Potential Tax Traps in Bonus
Depreciation
State "Decoupling" Requires Double Depreciation Bookkeeping
And Poses a Risk of Unexpected Taxable Income on Asset Sale
Small business owners operating in states that either have NOT
adopted or only partially adopted the federal bonus depreciation provided in either the 2003 Jobs &
Growth Tax Relief Reconciliation Act or the Job Creation and Worker
Assistance Act of 2002 may want to closely examine
the potential benefits and possible pitfalls of taking the 50 percent or 30 percent
bonus depreciation for business property put into service in either 2003
or 2004. Some tax professionals are advising small business clients
not to take the bonus depreciation deductions.
As of July 27, 2003, 24 states and the District of
Columbia have either not adopted
the federal bonus depreciation or have specifically "uncoupled" their
state tax depreciation schedules from the new federal rules. An
additional 7 states have only partially adopted the bonus depreciation
schedules. In
these states (click
for list), business owners must keep two sets of asset records for
any business property being depreciated under the federal bonus
depreciation schedule. Preparation of state tax returns in the
"uncoupled" or partially-conforming states will require a depreciation deduction adjustment for
every affected new business asset. Since bonus depreciation applies
to personal property used for business with IRS asset lives of up to 20
years, the double set of books could be in use for 21 years, or even
longer.
Like-Kind Exchange Trap
For property that is often traded in for new models, such
as business vehicles, the Section 1031 rules for like-kind exchanges
apply. That means the adjusted basis of the old property traded in
is used to calculate the basis for depreciation of the new property.
A business owner who regularly trades in vehicles could be forced to keep
two sets of depreciation schedules indefinitely.
Unexpected Taxable Income Trap
If a business asset for which the maximum first-year
write-offs were taken is sold, there is a risk of generation of
substantial taxable income on the sale. Take as an example the asset
from the Bonus Depreciation Table,
that is sold in the year after purchase for a price that is 80% of the original purchase price or $40,000. After the maximum
first-year write-offs of $50,000, such a sale could generate
second-year taxable income of as much as $30,000.
It is highly recommended that business owners consult a
tax professional before making a decision on the 50% or 30% bonus depreciation
option!
