This Technical Information Release ("TIR") explains the effects for corporate excise and personal income tax purposes of Massachusetts' decoupling from the provisions of Internal Revenue Code ("Code" or "IRC") § 168(k) which was recently amended by the Jobs and Growth Tax Relief Reconciliation Act of 2003, P.L. 108-27 (the 2003 Federal Act). Next, the TIR explains the Massachusetts impact of amendments enacted to Code § 179 by the 2003 Federal Act. Finally, the TIR explains the Massachusetts treatment of "listed property" under the rules of Code 280F.
I. Massachusetts Adoption of the Internal Revenue Code
Massachusetts Corporate Excise. In general, a corporation's net income is defined as gross income less the deductions (with certain exceptions), but not the credits, allowable under the Code, as amended and in effect for the taxable year. G.L. c. 63, § 30(4). However, under G.L. c. 63, § 30(4)(iv), Massachusetts does not allow the deduction at § 168(k) of the Code, which provides a special allowance ("bonus depreciation") for certain property acquired after September 10, 2001, and before January 1, 2005. Massachusetts also decoupled from IRC § 168(k) for purposes of the financial institutions excise and the utilities excise. G.L. c 63, §§ 1, 52A. See TIR 02-11.
Massachusetts Personal Income Tax . Generally, with respect to the personal income tax, Massachusetts adopts the Code as amended and in effect on January 1, 1998. G.L. c. 62, § 1. However, Massachusetts adopts the current Code with respect to certain sections. Id. Massachusetts generally follows current Code for § 62(a)(1), trade or business expense deductions, but Massachusetts specifically disallows the bonus depreciation deduction at IRC § 168(k). G.L. c. 62, §§ 1(c); 2(d)(1)(N). See TIR 02-11.
II. Election To Expense Depreciable Business Assets under IRC § 179; Additional Rules for Listed Property at IRC § 280F
For purposes of both the corporate excise and the personal income tax, Massachusetts generally follows current Code for § 179 which provides an election to expense certain depreciable business assets. The 2003 Federal Act amended IRC § 179 to increase both the deduction dollar limit and the threshold for figuring any reduction in the dollar limit. Subject to the rules and limitations included in § 179 and § 280F, for both corporate excise and personal income tax purposes, Massachusetts adopts the increased maximum § 179 deduction of $100,000, as well as any inflation adjustments to this amount, for taxable years beginning after 2002 and before 2006.[ 1]
Listed Property . Code § 280F limits annual depreciation deductions for certain "listed property," including passenger automobiles and other property used for transportation.[ 2] Any deduction allowable under IRC § 179 with respect to listed property is subject to the limitations of § 280F in the same manner as if it were a depreciation deduction allowable under § 168.[ 3] As part of the amendments to IRC § 168(k), the 2003 Federal Act increased the limitations on first-year depreciation for certain business property that is listed property under § 280F, but due to decoupling from IRC § 168(k), Massachusetts law does not incorporate these increases for purposes of both the corporate excise and the personal income tax.
Passenger Automobiles. Federal law requires the limitations on depreciation deductions at IRC 280F to be increased by a price inflation adjustment amount for passenger automobiles.[ 4] Rev. Proc. 2003-75 contains various inflation adjustment tables for depreciation limitations for business vehicles placed in service in 2003 depending on both the vehicle classification and the system of depreciation used.[ 5] For both corporate excise and personal income tax purposes, Massachusetts follows only those inflation adjustments found in Rev. Proc. 2003-75 that do not incorporate the increases enacted by the amendments of IRC § 168(k); Massachusetts does not adopt the higher limitations in Rev. Proc. 2003-75 for "§ 168(k)(1) property" or "§ 168(k)(4) property."
Accordingly, for property placed in service in 2003, in determining the Massachusetts depreciation limitation amount for both corporate excise and personal income tax purposes, taxpayers are permitted to use the following tables in Rev. Proc. 2003-75:
Table 1. Passenger automobiles (that are not § 168(k)(1) passenger automobiles, § 168(k)(4) passenger automobiles, trucks, vans, or electric automobiles).
Table 4. Trucks and vans (that are not § 168(k)(1) passenger automobiles or § 168(k)(4) passenger automobiles).
