Connecticut Response to Bonus Depreciation

CCH, 12/16/02:

A Connecticut Department of Revenue Services special notice explains the disallowance of the federal 30% bonus depreciation deduction, for purposes of calculating the Connecticut corporation business (income) tax, that is provided in IRC Sec. 168(k).

The federal Job Creation and Worker Assistance Act of 2002 (P.L. 107-147) allows a federal 30% bonus depreciation in the first year for qualifying property purchased after September 10, 2001, and before September 11, 2004, for purposes of computing federal net income. The bonus depreciation, in IRC 168(k), allows taxpayers to claim an additional first-year bonus depreciation allowance on new Modified Accelerated Cost Recovery System (MACRS) property when the recovery period is 20 years or less. The additional depreciation allowance is equal to 30% of the adjusted basis for the property (after any IRC Sec. 179 expense deductions are taken). The regular MACRS depreciation is calculated after reducing the adjusted basis of the new property by the additional first-year allowance.

The federal bonus depreciation cannot be claimed when calculating Connecticut corporation business (income) tax. However, if the bonus depreciation is claimed for federal purposes, the regular MACRS depreciation is calculated after reducing the adjusted basis of the new property by the additional first- year allowance. Since this allowance is not permitted for purposes of the Connecticut corporation business (income) tax, the corporation will use a different basis to calculate MACRS depreciation for state and federal purposes.

Certain modifications must be made for purposes of calculating the Connecticut corporation business (income) tax if the bonus depreciation is claimed for federal purposes. To calculate the tax, the corporation must: (1) add back the amount of the bonus depreciation to the amount of federal net income (loss) reported for Connecticut corporation business (income) tax purposes in the year the bonus depreciation is claimed; and (2) subtract the difference between the amount of MACRS depreciation that is allowed for Connecticut corporation business (income) tax purposes and the amount that is allowed for federal tax purposes in the initial year the bonus depreciation is claimed and in each subsequent year in which the property is depreciated.

Therefore, the corporation must calculate the MACRS depreciation twice, first, reflecting the bonus depreciation, and second, reflecting the MACRS depreciation without the bonus depreciation. A corporation that claims the bonus depreciation must keep a separate depreciation schedule for purposes of the Connecticut corporation business (income) tax.

The Department's notice also provides a calculation example, instructions on how a corporation can amend its 2000 or 2001 Connecticut return if it deducted the federal bonus depreciation, instructions on how and where to add back the bonus depreciation on 2001 Form CT-1120, the upcoming changes being made on 2002 Form CT-1120, and resulting penalties and interest from underpayment of tax.

Special Notice 2002 (10), Connecticut Department of Revenue Services,December 9, 2002.

RIA, 9/20/02:

Connecticut Explains Bonus Depreciation Add-back And Other 2002 Personal Income Tax Changes
by Teresa Callahan, Esq. (RIA)

The Connecticut Department of Revenue Services has issued a special notice explaining 2002 legislation affecting the state personal income tax. Among the changes discussed is the add-back of the 30% federal bonus depreciation allowance created by the federal Job Creation and Worker Assistance Act of 2002 (P.L. 107-147). ( Connecticut Special Notice 2002(12), 9/13/2002 .)

Bonus depreciation modification.
Federal provision explained: The federal Job Creation and Worker Assistance Act of 2002 (P.L. 107-147) created a special 30% federal depreciation allowance for certain property acquired after September 10, 2001 and before September 11, 2004, and, in general, placed in service prior to January 1, 2005. Under Internal Revenue Code Sec. 168(k) , taxpayers may claim an additional first-year bonus depreciation allowance on new Modified Accelerated Cost Recovery System (MACRS) property when the recovery period is 20 years or less. The additional first-year bonus depreciation allowance is equal to 30% of the adjusted basis of the property (after any Internal Revenue Code Sec. 179 expense deductions are taken). The regular MACRS depreciation deduction is calculated after reducing the adjusted basis of the new property by the additional first-year allowance.

