Depreciation Kills

My annual huge busy-season project is almost complete: a 900-page, 40-state tax return. It's actually not too bad thanks to the wonders of tax software. I have no idea how they did stuff like this before computers. I personally have no desire to learn the intricacies of taxation in Georgia or New Jersey. Usually, I just have to trust that the tax program knows what it is doing and I only have to go through and work out the kinks.

What makes this process painful is depreciation. Federal tax depreciation, at its core, is pretty easy if you enjoy working with tables - the IRS has a prescribed depreciation system, MACRS (Modified Accelerated Cost Recovery System), which everyone must follow. It tells you how long you can depreciate property based on its type and use, and what percentage you can take each year. It is a little bit of a pain to maintain two sets of schedules - a GAAP set for your regular books, as well as the MACRS set - but pretty manageable, especially with computer software.

But there are the wrinkles, such as the Section 179 deduction, which allows businesses an immediate depreciation deduction in the year of purchase. Back when I wsa first getting into tax preparation, the total allowed was $25,000 per year. And the deduction became phased out for businesses that exceeded $100,000 of capital investment for the year, so it was pretty much geared towards small businesses.

What makes my life interesting is when Congress started fooling around with mega-accelerated depreciation in the early part of last decade.

And I guess we have the terrorists to thank for what happened next. The government invented a little jewel known as 30% bonus depreciation. This allowed businesses to take an immediate 30% depreciation deduction in the year of purchase, for new (not used) equipment purchases, in hopes of stimulating the post-9/11 economy.

A couple of years later, the 30% became 50%. And the Section 179 deduction was increased to $100,000, and the maximum investment to $400,000. Suddenly the tax depreciation schedules weren't quite as tidy.

Especially considering that a few of the states were not feeling quite so generous as the federal government and opted not to adopt these new provisions of the Internal Revenue Code. At the time, this didn't really affect me at all, because I had not yet been exposed to the wonderful world of multi-state tax returns.

Bonus depreciation went away after 2004, and Section 179 saw only modest increases from $100,000 to $102,000 to $105,000 to $108,000 to $125,000.

And then the economy took another nosedive. Once again, Congress turned to the tax system in hopes of stimulating capital expenditures. For 2008, 50% bonus depreciation was re instituted, and Section 179 was doubled to $250,000, with a maximum capital investment of $800,000.

A few more states, notably Alabama and Arkansas, decided they could not stomach the bite out of their tax revenue and "decoupled" from federal tax depreciation.

And now it did affect me, because 2008 was the first year I prepared this company's tax return.

Last fall, they jacked it up again. Section 179 again doubled again to $500,000, with the investment limit soaring to an obscene $2 million. And get this. . . they instituted 100% bonus depreciation for new assets purchased after September 2010, which is akin to saying "Screw it. Let's just let 'em expense everything."

I mentioned before that having two sets of schedules was manageable. Well, if you have a company that does business throughout the United States, suddenly the number of sets you need to maintain grows to 25 or 30, because very few of the states are some. Some of them decoupled immediately, some decoupled in 2008, some in 2010. Some allow Section 179 but no bonus. Some have set their own amount of Section 179 that they allow. Some didn't allow it the first time around, but now they do. Some don't really say either way.

You would think there would be a good resource out there to tell you what each state allows. Nope. After many searches, I found one website that does a decent job state-by-state on bonus depreciation, but there is nothing similar for Section 179. Our own depreciation software will throw up some add-back schedules for bonus depreciation that I don't trust at all. They, too, are more focused on the bonus than 179 and I think some of their information is incorrect. I would be curious to see how well our tax software would do at calculating the adjustments, but that is a ton of data entry and that ship already sailed two years ago. So I'm left with a myriad of Excel spreadsheets, calculating my adjustments which may or may not be correct.

In conclusion, I salute the following states for their conformity to the federal provisions: Colorado, New Mexico, Utah, Idaho, Montana, North Dakota, Nebraska, West Virginia, Missouri, I love you all!

I mile-high salute Washington, Wyoming, Nevada, and South Dakota for not imposing an income tax on corporations.

I do not salute Ohio and Minnesota, but I respect them for easy-to-follow add-back methods which don't require a separate depreciation schedule.

I grudgingly respect California and those states which got off board immediately and have stuck with it ever since - at least we know where you stand.

I can not, and will not, respect states who don't really seem to know what they want you to do or how they want you to do it. Cough. North. Cough. Carolina.

I disrespect states such as Pennsylvania and some of its Northeasterly brethren, whose attitude seems to be "We know this is complex and hard to understand. That's why we will do everything we can to make it even more so."

Amen.