Bonus Depreciation and State Income Tax. (Fixed Assets Management)

By Faussett, Nancy | Strategic Finance, May 2003 | Go to article overview

Bonus Depreciation and State Income Tax. (Fixed Assets Management)


Faussett, Nancy, Strategic Finance


BNA Software Makes It Easy to Handle Both Federal and State Depreciation Even with New Complications Arising from the Job Creation and Worker Assistance Act

One of the most noteworthy provisions of the Job Creation and Worker Assistance Act of 2002 is the allowance for an additional first-year depreciation deduction of 30% of the adjusted basis of qualifying property. This new deduction is also referred to as "bonus depreciation." It is important to apply the rules for bonus depreciation correctly, on both federal and state tax returns, because it represents a significant deduction.

State rules for income tax preparation often differ from federal rules. Tax preparation would be complicated enough if all you had to do was keep up with federal tax law changes. However, it becomes even more of a challenge when some states decide not to follow the federal regulations and create their own set of rules. Even the states that do follow federal law may choose to do so only partially. This is especially true when federal changes are made to depreciation, since the amount of allowable depreciation expense can have a major impact on a company's taxable income and, therefore, on a state's revenue. Now, more than ever; state governments are paying close attention to any federal tax law changes, since so many states are having problems balancing their budgets. As a result, state depreciation rules often differ from federal depreciation rules.

Do all of the states allow the new bonus depreciation deduction? Although the short answer to this question is "no," it is not simply a matter of identifying which states allow it and which states have opted to "decouple" or disassociate from the new law. Many states have chosen to partially conform with the federal rules; they have decided to allow the deduction but have added a caveat. To make it more interesting, each of these partially conforming states has added a different requirement. For example, a state may require that the federal deduction for bonus depreciation be claimed by deducting only a portion of the federal amount each year over several years, with different states allowing different percentages of the deduction over different numbers of years. …

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