The Pennsylvania Department of Revenue issued Personal Income Tax Bulletin 2023-02 (the “Bulletin”) on August 3, 2023, allowing deductions from Pennsylvania Personal Income Tax for Section 179 Property (§179 Property).
Prior to the Bulletin, deductions for §179 property were capped at $25,000 annually. The Bulletin increases the available §179 Property deduction to $1,000,000 annually for property placed into service on or after January 1, 2023.
What is §179 Property?
The Pennsylvania Legislature passed legislation bringing Pennsylvania into conformity with Federal Tax Rules effective January 1, 2023. The Federal Income Tax rules contained in the Internal Revenue Code include deductions for §179 Property. As defined in the IRC, §179 Property subject to depreciation includes most types of tangible property except land. Examples of tangible property include buildings, machinery, vehicles, furniture, and equipment. §179 property also includes intangible property such as patents, copyrights, and computer software.
Property must meet four requirements to be considered §179 depreciable property. These requirements include: the property must be owned by the individual or entity claiming the deduction, the property must be used in a business or income-producing activity, the property must have a determinable useful life, and the property must be expected to last more than one year. The IRS has provided rules and examples for determining if a specific property is §179 property. If a property meets these requirements, it is considered deductible §179 property for both Federal and Pennsylvania Income Tax purposes.
What are the changes to Pennsylvania’s tax treatment of §179 Property?
The Department has determined that Pennsylvania taxpayers can treat the cost of §179 Property as a currently deductible expense, subject to specific limitations. Taxpayers may claim a deduction to offset gain from net profits, or Schedule C income, for personal income tax purposes. §179 Property deductions cannot be used to offset gain from any other Pennsylvania income class.
§179 Property deductions are subject to dollar and business income limitations. §179 Property placed in service before 2023 has a maximum annual limitation of $25,000. However, the annual dollar limitation for §179 Property placed in service on or after January 1, 2023, increases to $1,000,000 subject to an annual inflation adjustment. The business income limitation prevents taxpayers from using §179 deductions to reduce their taxable net profits below zero for any year.
Any amount of §179 Property deductions that cannot be utilized in a tax year is carried over indefinitely to subsequent tax years until the amount is exhausted. Partnerships and S-Corporations may elect to currently expense §179 Property at the entity level. All partners and shareholders must follow the entity’s election, and receive their pro rata share of the pass-through deductions.
What do the §179 changes mean for Pennsylvania taxpayers?
Pennsylvania taxpayers with business net profits now have access to up to $1,000,000 of business deductions starting Tax Year 2023. Entities and individuals subject to Pennsylvania income tax with business net income should review purchases to determine if they qualify as §179 property subject to the deduction. Additionally, taxpayers may be able to immediately reduce their taxable income by placing §179 property into service rather than depreciating the property over its useful life following the normal Pennsylvania depreciation rules.
Schneider Downs’ State and Local Tax (SALT) professionals are poised to help taxpayers with the Pennsylvania §179 changes. Please contact Stephen Worth ([email protected]) or Mark Balistrieri ([email protected]) with questions about Pennsylvania’s treatment of §179 deductions or other state and local tax matters.
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