Nebraska Response to Bonus Depreciation

CCH, 6/12/02

Pursuant to recently enacted L.B. 1085, Laws 2002, for Nebraska corporate income tax returns filed after September 10, 2001, corporations must increase federal taxable income by 85% of any bonus depreciation deduction claimed under the federal Job Creation and Worker Assistance Act of 2002 for assets placed in service after September 10, 2001, and before September 11, 2004. Eighty-five percent of bonus depreciation deducted on a tax year 2000 or 2001 federal income tax return should be entered as an "other adjustment" on line 5 (for 2000 returns) or line 6 (for 2001 returns), Nebraska Schedule A, Form 1120N. If an original Nebraska Form 1120N has already been filed, the increase should be reported  on an amended Nebraska return, Form 1120XN. For a corporation with a unitary business having activity both inside and outside Nebraska, federal taxable income should be increased by the full amount of bonus depreciation received, and the increase should be apportioned to Nebraska in the same manner as  income. The total amount of bonus depreciation added back to federal taxable income for Nebraska purposes may be subtracted in later tax years.

RIA, 6/7/02

The Nebraska Department of Revenue published a compilation of changes to Nebraska state tax provisions that arise from the passage of the Federal Job Creation and Worker Assistance Act of 2002, P.L. 107-147, and codified at Internal Revenue Code Sec. 168(k) and Internal Revenue Code Sec. 1400L . Changes include those to net operating losses, teacher classroom expense deductions and 30% bonus first year depreciation. In addition, the Department published a series of revenue rulings on new bonus depreciation add-backs for Nebraska income tax purposes that are based on Nebraska's passage of L. 2002, L1085. (Dept. of Rev., 5/2002; Nebraska Revenue Ruling 22-02-1, 5/3/2002 ; Nebraska Revenue Ruling 23-02-1, 5/3/2002 ; and Nebraska Revenue Ruling 24-02-1, 5/3/2002 .)

Net operating losses. Generally, taxpayers can carry back net operating losses for two years. However, the new federal law extends the carryback period to five years. Three-year net operating losses, including casualty losses, are also given 5-year carryback periods. Nebraska intends to follow the 5-year carryback for individual income tax purposes only because Nebraska prohibits carryback of corporate net operating losses and it requires that all corporate losses be carried forward for a maximum of five years.

Teacher classroom expense deductions. Nebraska will automatically allow educators in elementary and secondary schools to deduct qualifying classroom expenses up to $250 annually for 2002 and 2003. This above-the-line deduction includes expenses for supplies, books, and equipment.

Bonus depreciation. The Nebraska legislature passed L. 2002, L1085, which requires a portion of the bonus depreciation to be added back and then reclaimed in a later year for Nebraska tax purposes. L1085 takes into account the federal changes to bonus depreciation. Property must be acquired after September 10, 2001 and before September 11, 2004 and the property must be placed in service before January 1, 2005 to qualify. Any taxpayer who claims the federal 30% bonus depreciation on the federal return must add back 85% of this depreciation. This includes corporations and sole proprietorships.

Amounts added back can be reclaimed in a later year. Twenty percent can be subtracted in the first taxable year beginning on or after January 1, 2005 and 20% can subtracted in each of the next four years. For those taxpayers that have not yet claimed the bonus depreciation, the taxpayer must claim the bonus depreciation, include the required add-back, and attach a note explaining the calculation of the add-back. The taxpayer must attach a copy of the federal return in which the special deduction was claimed.

Bonus depreciation received by partnerships, limited liability companies (LLCs), cooperatives (including cooperatives exempt under Internal Revenue Code Sec. 521 ), S corporations or joint ventures must be distributed to the partners, members, shareholders, patrons or beneficiaries in the same manner as income is distributed for purposes of calculating the taxpayer's Nebraska income tax liability. Any increase must be modified to exclude the portion of bonus depreciation received from an S corporation or LLC that is not derived from or connected with Nebraska sources as determined in Neb. Rev. Stat. § 77-2734.01 .

Nonresident individuals: Nonresident taxpayers filing a Nebraska return who operate businesses in Nebraska are also required to add back any bonus depreciation claimed for assets obtained and used after September 10, 2001. The taxpayer must report 85% of the bonus depreciation claimed on Nebraska Form 1040N, Schedule I, Line 43, which is then included on Line 12, “Adjustments Increasing Federal AGI.” The depreciation add-back is also required on Nebraska Schedule III, line 58, together with other income from Nebraska sources.

Corporations: Corporations must enter 85% of the bonus depreciation claimed on a tax year 2000 or 2001 federal income tax return as an “other adjustment” on Nebraska Form 1120N, Schedule A, Line 6 (for 2001 returns) or Line 5 (for 2000 returns). If the taxpayer filed a 2000 or 2001 tax return, the taxpayer must report the increase on an amended Corporation Income Tax Return, Form 1120XN.

Unitary businesses with activities inside and outside Nebraska must apportion the increased income due to the bonus depreciation received to determine the portion of the increase to report on the Nebraska return. The income is apportioned according to Neb. Rev. Stat. § 77-2734.05 .

Fiduciary income tax: Fiduciary taxpayers must increase federal income by 85% of any amount of bonus depreciation received under the federal act for assets placed in service after September 10, 2001 and before September 11, 2004. The bonus depreciation deducted from tax year 2000 or 2001 federal returns must be entered as “other Nebraska adjustment increasing federal taxable income” on Nebraska Fiduciary Income Tax Return, Form 1041N, Line 5. If the taxpayer filed a 2000 or 2001 tax return, the taxpayer must report the increase on an amended return.