Depreciation Deductions for State Taxes
Maybe your tax preparer has suggested you take depreciation deductions to reduce your business taxes. The rules for taking these deductions are well-known for federal income taxes, but your state may have different rules.
What Are Depreciation Deductions?
Businesses who buy assets (like equipment, furniture, computers, and vehicles) take the expenses for the cost of these assets over time, not just in one year.
But, in order to give businesses an incentive to buy assets and stimulate the economy, Congress has enacted laws to allow businesses to accelerate (speed up) depreciation. This acceleration gives businesses more deductions in the first year of the life of the asset, reducing their business taxes.
Only certain assets (called depreciable assets) can qualify for these accelerated depreciation deductions.
A Section 179 deduction is one of these accelerated depreciation benefits, along with bonus depreciation. The current laws allow $500,000 of eligible property to be deducted in the first year. Bonus depreciation is an accelerated depreciation for the purchase of qualified (by the IRS) business assets, in addition to the Section 179 deductions.
State Laws for Section 179 Deductions and Bonus Depreciation
Some US states don't conform to the IRS limits and regulations on Section 179 deductions and bonus depreciation. Some states conform with one or the other, while other states don't conform with either.
Here is a detailed chart showing which states do and don't conform to both federal Section 179 and bonus depreciation limits, from Thompson Reuters Tax.
How Do These State Laws Affect My Business Taxes?
These state regulations don't affect your business's federal income taxes, but they will affect your state business taxes for all states in which you do business. If your state imposes a tax on business income, and the state doesn't comply with the federal guidelines, it will affect your business taxes for the year.
The Tax Foundation says that states have varying types and degrees of conformity with the federal depreciation regulations.
For those states that don't comply with the federal regulations, the state limits for Section 179 deductions and bonus depreciation are typically lower. This means that doing business in that state is costing you a loss of deductions.
State laws change frequently, and the new Tax Reform legislation has them scrambling to catch up, so this information should not be relied on for future years. Check with your tax preparer or contact your state's taxing authority for more information or the most recent tax laws in your state.
The information in this article and on this site is intended to be general and is not intended to be tax or legal advice. Check with your tax preparer before making business decisions that can affect your taxes.