Minnesota Income Tax Treatment of Federal Bonus Depreciation

What is bonus depreciation?

Federal law allows taxpayers to claim a percentage of an asset's basis as "bonus depreciation" in the year the asset is placed in service. Taxpayers may then claim the regular depreciation amount on the remaining share of the asset's basis. The bonus depreciation percentage is 50 percent for assets placed in service after December 31, 2007, and before January 1, 2018, for most property, and before January 1, 2019, for certain property with longer production periods. The percentage decreases to 40 percent for tax year 2018, and 30 percent for tax year 2019. No bonus depreciation is allowed for tax year 2020 or later years.

Table 1 compares depreciation allowed at the federal level before and after enactment of bonus depreciation for a ten-year asset with a $100,000 basis.

The total amount of depreciation allowed over the life of the asset equals its $100,000 basis, both under the current federal law and under the old law. The bonus depreciation provision acts to shift depreciation toward the early years of the asset's life.

What assets qualify for federal bonus depreciation?

The following types of assets qualify for federal bonus depreciation:

• assets with depreciable lives of 20 years or less, that are subject to the general rules of the federal modified accelerated cost recovery system (MACRS). These include automobiles, office equipment, computers, certain manufacturing equipment, and certain structures
• water utility property
• certain computer software and
• qualified leasehold improvement property

How does Minnesota treat bonus depreciation?

Under the provisions of Laws 2008, chapter 154, Laws 2011, first special session, chapter 7, and Laws 2013, chapter 143, Minnesota requires taxpayers to add-back to taxable income 80 percent of the bonus depreciation in the year the asset is placed in service, and then subtract one-fifth of the amount added back in each of the five following tax years. Put another way, Minnesota taxpayers are allowed to claim 20 percent of the bonus depreciation in the first year, and the remaining 80 percent in equal parts in each of the five following years. This is the same state tax treatment as applied to bonus depreciation enacted at the federal level in 2002 and 2003. Taxpayers are allowed to claim the full bonus amount, just over a six-year period rather than all in the first year. Minnesota has not yet acted with regard to the extension of federal bonus depreciation to tax years 2015 to 2019.

Table 2 shows how the bonus depreciation is treated at the state level.

Does Minnesota continue to recognize "regular" depreciation as it occurs under the federal tax?

In addition to the bonus depreciation of an asset in its first year of life, federal law provides for taxpayers to depreciate the remaining basis of the asset using previously existing depreciation rules and schedules. Minnesota will continue to allow deduction of this "regular" depreciation in the same year it is allowed at the federal level. Table 3 continues the example of the ten-year, $100,000 basis asset. Deduction of bonus depreciation in the first year federally and first six years at the state level left $50,000 of basis remaining for assets placed in service under 50 percent depreciation.

March 2016