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WHAT GEORGE BUSH GIVETH, JANET NAPOLITANO IS
KEEPING!
By Jean
DeKraker, CPA, PC
Did you purchase a
new business vehicle or business assets that qualify
for the $100,000 expensing rules enacted in the 2003
tax bill? Many business owners who planned for the
state to follow the federal guidelines may end up
with larger state tax bills because of the
discrepancy between the state and federal laws.
These discrepancies are due to the different
maximums for expensing new assets and the 50 percent
bonus depreciation, both included in the 2003
federal tax act.
Arizona and many
other states have decided not to conform to the new
federal guidelines, leaving the maximum state
expensing at $25,000. Therefore, for federal
purposes, you can deduct $100,000 for new assets
purchased in 2003 and only $25,000 for state
purposes. Taxpayers that own an S Corporation, LLC
or partnership (also called pass-through entities)
will add the $75,000 to state income on their
individual tax returns. C Corporation owners will be
faced with higher corporate income reported on the
corporate state return. The additional 50 percent
bonus depreciation offered at the federal level will
be treated similarly.
Income reported by
a pass-through entity passes to the individual tax
returns. Income on the owners’ federal individual
and state individual return will now be adjusted for
the difference in the state and federal depreciation
laws. The individual state tax return reports the
difference as additional income when federal
depreciation is greater than state depreciation. The
taxpayer subtracts the difference in income on the
individual tax return in years that the federal
depreciation is less than the state depreciation. C
Corporation owners must also account for and track
the differences in federal and state depreciation,
and report these differences on the federal and
state corporate income tax returns.
A general rule for
pass-through entities: When bonus depreciation or
asset expensing is greater than $25,000, Arizona
personal income increases. In years when no assets
are purchased, Arizona personal income may decrease.
In years when a business has added assets for two or
more years consecutively, the additions and
subtractions from income will be netted.
These differences
require more paperwork as separate depreciation
schedules must be maintained for federal and state
returns. Businesses changing accountants in the next
few years must be aware of this discrepancy and
personally understand the impact on their returns,
otherwise deductions for state income could be
overlooked with prior year bonus depreciation and
Section 179 deductions carried forward.
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