CORPORATE INCOME TAX AND BONUS DEPRECIATION SPECIAL REPORT

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1 December 4, 2003 CCH Tax Briefing: CORPORATE INCOME TAX AND BONUS DEPRECIATION SPECIAL REPORT Bonus Depreciation Scorecard ] Conforming States:12 ] Add-back and Take Over Time: 8 ] Recompute and Adjust Annually: 21* ] Conform to One Not Both: 4 ] Did Not Conform Before Enactment: 2 ] No General Corporate Income Tax: 4 * Includes District of Columbia. Inside Background... 1 States Positions... 1 State Law References... 4 Conformity Summary... 5 Since 2002, the issue of state conformity with federal bonus depreciation has been one of major concern to taxpayers, as many states have decoupled, in whole or in part, from the Internal Revenue Code with regard to this provision. The reactions are examined on a stateby-state basis in this CCH Tax Briefing. FEDERAL BONUS DEPRECIATION ENACTED Enacted in March 2002, the Job Creation and Worker Assistance Act ( JCWAA ) (P.L ) included many tax provisions affecting businesses. A cornerstone of the JCWAA was the allowance of bonus depreciation (IRC Sec. 168(k)). Under the JCWAA, taxpayers are allowed an additional first-year depreciation deduction equal to 30% of the adjusted basis of qualified property. The 30% bonus depreciation is allowable for regular and alternative minimum tax (AMT) purposes for the tax year in which the property is placed in service. Property eligible for bonus depreciation includes (1) property with a recovery period of 20 years or less, (2) water utility property, (3) non-irc Sec. 197 computer software, or (4) qualified leasehold improvements. Under the JCWAA, qualifying property has to be new and acquired after September 10, 2001, and before September 11, Once purchased, the property must be placed in service generally before January 1, The basis of the property and the depreciation allowances in the year of purchase and in later years must be adjusted to reflect the additional first-year depreciation deduction. In May 2003, the Jobs and Growth Tax Relief Reconciliation Act ( JGTRRA ) (P.L ) was enacted. As with the JCWAA, JGTRRA contained numerous tax provisions, including a modification of the bonus depreciation provision contained in the JCWAA. Under the JGTRRA modification, 50% bonus depreciation may be claimed for property acquired after May 5, 2003, and before January 1, 2005, and placed in service generally before January 1, Property does not qualify for the 50% bonus depreciation if a binding written sales contract was in effect before May 6, 2003 (although the 30% bonus would be applicable). Property eligible for the 50% bonus depreciation is the same as for the 30% bonus under the JCWAA. STATES POSITIONS Alabama: Alabama allows the federal Alaska: Alaska allows the federal Arizona: Arizona requires that bonus depreciation be added back. However, a subtraction is allowed for each year that the taxpayer claims a federal depreciation deduction on property for which bonus depreciation was taken. The subtraction is equal to 3/7 of the amount of regular depreciation on the property. Arkansas: Arkansas does not conform to federal bonus depreciation because its incorporation of federal depreciation provisions, including IRC Sec. 168, are

2 2 Corporate Income Tax and Bonus Depreciation as in effect on January 1, Because Arkansas does not use federal income as its starting point, no addition adjustment would be necessary, but the prior federal depreciation rules would have to be used in claiming an Arkansas depreciation deduction. California: California does not generally follow federal depreciation provisions and does not conform to the bonus depreciation provisions. Colorado: Colorado allows the federal Connecticut: Connecticut disallows any federal depreciation computed under IRC Sec. 168(k). Taxpayers are required to add back the amount of bonus depreciation claimed, and then may subtract the difference between the amount of depreciation that would have been allowed had bonus depreciation not been claimed federally, and the amount of regular depreciation claimed federally (after the bonus depreciation had been calculated). Delaware: Delaware allows the federal District of Columbia: The District decoupled from JCWAA bonus depreciation by requiring depreciation to be calculated without regard to IRC Sec. 168(k). Legislation has been introduced to also decouple from the extended time period under JGTRRA. Florida: Florida allows the federal bonus depreciation under the JCWAA, but does not allow the additional bonus depreciation under JGTRRA. Florida s IRC conformity was updated in 2002 with specific reference to inclusion of the JCWAA. When its conformity was updated in 2003, there was no specific reference to inclusion of JGTRRA. Accordingly, Florida incorporates the IRC as in effect