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.
Key Takeaways
- A section 179 deduction allows a business to deduct the cost of eligible property in full during the first year to reduce their business income taxes
- Bonus depreciation is a first-year deduction on eligible property in addition to the section 179 deduction
- Some state tax laws allow businesses to take these deductions on their state income tax, but some don’t
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.
Only certain assets can qualify for these accelerated depreciation deductions. The Internal Revenue Service (IRS) requires that these assets be owned by your business, used in producing income, and have a useful life that can be determined.
To give businesses an incentive to buy assets and stimulate the economy, the U.S. 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.
A section 179 deduction is one of these accelerated depreciation benefits. The U.S. tax laws allow certain types of property to take this deduction.
Note
Only property used in your trade or business is eligible for a section 179 deduction. Investment or rental properties, though income producing, are not.
In most cases you must depreciate business property by expensing the cost of property over multiple years. Taking a section 179 deduction allows you to deduct the entire expense of the property in the first year you buy it and put it to use.
There are limits to the amount you can deduct in a year for an individual item and combined limits for all section 179 property you deduct in that year. For the 2022 tax year and beyond, the maximum deduction is $1,080,000 for an individual depreciable asset. Section 179 deductions decrease when they reach a threshold amount of $2,700,000. The maximum section 179 deduction for sport vehicles is $27,000.
For example, you can have three individual items—one at $800,000, another at $1,020,000, and another at $950,000—eligible for deduction because neither one is over the $1,080,000 individual limit. But, the total of all three items is $2,770,000, and it can’t be more than $2,700,000.
Bonus Depreciation
Bonus depreciation is another type of accelerated depreciation for the purchase of certain business assets, in addition to the Section 179 deduction. Eligible property for bonus depreciation can be expensed at 100% for eligible property in the first year it’s bought and used before January 1, 2023.
State Laws for Section 179 Deductions and Bonus Depreciation
U.S. states, typically, start with the U.S. tax code in deciding how to tax businesses for state income tax purposes. It’s easier for a state to use the federal tax law as a starting point, because it’s more detailed and substantial than they could come up with.
Note
Some US states don't conform to the Internal Revenue Service (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 one.
How Do State Laws on Section 179 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.
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.
Here’s a quick overview of which states conform with federal section 179 limits and bonus depreciation:
No tax, no deductions: Nevada, South Dakota, Wyoming, and Washington have no corporate income tax, so section 179 deductions and bonus depreciation don’t apply.
Section 179: All U.S. states and the District of Columbia except Ohio allow section 179 deductions. But 14 states and the District of Columbia conform with different limits, ranging from $25,000 to $1,040,000.
Bonus Depreciation: 18 states allow bonus depreciation; including Minnesota, which has a five-year time period and North Carolina, a six-year period. Connecticut has a different structure for bonus depreciation. The rest do not allow bonus depreciation.
Note
State laws change frequently and each tax situation is different. Check with your tax preparer or contact your state's taxing agency for more information on the most recent tax laws in your state.
Examples of Section 179 Depreciation Adjustments for a State
Wisconsin limits the section 179 deduction to $25,000 and the threshold for phasing out this deduction is the same for both federal and Wisconsin tax purposes. Wisconsin doesn’t allow the deduction for bonus depreciation, and it doesn’t allow you to carry over a section 179 deduction to offset income being reported for Wisconsin taxes.
Minnesota allowed an 80% addition to income in the first year and a 20% subtraction for the five years following the addback, for tax years beginning before 2020. For 2020 and beyond, the Minnesota addition isn’t required, and Minnesota subtractions continue until the five year period ends. Minnesota also allows bonus depreciation, over six years.
Frequently Asked Questions (FAQs)
Will section 179 go away in 2022?
Section 179 deductions remain in place through December 31, 2022. The maximum section 179 expense deduction for an individual item of depreciable property is $1,080,000. And the maximum limit for the total cost of all depreciable property for the year is $2,700,000. State laws for section 179 and expensing bonus deductions may differ from the federal tax rules.
Which states allow bonus depreciation?
Bonus depreciation is a special first-year 100% deduction for eligible property in its first year of use, in addition to any section 179 deduction. Of the 47 states that have no corporate income tax, 8 states and the District of Columbia allow businesses to take bonus depreciation to reduce their state income taxes. Four states – Nevada, South Dakota, Wyoming, and Washington – don’t have corporate income taxes, and the other states don’t allow bonus depreciation.
As a seasoned expert in tax laws and business deductions, my wealth of knowledge stems from years of hands-on experience navigating the intricate landscape of federal and state tax regulations. My expertise is grounded in a comprehensive understanding of the tax code, gained through practical application and continuous engagement with the ever-evolving nuances of tax legislation.
Now, delving into the information provided in the article, it revolves around the crucial concepts of depreciation deductions for businesses. Let's break down the key points:
Section 179 Deduction:
- Definition: A Section 179 deduction allows a business to deduct the entire cost of eligible property in the first year of acquisition, thereby reducing business income taxes.
- Eligible Property: Limited to assets used in the trade or business, excluding investment or rental properties.
- Limits: There are individual and combined limits for Section 179 deductions. For the 2022 tax year and beyond, the maximum deduction is $1,080,000 for an individual depreciable asset, with decreasing deductions beyond a threshold of $2,700,000.
Bonus Depreciation:
- Definition: Bonus depreciation is an additional first-year deduction on eligible property, complementing the Section 179 deduction.
- Timing: Bonus depreciation applies to eligible property bought and used before January 1, 2023.
- Percentage: Allows for a 100% expense deduction in the first year for eligible property.
State Laws on Section 179 and Bonus Depreciation:
- Alignment with Federal Laws: Many U.S. states align their tax laws with the federal tax code as a baseline.
- Non-Conforming States: Some states deviate from Internal Revenue Service (IRS) limits and regulations on Section 179 and bonus depreciation.
- Impact on Business Taxes: Non-conforming states may have lower limits for these deductions, influencing the overall tax liability for businesses operating in those states.
Examples of State Regulations:
- Wisconsin: Limits Section 179 deduction to $25,000, with similar thresholds for phasing out. Bonus depreciation is not allowed.
- Minnesota: Historically allowed an 80% addition to income in the first year, with subsequent subtractions over five years. As of 2020, the addition is not required, and subtractions continue until the end of the five-year period. Bonus depreciation is allowed over six years.
FAQs:
- Section 179 Expiry: Section 179 deductions are effective through December 31, 2022, with maximum limits for individual items and total depreciable property costs.
- Bonus Depreciation by States: Of the states with no corporate income tax, eight allow bonus depreciation. Some states conform to federal rules, while others don't.
In conclusion, the article serves as a comprehensive guide for businesses, highlighting the intricacies of Section 179 deductions, bonus depreciation, and the varying landscape of state tax laws. For the most up-to-date and specific information tailored to individual circ*mstances, consulting with a tax preparer or contacting the state's taxing agency is recommended.
