September 2002
States Decouple Depreciation and NOL Carrybacks from New Federal Law
By Mark H. Levin, CPA, H.J. Behrman & Company, LLP
The Job Creation and Workers Assistance Act of 2002 (PL 107–147) has motivated a rush to decouple certain state tax provisions from their treatment under the IRC not seen since the passage of the Economic Recovery Tax Act (ERTA; PL 97-34) introduced the accelerated cost recovery system (ACRS). The ACRS provisions provided for a more accelerated depreciation, which would have reduced state tax revenues if they hadn’t been decoupled from the federal provisions.
The 2002 Act introduces an additional 30% first-year depreciation deduction [IRC section 167(k)] on certain real and personal property placed in service after September 10, 2001, if acquired or contracted for after September 10, 2001. In addition, the 2002 Act permits a five-year net operation loss (NOL) carryback period for tax years ending in 2001 and 2002. The bonus depreciation and five-year NOL carryback could significantly reduce the states’ tax revenue if taxpayers take full advantage of them.
In order to reduce the risk of losing tax revenues, several states have introduced legislation that would decouple the state tax laws from the bonus depreciation and the five-year NOL carryback. Maryland has enacted legislation to decouple from the bonus depreciation and five-year NOL carryback. Pennsylvania and Wisconsin are working on legislation to decouple from the bonus depreciation (neither state allows NOL carrybacks).
The New York State Tax Law provides that, unless otherwise specified, federal provisions govern. Since there are no specific provisions in the New York Tax Law about the bonus depreciation or NOL carryback period, the federal provisions have been incorporated into the New York Tax Law.
The Exhibit identifies which states automatically conform to the IRC. Because of the possibility that additional states may decouple from the federal provisions, it is important to check the status of a state before preparing its tax return or amending a prior filed return.
Editor:
Philip Zimmerman, CPA, APM
Mediator and Arbitrator
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