on January 1, 2003, prior to the enactment of JGTRRA. Georgia: Georgia does not allow bonus depreciation because it does not incorporate IRC Sec. 168(k). The amount computed on federal Form 4562 must be added back, while Georgia Form 4562 must be completed and the amount computed may be subtracted. Hawaii: Hawaii does not conform to federal bonus depreciation as it specifically excludes IRC Sec. 168(k) from its conformity for property acquired before September 11, Idaho: Idaho requires that bonus depreciation be added back. The modification to the basis of the property for Idaho purposes will result in a smaller deduction in the year in which the property is placed in service, but increased deductions in the remaining life of the property. Illinois: Illinois requires any bonus depreciation to be added back. A subtraction is then allowed for 42.9% of the regular depreciation on the property for which bonus depreciation was claimed federally. The deduction may be claimed in succeeding taxable years until the entire amount of the add-back has been claimed. Indiana: Indiana does not allow federal A modification is required to ascertain the appropriate deduction for Indiana purposes. The modification is equal to the difference in the amount of depreciation computed with bonus depreciation and the amount of depreciation allowed had the bonus depreciation not been claimed. Iowa: Iowa specifically excludes bonus depreciation under IRC Sec. 168(k). The state requires an add-back of all depreciation claimed on property for which the bonus was taken federally. A subtraction is then allowed for the amount of depreciation on such property, computed without regard to IRC Sec. 168(k). Kansas: Kansas allows the federal Kentucky: Kentucky does not allow Kentucky depreciation is computed using the IRC in effect on December 31, Louisiana: Louisiana allows the federal Maine: Maine requires an add-back of the net increase in depreciation attributable to claiming bonus depreciation for federal purposes. With respect to all property placed in service in a tax year after 2002, a subtraction is allowed beginning in the tax year after the property was placed in service. The subtraction is equal to 5% of the amount added back for the first year in which a subtraction is allowed. For each subsequent year, the subtraction is equal to 95% of the amount added back divided by the number of years in the recovery period for the property minus two. Maryland: Maryland does not allow bonus depreciation and requires an adjustment to allow the depreciation that would have been allowed had the bonus not been taken federally. An adjustment must be made each year (either an addition or subtraction) to account for the difference in the depreciation under federal and Maryland statutes. Massachusetts: Massachusetts does not conform to Returns must be adjusted to compute depreciation as if IRC Sec. 168(k) had not been enacted. Michigan: Michigan does not allow any federal depreciation for purposes of the single business tax. All depreciation claimed federally must be added back. Minnesota: Minnesota requires an addback of 80% of the bonus depreciation claimed for federal purposes. In each of the five succeeding tax years, the taxpayer is entitled to a subtraction of one-fifth of the amount added back. Mississippi: Mississippi does not allow the An adjustment is required each year to reflect the depreciation the taxpayer would be entitled to had the bonus not been claimed. Missouri: Missouri requires an addback for the amount that any bonus depreciation claimed under the JCWAA exceeds what would have been claimed without the bonus. The add-back applies to the extent the amount deducted federally relates to property purchased on or after July 1, 2002, but before July 1, A subtraction is allowed in each year for the amount that would have been deducted for that property if the bonus depreciation was not claimed. Any amount claimed under the 50% bonus depre- 2003, CCH INCORPORATED

3 December 4, ciation provision of JGTRRA does not need to be added back. Montana: Montana allows the federal Although Montana specifically adopts IRC Sec. 167 and does not reference IRC Sec. 168, it has been the state s longstanding practice to follow Sec. 168 treatment if that is the method chosen by the taxpayer. Nebraska: Nebraska requires an addition of 85% of the bonus depreciation claimed for federal purposes. For taxpayers required to make the addition in a taxable year beginning after 2002, a subtraction in the amount of 20% of the add-back may be claimed in the first taxable year after A similar 20% subtraction may be made in each of the following four taxable years. Nevada: Nevada does not impose a corporate income tax. New Hampshire: New Hampshire does not allow bonus depreciation because its IRC conformity date is as