By Rose Litvack, CPA, Kingsborough Community College
New York has recently changed its rules for determining the amount of depreciation allowed for certain property (referred to as subject property) placed in service outside New York State for tax years 19851993 (TSB-M-99(1)I and (1)C, February 16, 1999). The new rules apply to the personal income tax (Article 22), the business corporation tax (Article 9-A), the franchise tax on banking corporations (Article 32), and the franchise taxes on insurance corporations (Article 33).
Under the old rules, New York State did not allow the accelerated cost recovery system (ACRS) or modified ACRS (MACRS) deductions, determined under IRC section 168, for property placed in service outside New York State for tax years beginning after 1984 but before 1994. Instead, New York State required taxpayers to report the depreciation deduction under IRC section 167 as it was in effect on December 31, 1980. New York City had the same provision for purposes of the New York City corporation tax.
The change is a result of a recent New York Supreme Court Appellate Division decision (R.J. Reynolds Tobacco Co. v. City of New York Department of Finance, 667 N.Y.S.2d 4, December 3, 1997). This decision held that the New York City provision is unconstitutional because it violates the Commerce Clause by discriminating against owners of out-of-state property. New York State has decided to follow this decision and will now allow taxpayers to claim the same appreciation as was claimed on the Federal tax return for property placed in service outside New York State in tax years 1985 through 1993.
The Taxpayer's Choice
The New York State Tax Department will allow taxpayers, at their option, to continue to use the IRC section 167 depreciation deduction or to switch to the IRC section 168 depreciation deduction. The method chosen by the taxpayer must be used on all subject property owned by the taxpayer.
Changing to IRC Section 168 Depreciation
A taxpayer may choose to switch to IRC section 168 depreciation deduction by either not making the New York depreciation addition and subtraction uncoupling modifications on any original return, or by filing an amended return for prior years. However, an amended return can only be filed for a prior year open under the statute of limitations.
Although a taxpayer has the option to switch to IRC 168 depreciation at any time, once the switch is made, the taxpayer must continue to use the IRC section 168 depreciation method.
For example, a taxpayer that chooses to switch to IRC section 168 depreciation in the year 2000 must use that method for all subsequent years. Similarly, if in 1999 a taxpayer chooses to file an amended return for 1997 and claim a refund resulting from the switch to IRC section 168 depreciation, the taxpayer must apply IRC section 168 depreciation to all tax years after 1997, even if the application results in an additional tax due for one or more of those years.
Upon the sale or disposition of the property, the taxpayer must make the applicable depreciation addition or subtraction catch-up modification to make the New York depreciation deduction on the property equal to the Federal depreciation amount.
Remaining with IRC Section 167 Depreciation
If a taxpayer chooses to continue using IRC section 167 depreciation, then the applicable New York depreciation addition or subtraction uncoupling modifications must be made on the taxpayer's New York tax returns. These modifications must be made until the taxpayer chooses (if ever) to switch to IRC section 168 depreciation.
Upon the sale or disposition of the property that has been depreciated using the section 167 method, the taxpayer must make the applicable depreciation addition or subtraction catch-up modification to make the New York depreciation deduction on the property equal to the Federal depreciation amount. *
State and Local Editor:
Barry H. Horowitz, CPA
Eisner & Lubin LLP
Nicholas Nessi, CPA
BDO Seidman LLP
Henry Goldwasser, CPA
M.R. Weiser & Co. LLP
Steven M. Kaplan, CPA
Kahn, Hoffman, Nonenmacher & Hochman, LLP
John J. Fielding, CPA
Warren Weinstock, CPA
Paneth, Haber & Zimmerman LLP
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