29, 2002, a corporate taxpayer that claims bonus depreciation under IRC Sec. 168(k) on its federal income tax return must add that bonus depreciation back to its Pennsylvania taxable income. The taxpayer may then subtract from Pennsylvania taxable income an amount equal to 3/7 of the taxpayer's ordinary depreciation deduction under IRC Sec. 167. Personal income taxpayers must continue to calculate depreciation under the Internal Revenue Code, as amended to January 1, 1997.
Tax Update No. 100, Pennsylvania Department of Revenue, August 2002.
The tax bill enacted in conjunction with the state budget includes amendments affecting Pennsylvania corporate net income tax, personal income tax, Philadelphia business privilege tax, and certain other taxes.
Federal Bonus Depreciation Deduction
For Pennsylvania corporate net income tax purposes, Pennsylvania has decoupled from a provision of the federal Job Creation and Worker Assistance Act (P.L. 107-146) that allows a taxpayer to claim a 30% bonus depreciation deduction. Rather than adopt a prior version of the Internal Revenue Code, the state enacted a formula that approximates the federal deduction without the bonus deduction. Effective for tax years beginning after September 11, 2000, a taxpayer that claims a federal income tax bonus depreciation deduction under IRC Sec. 168(k) must add the bonus depreciation deduction back to the taxpayer's Pennsylvania taxable income. The taxpayer may then subtract from Pennsylvania taxable income an amount equal to 3/7 of the taxpayer's ordinary depreciation deduction under IRC Sec. 167.
For Philadelphia business privilege tax purposes, the bonus depreciation deduction is also disallowed. For tax years beginning after September 11, 2000, net income must be adjusted according to the state formula.