in effect on December 31, Taxpayers must adjust their depreciation deduction in accordance with the IRC as of that date. New Hampshire has created Schedule R to assist in the recalculation. New Jersey: New Jersey requires that all depreciation claimed on property for which bonus depreciation was claimed federally be added back. A subtraction is then allowed for the amount of depreciation that would have been allowed had IRC Sec. 168(k) not been enacted. The decoupling from JGTRRA extends through at least September 12, New Mexico: New Mexico allows the federal New York: New York does not conform to bonus depreciation, except with regard to qualified resurgence zone property and qualified New York Liberty Zone property. For tax years beginning after 2002 and for property placed in service after May 2003 for which the bonus was claimed, taxpayers are required to add back the amount of depreciation claimed federally on such property and then are allowed to deduct the amount of depreciation they would have been allowed if the property did not qualify for the bonus. North Carolina: North Carolina requires an add-back of 70% of the bonus depreciation claimed for tax years 2003 and In each of the first five tax years beginning after 2004, taxpayers are allowed a subtraction equal to 20% of the add-back. North Dakota: North Dakota allows the federal Ohio: Ohio requires taxpayers to add back five-sixths of the amount claimed federally as In each of the five succeeding years, the taxpayer is allowed a subtraction in the amount of one-fifth of the add-back. Oklahoma: Oklahoma requires an add-back of 80% of the amount of the bonus depreciation claimed under the JCWAA. In the tax year following the add-back, and in each of the next three years, 25% of the amount added back may be subtracted. No adjustment is required for any 50% bonus depreciation claimed under JGTRRA. Oregon: Oregon allows the federal Pennsylvania: Pennsylvania requires that taxpayers add the bonus depreciation back to the taxpayer s Pennsylvania taxable income. The taxpayer may then subtract an amount equal to threesevenths of the taxpayer s ordinary depreciation deduction under IRC Sec The deduction may be claimed in succeeding taxable years until the entire amount of the add-back has been claimed. Any disallowed depreciation not claimed as a result of the subtraction may be claimed in the last year that the property is depreciated federally. Rhode Island: Rhode Island does not allow In the year property is placed in service and all subsequent years, adjustments must be made to reflect the depreciation that would have been allowed federally if IRC Sec. 168(k) had not been enacted. South Carolina: South Carolina does not conform to federal bonus depreciation provisions because IRC Sec. 168(k) is included among the provisions specifically not adopted by South Carolina. South Dakota: South Dakota does not impose a general corporate income tax; rather it imposes a franchise tax on financial institutions. Tennessee: Tennessee requires an add-back of all bonus depreciation Continued on page 6

4 4 Corporate Income Tax and Bonus Depreciation STATE LAW REFERENCES TO BONUS DEPRECIATION PROVISIONS Arizona ARS Sec and Sec ; FAQs About Conformity and Depreciation, Arizona Department of Revenue Arkansas Sec , A.C.A. Connecticut Sec , G.S.; Special Notice 2002(10), Connecticut Department of Revenue Services District of Columbia Sec , D.C. Code Florida Sec , F.S.; TIP #02C01-02, Florida Department of Revenue Georgia Sec , Code; Information Release, Georgia Department of Revenue, October 2003 Hawaii Haw Rev Stat Sec ; Announcement No , Hawaii Department of Taxation Idaho Tax Update, Idaho State Tax Commission, June 2003 Illinois 35 ILCS 5/203; IT GIL, Illinois Department of Revenue Indiana Commissioner s Directive #19, Indiana Department of Revenue; Indiana Treatment of Bonus Depreciation, Indiana Department of Revenue, October 3, 2003 Iowa Sec , Code of Iowa Kentucky Instructions to 2003 Kentucky Corporation and License Tax, Form 720 Maine 36 M.R.S.A. Sec A Maryland Sec, , Tax General Article Massachusetts Sec. 30, Ch. 63, G.L.; TIR 02-11, Massachusetts Department of Revenue Michigan Sec , M.C.L. Minnesota Sec , Minn Stats Mississippi Miss Reg. 504 Missouri Sec and Sec , RSMo.; FAQs About Changes in Depreciation, Missouri Department of Revenue Nebraska Sec , R.S. New Hampshire RSA 77-A1; 2003 General Instructions for Filing Business Taxes New Jersey Sec. 5410A-4, R.S.; 2002 Instructions to Form CBT-100; Division s Position on 50% Bonus Depreciation, New Jersey Division of Taxation New York Sec , Tax Law; TSB-M-03(5)C, New York Department of Taxation and Finance North Carolina Sec , G.S. Ohio Sec , Ohio R.C. Oklahoma 68 O.S. Sec ; 2003 Instructions to Form 512 Pennsylvania 72 P.S. 7401; Federal Changes Increase First-Year Bonus Depreciation, Pennsylvania Department of Revenue Rhode Island RI Gen Laws Sec ; Notice, Rhode Island Division of Taxation, September 2003 South Carolina Sec , S.C. Code; Information Letter #03-17, South Carolina Department of Revenue Tennessee Sec , T.C.A.; Telephone Conversation with Tennessee Department of Revenue, November 19, 2003 Texas Sec , Tax Code; Letter No L, Texas Comptroller of Public Accounts Vermont 32 V.S.A. Sec Virginia Sec , Code; Fixed Date Federal Conformity FAQs, Virginia Department of Taxation Wisconsin Sec , Wis. Stats.; Wisconsin Tax Bulletin #135, Wisconsin Department of Revenue 2003, CCH INCORPORATED

