Building owners and lessees will be impacted by several changes made to depreciation rules under the Tax Cuts and Jobs Act (TCJA). Two of the main changes affect Section 179 expensing and Section 168 dealing with bonus depreciation. The new tax law also affects how each state treats depreciation and whether they adopted the new TCJA rules for the respective changes.
How States are Responding
Section 179
Previously, Section 179 allowed taxpayers to immediately deduct up to $500,000 with a phase-out threshold of $2 million. Under the new law, taxpayers can now deduct up to $1 million with the new phase-out threshold being $2.5 million. It also now includes qualified improvement property, roofs, HVAC, fire protection systems, alarm systems & security systems for nonresidential buildings
Below is a breakdown of which states conformed to the new TCJA ruling and which states have their own Section 179 rules. If the states conform, that means that they follow the updated TCJA ruling on Section 179 and adopt the same limitations. If the states do not conform to the TCJA ruling, they have separate rules on what’s deductible for Section 179 and their own limitations. The chart below outlines the limitations for states not following TCJA ruling compared to the federal guidelines.
The following states have a $25,000 Section 179 deduction limit and a $200,000 phaseout:
- Arkansas
- California
- District of Columbia
- Hawaii
- Indiana
- Maryland
- New Jersey
- Texas
- Wisconsin
The following states have apportionment methods:
- Minnesota
- North Carolina
- Ohio
As you can see by the chart and states listed above, states that are not adhering to the federal limitations generally have much lower deduction and phaseout limits.
Bonus Depreciation
The bonus depreciation rules also changed under the TCJA. Prior to the new law, bonus depreciation was 50% of qualified property. The new bonus depreciation is 100% of qualified property acquired and placed in service after September 27, 2017.
States that have adopted the new bonus depreciation rules:
- Alabama
- Alaska
- Colorado
- Delaware
- Illinois
- Kansas
- Louisiana
- Michigan
- Missouri
- Montana
- Nebraska
- New Mexico
- North Dakota
- Oklahoma
- Oregon
- Rhode Island
- Utah
- West Virginia
States that do not conform to the new rules:
- Arizona
- Arkansas
- California
- Connecticut
- District of Columbia
- Florida
- Georgia
- Hawaii
- Indiana
- Iowa
- Kentucky
- Maine
- Maryland
- Massachusetts
- Minnesota
- Mississippi
- New Hampshire
- New Jersey
- New York and New York City
- North Carolina
- Ohio
- Pennsylvania
- South Carolina
- Tennessee
- Texas
- Vermont
- Virginia
Nevada, South Dakota, Washington and Wyoming have no corporate tax and are unaffected by federal and state depreciation changes.
The states listed as conforming to the TCJA bonus depreciation rules allow for the 100% deduction of qualified property. The states that do not conform simply do not allow bonus depreciation and no additional deduction for bonus depreciation is allowed.
These new changes under the TCJA could not only affect your federal return, but impact you on a state level as well depending on where you file. For more specific guidance on each state’s depreciation rules or for more information on how these changes could affect you, contact an Anders advisor.