Table 7. Electric Automobiles (that are not § 168(k)(1) passenger automobiles or § 168(k)(4) passenger automobiles).
In Rev. Proc. 2003-75, Tables 2, 3, 5, 6, 8 and 9 allow higher federal depreciation deductions for passenger automobiles that are also IRC § 168(k) property, but these deductions are not adopted by Massachusetts. Where a taxpayer is allowed to use one of the tables for IRC §168(k) property in Rev. Proc. 2003-75 for federal purposes, the taxpayer must use the appropriate Table 1, 4 or 7 for Massachusetts purposes.
III. Modifications For Decoupling From Federal Bonus Depreciation At IRC § 168(K) For All Taxable Years Business Assets Are In Service
Bonus depreciation is that part of any depreciation allowed in computing federal taxable income that is attributable to the special first-year depreciation for qualified property allowed under IRC § 168(k). The 2003 Federal Act amended IRC § 168(k) to increase first-year bonus depreciation from 30% to 50% of the adjusted basis of qualified property.[ 6] For federal purposes, in order to qualify for the 50% bonus depreciation deduction, the property must be acquired after May 5, 2003, and before January 1, 2005.
As explained above, for purposes of both the corporate excise and the personal income tax, Massachusetts does not adopt any of the provisions of IRC § 168(k). Thus, the federal changes to IRC § 168(k) that occurred as a result of the 2003 Federal Act are not recognized for Massachusetts purposes. A Massachusetts taxpayer that claims bonus depreciation under IRC § 168(k) for federal purposes must calculate a separate depreciation schedule for purposes of claiming depreciation on the Massachusetts corporate excise return or the Massachusetts personal income tax return. For the year property is placed in service and subsequent years, a taxpayer must calculate Massachusetts depreciation as if the taxpayer elected not to utilize the bonus depreciation allowance at IRC § 168(k).
IV. Effect of Depreciation on Basis; Modifications to Gain or Loss in Year of Disposition
In the case of any depreciable asset where Massachusetts depreciation is different from federal depreciation as a result of decoupling from Code § 168(k), the basis of the asset must be adjusted annually for Massachusetts tax purposes. For purposes of both the corporate excise and the personal income tax, upon disposition of depreciated property, any gain or loss must be calculated using the depreciation allowed under the Massachusetts method cited above. In the year of disposition, adjustments to federal gains or federal losses must be made to reflect the disallowance of bonus depreciation. As a result of the difference in basis, the gain or loss reported on the federal return will be different than the gain or loss reported on the Massachusetts return.
Commissioner of Revenue
1. For qualified enterprise zone, renewal community, and Liberty Zone property, the maximum IRC § 179 deduction is $135,000.
2. Recently, the Internal Revenue Service issued temporary regulations that exclude from the definition of passenger automobile any truck or van that is a qualified nonpersonal use vehicle as defined in Treas. Reg. § 1.274-5T(k). See Treasury Decision 9069 at 68 FR 40129 (July 7, 2003). The depreciation of any such qualified nonpersonal use vehicle is not limited by the rules of IRC § 280F. Examples of the types of trucks and vans that are qualified nonpersonal use vehicles include dump trucks, cement mixers, delivery trucks with seating only for the driver, and refrigerated trucks. Massachusetts follows the rule in Treasury Decision 9069 that trucks and vans placed in service after July 6, 2003, that are qualified nonpersonal use vehicles are not treated as passenger automobiles, and, consequently are not subject to the restrictions of IRC § 280F. [ return to text]
5. In Rev. Proc. 2003-75, the method of calculating price inflation for trucks and vans placed in service in or after calendar year 2003 uses a different CPI "automobile component" than that used in the price inflation amount calculation for other passenger automobiles, resulting in higher depreciation deductions for trucks and vans. Massachusetts adopts this method for those inflation adjustments in Rev. Proc. 2003-75 that do not incorporate the increases found in IRC § 168(k). [ return to text]
6. See also, in Part II above, the amendments to IRC § 168(k) that increased the limitations for property that is listed property under IRC § 280F as well as qualified property under IRC § 168(k). [ return to text]
April 29, 2004