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States, localities respond to Federal stimulus legislation.

The Job Creation and Worker Assistance Act of 2002 enacted legislation that, according to state and local government groups, will probably reduce tax revenues by billions of dollars over the next three years, when they will be facing budget shortfalls and skyrocketing costs for education, healthcare and transportation. This projected impact derives primarily from the new law's bonus-depreciation and net operating loss (NOL) carryback provisions.

Approximately 20 states have tax laws that automatically conform to Code changes. At the same time, many of these states enacted their own versions of some Code provisions (e.g., by adopting different NOL periods or different depreciation methods). Other states must enact legislation after each Federal law change to have conforming rules in their tax laws.

Some states have begun decoupling from automatic conformity to the Code as a way to limit the impact of Federal legislation. For example, Virginia, which historically adopted the Code, decided to link its tax law to the Code as of Dec. 31, 2001. Nebraska enacted legislation requiring taxpayers to add back 85% of any bonus-depreciation deduction claimed in computing Federal taxable income.

Maine, taking somewhat of a "wait and see" attitude toward the Federal legislation, recently enacted legislation that permits taxpayers to claim the 30%-bonus-depreciation deduction for 2001 and later years, but requires an addback if there is insufficient revenue to fund the conformity. In addition, the legislation restricts the carryback of an NOL arising from a tax year beginning or ending in 2001 to two years, and eliminates NOL carrybacks for tax years beginning after 2001.

Massachusetts enacted legislation decoupling from the bonus-depreciation rules that grant taxpayers that claimed a bonus-depreciation deduction prior to enactment a waiver of interest for 180 days on any additional tax payments. A new Maryland law prohibits taxpayers from claiming the bonus-depreciation deduction or the extended NOL carryback period for losses generated in 2001 and 2002. In general, the law defers the impact of future Federal tax law changes for one year, to the extent they cost the state $5 million or more in lost revenue.

Minnesota indicated that it may be a while before taxpayers will know whether the state will adopt the provisions of the Federal stimulus legislation, and directed taxpayers to "play it safe." Accordingly, taxpayers were advised to add back any bonus-depreciation deduction. Mississippi posted a statement on its website and proposed a regulation to the effect that the state does not permit taxpayers to claim a bonus-depreciation deduction in computing taxable income. While Mississippi does not conform automatically to the Code, it historically allowed taxpayers to claim a "reasonable allowance" for wear and tear, and often looked to Sec. 168 in computing such a deduction. The Mississippi State Tax Commission takes the position that the bonus depreciation is not "reasonable"

Some legislators suggest that while enacting provisions may eliminate the impact of the most costly sections of the Federal legislation, such legislation runs counter to attempts to mirror the Federal depreciation and NOL computations as a way to minimize complexity and maintain a workable tax system. Such reasoning appears to be behind West Virginia's enactment of legislation adopting an updated conformity date of March 15, 2002. Accordingly, West Virginia taxpayers can claim the bonus-depreciation deduction and use the extended NOL carryback period, subject to a state-specific $300,000 limit on NOL carrybacks. What is most notable about the West Virginia legislation is that it was enacted only two weeks after enactment of legislation adopting a Dec. 31, 2001 conformity date. On a similar note, the North Carolina Department of Revenue issued a release allowing taxpayers to claim a bonus-depreciation deduction, pending legislative action that would update Code conformity. However, amended returns would have to be filed and adjustments made if the legislature decides not to conform, the department advised.

The confusion caused by keeping two sets of records (one for Federal and one for state tax purposes) has not deterred some states from adopting a conformity date just shy of the Federal-stimulus legislation enactment date. For example, Georgia conformed its tax law to the Code as enacted on or before Jan. 1, 2002; thus, the Federal legislation will not be followed.

While the Federal-stimulus legislation might benefit states in the long run (if the tax law changes generate a significant increase in employment and profits), the immediate impact of the law might be difficult to handle. Accordingly, state legislators face a difficult task in determining the best way to limit the effect of the Federal legislation on state tax revenues in the short run.

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Title Annotation:bonus-depreciation deduction
Author:Smith, Annette B.
Publication:The Tax Adviser
Geographic Code:1USA
Date:Jul 1, 2002
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