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. 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.
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.
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.
