State Depreciation Adjustments: Limitations on Sec. 179, Bonus Depreciation, Etc.

As you may be aware, most, if not all states require taxpayers to make some type of adjustment to taxable income for depreciation taken on the federal return, including Sec. 179 and/or bonus depreciation.

For example, Minnesota requires 80% of federal bonus depreciation to be added-back to taxable income. Minnesota also did not adopt the increased Sec. 179 expensing; therefore, 80% of the difference between what Minnesota allows and what is allowed for federal purposes is added-back.

Another example is Texas. Texas, recently provided guidance in its Tax Policy News regarding Sec. 179 adjustments as follows:

An Internal Revenue Code (IRC) Section 179 expense deduction is allowed for taxable entities that elect to deduct cost of goods sold (COGS) to compute their margin. Only taxable entities that sell real or tangible personal property in the ordinary course of business are eligible to deduct COGS. Allowable costs include depreciation and IRC Section 179 expense deductions that are related specifically to equipment used in the production of goods.

“Internal Revenue Code” is defined in Texas Tax Code Section 171.0001(9) as the Internal Revenue Code of 1986 in effect for the federal tax year beginning on Jan. 1, 2007, not including any changes made by federal law after that date. Therefore, for Texas franchise tax, any increase or decrease in the Section 179 expense deduction is tied to the IRC Section 179 in effect as of Jan. 1, 2007. The changes in the Section 179 expense deduction allowed by the Small Business and Work Opportunity Act of 2007 and the American Recovery and Reinvestment Act of 2009 do not apply to franchise tax reports.

Therefore, for franchise tax report year 2008, the limit is $112,000. The limit for 2009 is $115,000, for 2010 is $120,000, and for 2011 is $25,000. Again, the years as noted are the "franchise tax report year," and not the "accounting period/year." The report coming due in May of 2010 is the 2010 report year.

If you have questions about a state's depreciation adjustments please contact me at brian.strahle@bakertilly.com.