5 December 4, State response to the bonus depreciation provisions of the JCWAA and JGTRRA has varied and the summary below reflects the states positions for bonus depreciation claimed in tax years 2003 and (Listings as of 12/1/03) Conforming States The following states allow the bonus depreciation for state corporate income tax purposes. Alabama Alaska Colorado Nonconforming States The following states do not allow the bonus depreciation for state corporate income tax purposes. Arkansas California Connecticut District of Columbia Georgia Delaware Kansas Louisiana Hawaii Idaho Indiana Iowa Kentucky FEDERAL CONFORMITY SUMMARY Montana New Mexico Maryland Massachusetts Mississippi Missouri New Hampshire North Dakota Oregon New Jersey New York Rhode Island South Carolina Utah West Virginia Tennessee Vermont Virginia Wisconsin States with Special Situations Nevada, South Dakota, Washington, and Wyoming do not impose a general corporate income tax. Arizona requires that bonus depreciation be added back, but allows a subtraction of 3/7 of the amount of regular depreciation on the property in each year that depreciation is claimed federally. Florida conforms to the JCWAA but not to JGTRRA. Illinois requires that bonus depreciation to be added back, but allows a subtraction of 42.9% of the regular depreciation on the property which may be claimed in succeeding taxable years until the disallowance has been claimed. Maine requires an add-back of the net increase in depreciation. For property placed in service in a tax year after 2002, a subtraction is allowed beginning in the tax year after the property was placed in service, equal to 5% of the amount added back for the first year in which a subtraction is allowed. In later years, the subtraction is equal to 95% of the amount added back divided by the number of years in the recovery period for the property minus two. Michigan allows the bonus depreciation deduction in computing the federal taxable income amount that is the tax base for the Single Business Tax. However, the federal depreciation deduction must be added to federal taxable income for purposes of determining the Michigan tax base. Minnesota will allow the bonus depreciation subject to an 80% addback provision, and the addback amount is allowed as a subtraction for the five tax years following the addback. Missouri requires an add-back for the amount that any bonus depreciation claimed under the JCWAA exceeds what would have been claimed without the bonus for property purchased on or after July 1, 2002, but before July 1, A subtraction is allowed in each year for the amount that would have been deducted for that property if the bonus depreciation was not claimed. JGTRAA 50% bonus depreciation is allowed. Montana has a longstanding practice to follow 168 treatment if that is the method chosen by the taxpayer. Nebraska requires that 85% of any bonus depreciation be added back. The amount may later be deducted over five years beginning with tax year New York does not require an addback for qualified resurgence zone/new York Liberty Zone property. North Carolina requires an add-back of 70% of the bonus depreciation claimed for tax years 2003 and In each of the first five tax years beginning after 2004, taxpayers are allowed a subtraction equal to 20% of the add-back. Ohio requires taxpayers to add back 5/6 of the amount of bonus depreciation taken for federal purposes. Taxpayers may deduct the add-back amount in equal installments over the following five tax years. Oklahoma requires an add-back of 80% of the amount of the bonus depreciation claimed under the JCWAA. In the tax year following the add-back, and in each of the next three years, 25% of the amount added back may be subtracted. JGTRAA 50% bonus depreciation is allowed. Pennsylvania requires an add-back of the bonus depreciation, but allows a subtraction equal to 3/7 of the regular depreciation deduction, which may be claimed in later taxable years until the entire amount of the add-back has been claimed. Tennessee decoupled from the JCWAA but did not decouple from JGTRRA. Texas generally does not allow bonus depreciation except for the FIT method of reporting taxable capital.

