Q&A with the Pennsylvania Department of Revenue

Scenario: assests subject to federal 50% bonus depreciation pursuant to IRC Section 168

Sep 25, 2014
Q:

In the following situations involving assets that are subject to federal 50% bonus depreciation pursuant to IRC Section 168, would the transaction be deemed a disposition that would result in the full deduction of the unrecovered bonus carry over to the surviving/successor entity and be recovered over the remaining life of the assets?

1) Capital Contribution: Corporation A contributes its 50% bonus assets to the Corporation B. Pursuant to IRC Section 351, no gain or loss is recognized on the contribution.

A:

If no gain or loss is recognized then this is not a disposition and the taxpayer will not be able to recover the disallowed bonus depreciation. This will be recovered by the successor.


2) Statutory Merger, Taxpayer Survives: Corporation A holds 50% bonus assets. Corporation A merges under the laws of State X with Corporation B. Corporation A survives. Pursuant to IRC Sections 361 and 368(A)(1)(A) no gain or loss is recognized by A or B. A continues to hold and depreciation its 50% bonus assets for federal income tax purposes.

A:

Not a disposition. Survivor receives tax attributes and will continue to recover bonus deprecation.

3) Statutory Merger, Successor Survives: corporation A holds 50% bonus assets. Corporation A merges under laws of State X with and into Corporation B. Corporation B survives. Pursuant to IRC Sections 361 and 368(a)(1)(A) no gain or loss is recognized by A or B. Pursuant to IRC Sections 381(a) Corporation B shall succeed to and take into account various tax attributes of Corporation A including A’s method of computing its depreciation allowance. B continues to hold and depreciate the 50% bonus assets previously held by A.

A:

Not a disposition. Survivor receives tax attributes and will continue to recover bonus deprecation.

4) Partnership Technical Termination: Corporation A owns a 40% interest in Partnership P, which holds 50% bonus assets. Corporation B owns the other 60% of P, which it transfers to Corporation C, causing P to undergo a technical termination pursuant to IRC Section 708(b) in which P is deemed to liquidate and reform as “New P” for federal income tax purposes. A continues to hold 40% of New P while C holds the other 60%. What would happen to PA bonus recovery for each of A, B and C?

A:

This is a disposition and any remaining bonus depreciation will be recovered at the time of the technical termination.


5) Corporation Enters PA: Corporation A acquired 50% bonus assets in Year 1, curing which year it was not doing business in PA. In Year 3, A sells the 50% bonus assets. What PA bonus recovery would A claim in Years 2 and 3?

A:

None. Taxpayer did not adjust taxable income for bonus depreciation on these assets in a prior year.

6) Corporation Exits PA: corporation A acquired 50% bonus assets in Year 1, during which year it was doing business in PA and filed an RCT-101 adding back the bonus deduction and claiming a partial recovery based on the 3/7ths formula. Halfway through Year 2, A ceases doing business in PA, but continues to do business outside PA and continues to hold and depreciate the 50% bonus assets. In Year 3, when A does not do business in PA and does not file RCT-101, A sells the 50% bonus assets. What PA bonus recovery would A claim in Years 2 and 3?

A:
 
Year two: consistent with the statute.
Year three: none. There is no provision for a taxpayer withdrawing from PA to recover any bonus depreciation that was not recovered in prior years.

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These documents provide a summary of the answers provided by the Department of Revenue to the PICPA Committee on State Taxation at its annual question and answer session. These documents are classified as revenue information issued for informational purposes only for the convenience of PICPA members. Pursuant to 61 Pa. Code Section 3.4, these documents should not be relied upon for any purpose or used in tax appeals. Taxpayers requiring a binding opinion on their specific fact situation may request a written letter ruling under 61 Pa. Code Section 3.3.