Connecticut decouples from federal provision: Connecticut decoupled from the federal additional first-year bonus depreciation allowance for state income tax purposes. In computing their Connecticut adjusted gross income, individuals must add the additional bonus depreciation allowance (to the extent deductible in determining their federal adjusted gross income) to their federal adjusted gross income. The effect of this requirement is to disallow permanently the deduction of the additional first-year bonus depreciation, rather than to merely defer the deduction.

If there is a sale or other disposition of the property for which the additional first-year bonus depreciation was deducted for federal tax purposes, the gain recognized is the same for both federal and Connecticut income tax purposes. In computing Connecticut adjusted gross income, no modification to federal adjusted gross income is expressly authorized by Conn. Gen. Stat. § 12-701(a)(20) in connection with the gain recognized from the sale or disposition of such property.

Reporting the modification: For taxable years beginning on or after January 1, 2002, the bonus depreciation modification will be included on Form CT-1040, Schedule 1; Form CT-1040NR/PY, Schedule 1, Form CT-1120SI, Part VI; and Form CT-1065, Schedule D. The bonus depreciation does not apply to taxable years of individuals prior to the 2002 taxable year.

Trusts and estates: A trust or estate that owns property for which the bonus depreciation allowance is deducted for federal income tax purposes is not required to add the bonus depreciation allowance to its federal taxable income in computing Connecticut taxable income. Consequently, Form CT-1041 will not have an addback modification.

Pass-through entities: Pass-through entities, such as S corporations, partnerships, and limited liability companies, treated as partnerships for federal tax purposes, which own property for which the bonus depreciation allowance is deducted for federal purposes, and whose taxable year is the calendar year, are not required for their 2001 taxable year to pass-through the addition modification to each individual who is a shareholder, partner or member. If an entity deducts the bonus depreciation allowance for federal purposes in a succeeding taxable year, it is required to pass through the addition modification to each individual shareholder, partner or member so that they can add the modification to federal adjusted gross income in computing Connecticut adjusted gross income.
In contrast, pass-through entities whose taxable year is other than the calendar year must pass through the addition modification to each individual shareholder, member or partner for the 2001 taxable year, as well as in succeeding years if applicable.

RIA, 7/8/02

Connecticut Governor John Rowland signed the state budget bill on July 1, the start of the new fiscal year. The eleventh hour measure authorizes a tax amnesty program, opts out of federal bonus depreciation rules enacted by the federal Job Creation and Worker Assistance Act of 2002 (P.L. 107-147), defers an increase in the singles exemption under the personal income tax, delays the phase-out of the sales tax on computer and data processing services and defers the phase-down of the gift tax. The bill puts a cap on corporation business tax credits, imposes a $250 minimum tax and imposes a $250 surcharge on limited liability companies, S corporations and limited liability partnerships. The legislation also hikes the tax on diesel fuel. (L. 2002, H6002, eff. as stated.)

Federal bonus depreciation rules. Effective July 1, 2002 and applicable to property placed in service after September 10, 2001, the legislation amends Conn. Gen. Stat. § 12-217 to disallow the bonus depreciation rules adopted by the federal Job Creation and Worker Assistance Act of 2002 (P.L. 107-147), which established a 30% depreciation bonus for qualified capital investments by businesses for a 36-month period for property placed in service after September 10, 2001.

For purposes of the personal income tax, the definition of “Connecticut adjusted gross income” is amended effective July 1, 2002 and applicable to taxable years commencing on or after January 1, 2002. The amendment provides that for property placed in service after September 10, 2001, but prior to September 11, 2004, in taxable years ending after September 10, 2001, any additional allowance for depreciation under Internal Revenue Code Sec. 168(k) as provided by the federal Job Creation and Worker Assistance Act of 2002 (P.L. 107-147) must be added back, to the extent deductible in determining federal adjusted gross income.