6 6 Corporate Income Tax and Bonus Depreciation under the JCWAA, and then allows a subtraction to reflect the amount of depreciation that would have been allowed had the bonus not been claimed. Because the statute requiring the modifications only references the JCWAA, the Department of Revenue has indicated that JGTRRA s 50% bonus depreciation applies for Tennessee purposes. The Department anticipates that legislation will be introduced in 2004 to apply the add-back to JGTRRA Texas: Because Texas conforms to the IRC as in effect for tax years beginning in 1996, it does not recognize bonus depreciation for earned surplus purposes. However, taxpayers that are qualified to and elect to report taxable capital using the FIT method will be allowed to use the bonus depreciation provided that the same method was used on the most recent federal return. Utah: Utah allows the federal bonus depreciation. Vermont: Vermont does not allow bonus depreciation for C corporations, and depreciation must be computed without regard to IRC Sec. 168(k). Virginia: Virginia does not conform to federal Depreciation must be recalculated as if the bonus depreciation had not been claimed, and then an adjustment (either and addition or subtraction) must be made to reflect the appropriate amount of depreciation. Washington: Washington does not impose a corporate income tax. West Virginia: West Virginia allows the federal Wisconsin: Wisconsin does not allow Depreciation must be recalculated as if the bonus depreciation had not been claimed, and then an addition or subtraction adjustment must be made to reflect the appropriate amount of depreciation for Wisconsin purposes. Wyoming: Wyoming does not impose a corporate income tax. CCH offers comprehensive solutions as part of The ProSystem fx Office suite of software and workflow tools. These solutions - named 2004 Top 100 Software Products by Accounting Today - will help you manage your most complex tax compliance needs. Benefit today from these award-winning software applications: ProSystem fx Tax ax - The cornerstone of The ProSystem fx Office is the industry s most respected tax preparation and compliance tool. ProSystem fx Tax is designed to handle an extensive range of federal and state individual, corporate, partnership, fiduciary, deferred compensation, exempt organization, and estate and gift tax returns. ProSystem fx Fixed Assets - Automate the complicated task of tracking and managing assets, which in turn can affect accounting, tax, financial planning, reporting and control activities. ProSystem fx Fixed Assets provides complete automated data entry, depreciation calculations, and asset tracking, as well as management and reporting solutions for accounting and finance professionals. For more information on these and other ProSystem fx Office products, call PFX-9998 ( ), option 1, or visit Tax.CCHGr ax.cchgroup.com. CCH STATE TAX GUIDEBOOKS-20 STATES AVAILABLE! CCH s 2004 State Tax Guidebooks provide practitioners with insights and guidance on state and local taxes. Useful to tax practitioners, in-state and multistate businesspersons, and those who are obligated to file returns or who are required to deal with state taxes, the 20 individual state tax guides include explanations of sales and use taxes, corporate income taxes, and other state and local taxes. In addition to offering a general picture of state tax laws and regulations, they highlight significant court cases and administrative rulings and provide helpful practice tips, pointers and examples from leading tax practitioners to assist readers in applying the complex principles of each state s tax laws to specific practice situations. For a quick look at what is new in a state, each guidebook also includes a special section pointing out recent tax changes. CCH s growing state tax guidebook lineup now includes: California (# ), NEW! Colorado (# ), Connecticut (# ), Florida (# ), Georgia (# ), Illinois (# ), Indiana (# ), Kentucky (# ), Maryland (# ), Massachusetts (# ), Michigan (# ), New Jersey (# ), New York (# ), North Carolina (# ), Ohio (# ), Pennsylvania (# ), Tennessee (# ), Texas (# ), Virginia (# ), and Washington (# ). Copies of these time-saving guides are available from CCH INCORPO- RATED, 4025 W. Peterson Avenue, Chicago, Illinois or order through CCH s Online Store at tax.cchgroup.com. To order by phone, call , priority code Y0401. Single-copy price for each is $57.50 (quantity discounts are available). Special subscription package providing all 20 state guidebooks for only $525 is also available (offer # ). 2003, CCH INCORPORATED