Navigating the Depreciation Decoupling Maze

By Mark H. Levin

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New York State is not alone in decoupling its depreciation from the IRC. New York City and New Jersey have also each passed their own version of decoupling their depreciation from the IRC. Areas of particular interest include the “bonus” depreciation, IRC section 179 expense, as well the varying treatment of sport utility vehicles (SUV).

New York State

New York State accepts all of the 30%-bonus depreciation for all assets placed in service prior to June 1, 2003, and all of the 50%-bonus depreciation for all assets placed in service on or after May 6, 2003, but before June 1, 2003. As of June 1, 2003, New York decoupled from the bonus depreciation for all assets acquired on or after June 1, 2003, located outside of the Liberty Zone or the Resurgence Zone. This decoupling requires that taxpayers recompute the depreciation deduction for affected assets without taking any bonus depreciation, and adjust the taxable income by any decrease or increase in the recomputed depreciation. Upon its sale or other disposition, a disposition adjustment is made to restore the asset to its federal adjusted basis so that the New York State gain or loss is the same as it is on the federal return.

New York accepts the IRC section 179 expense deduction for all assets placed in service prior to May 15, 2003. As of May 15, 2003, New York decoupled from section 179 with regard to SUVs weighing in excess of 6,000 pounds placed in service on or after May 15, 2003, in taxable years beginning on or after January 1, 2003 (except for eligible farmers). Under this decoupling, a taxpayer must add back, when computing taxable income, any section 179 expense deducted on the federal return. Under this rule, the taxpayer will lose any section 179 deduction taken on the federal return, as the taxpayer may not recompute the depreciation for New York State purposes. In addition, the taxpayer may not take a disposition adjustment on the sale or other disposition of the SUV.

New York City

New York City decoupled from both the 30% “bonus” depreciation after September 10, 2001, and the 50% “bonus” depreciation after May 5, 2003, from its enactment for assets placed in service and that are located outside of the Liberty Zone or the Resurgence Zone. This decoupling requires that taxpayers recompute the depreciation deduction for affected assets without taking any “bonus” depreciation, and adjust the taxable income by any decrease or increase in the recomputed depreciation. On sale or other disposition, a disposition adjustment is made to restore the asset to its federal adjusted basis so that the New York State gain or loss is the same as it is on the federal return.

New York City accepts the federal section 179 expense deduction except for SUVs weighing in excess of 6,000 pounds (except for eligible farmers). This decoupling is effective for taxable years beginning on or after January 1, 2004, for all SUVs weighing in excess of 6,000 pounds (except for eligible farmers) regardless of when they were placed in service. For taxable years 2004 and thereafter, taxpayers may deduct only, for affected SUVs, the amount allowable under IRC section 280-F. If an affected SUV, acquired in taxable years 2003 and 2004, is built in a truck chassis, the taxpayer must use the IRC section 280-F amounts for trucks and vans. All other SUVs must use the IRC section 280-F amounts for passenger automobiles. The applicable section 280-F limit each year depends on both the calendar year in which the taxpayer placed the affected SUV in service and the number of taxable years that the affected SUV has been in use. On sale or other dispositions, a disposition adjustment is made to restore the asset to its federal adjusted basis so that the New York State gain or loss is the same as the federal return.

New Jersey

The Business Tax Reform Act decoupled New Jersey from the 30% bonus depreciation for all assets placed in service on or after January 1, 2002, for taxable years beginning on or after January 1, 2002. In separate legislation, New Jersey also decoupled from the 50% “bonus” depreciation for all assets placed in service after May 5, 2003. Upon the sale or other disposition, a disposition adjustment is made to restore the asset to its federal adjusted basis so that the New Jersey gain or loss is the same as the federal return.

Corporations receiving income from a pass-through entity must make an adjustment, in computing their entire net income, for their pro rata share of the adjustment that would have been required if the pass-through entity were subject to the corporate business tax.

The 2004–2005 Budget Act decoupled New Jersey from the 50% bonus depreciation for all assets placed in service on or after January 1, 2004, for taxable years beginning on or after January 1, 2004. Because the Budget Act rolls the depreciation rules back to those in effect in the IRC as it existed on December 31, 2002, when the 30%-bonus depreciation was in effect, taxpayers are allowed to utilize the 30%-bonus depreciation in computing their entire net income. Thus, taxpayers have the choice of not utilizing any bonus depreciation or utilizing the 30%-bonus depreciation in computing entire net income. Taxpayers are required to make the adjustment in computing their entire net income to reflect the New Jersey depreciation option they have chosen. Upon its sale or other disposition, a disposition adjustment is made to restore the asset to its federal adjusted basis so that the New Jersey gain or loss is the same as the federal return.

Taxpayers subject to the gross income tax that receive income from a pass-through entity must make an adjustment, when computing their entire net income, for their pro rata share of the adjustment that would have been required if the pass-through entity were subject to the gross income tax.

The Budget Act also decoupled New Jersey from the federal section 179 expense deduction. Effective for property placed in service on or after January 1, 2004, the maximum amount allowed to be deducted under IRC section 179 is limited to the maximum amount allowed as it existed on December 31, 2002 ($25,000). Upon its sale or other disposition, a disposition adjustment is made to restore the asset to its federal adjusted basis so that the New Jersey gain or loss is the same as the federal return.

When preparing other state or local tax returns, tax preparers should take the time to determine if other states have decoupled their depreciation to those in the IRC.