I would like to take bonus depreciation on assets I placed in service this year. I copied the text of my previous post below to give a little background. If I take federal bonus depreciation, I have no issue with Oklahoma since they fully conform. Unfortunately Ohio does not, and requires a 5/6 addback of bonus depreciation if I show taxable income on the federal level, or 6/6 addback if I don't show taxable income. My question is this: is bonus depreciation taken AFTER you figure regular depreciation (I would do straight-line depreciation over 5 years), or is it in place of regular depreciation? If it is in place of regular depreciation, therefore not showing any other depreciation, and my taxable income is reduced to zero from the bonus depreciation, then I would be adding back 6/6 and would have ZERO depreciation deduction on my Ohio taxes for the first year. Consequently, I would owe taxes on all income generated by the assets this first year. Is this true, or am I missing something here? I'm sure this is also an issue with other states that don't conform to federal bonus depreciation. I would like to take the bonus depreciation on the federal level so I can get a refund and be able to use that money to purchase additional equipment, but if I get no depreciation deduction the first year in Ohio, this may not be a wise move.
If any of you have read my previous questions, I have farm equipment located in Oklahoma that I receive rental income on. It was put in service this year. I am an Ohio resident. The equipment is classified as a 5-year property for depreciation purposes and it is eligible for bonus depreciation. The issue is that while Oklahoma fully conforms to IRS bonus depreciation rules, Ohio does not. Ohio requires addback of the bonus depreciation amounts. This seems to create a messy tax situation when doing my Ohio and Oklahoma tax returns. I'm assuming that while I won't have Oklahoma taxable income this first year if I take bonus depreciation, I will then be fully taxed on the Oklahoma income in Ohio since Ohio doesn't conform to bonus depreciation. Am I correct in assuming this? If so, would I just be better off not taking bonus depreciation at all and just do straight-line depreciation over 5 years? Is there anything else to consider with this situation that I might be missing?
Don't think I can answer your question about Ohio........but bonus depreciation is not figured after regular depreciation.....it's an option to expense the cost rather than deduct it ratably over the recovery period.
you can elect out of bonus depreciation for federal purposes. then it is likely that either by electing out for federal you elect out for OK or you can make a separate election. electing out the farm equipment would be depreciated over 5 years using the MACRS convention which is the same as double-declining balance.
the result would be the following % of the original cost basis would be expensed each year
4 and 5. 11.52%
don't know OK or OH tax laws but if there is sufficient income from the farm rather than bonus depreciation section 179 depreciation could be available. section 179 is limited to business income before the 179 deduction
My thoughts on this are as follows:
- My mantra is never let the tax tail wag the dog. If this is a good business decision overall, don't make the Ohio depreciation adjustment the overriding factor. Taxes are just one factor.
- Keep in mind that the Ohio bonus depreciation adjustment is timing only. You will get the benefit over the next several years.
- Ohio's tax rate is not bad and is a graduated rate.
- You may want to run the numbers by not taking bonus depreciation. Here you will want to look at the impact on both OK and OH. Keep in mind that OH provides a credit for taxes paid to other states. You will want to run this for the entire time period for the OH addback. Total all years taxes and see where you come out. I understand this will require some assumptions and estimates, but that's how it works.
- Also keep in mind that next year you will most likely have OK income, get the benefit of the partial bonus depreciation deduction on OH and then the credit for taxes paid to other states on OH as well.
I can't help with the Ohio tax stuff. All I can tell you is that the program generally handles things just fine. One thing though... when doing multiple state returns always *always" complete the resident state tax return *LAST*.
My question is this: is bonus depreciation taken AFTER you figure regular depreciation
No. You either take normal depreciation *or* the bonus depreciation (called Special Depreciation Allowance). But not both. Additionally, you can only take the bonus depreciation in the tax year the asset is actually placed in service.
Additionally, the bonus depreciation is only beneficial if you actually have the taxable income to claim it against in that first year you place the asset in service. Otherwise, the excess loss just gets carried over anyway.
Another thing to consider and keep in mind, is that when you sell or otherwise dispose of the asset, all of that depreciation has to be accounted for in the tax year of sale or other disposition. So it's perfectly possible that taking bonus depreciation now, will just result in your paying significantly more in taxes later, that you would if you just depreciated the asset over it's 5 year depreciation life span.
It's unfortunate that I can't take the bonus depreciation due to Ohio's rules. With Ohio not conforming, due to their rules, if I show no taxable income on my federal return, I must add back 100% of the bonus depreciation during the first year the equipment is placed in service. Meaning, I would have no depreciation deduction at all for Ohio during the first year. I would show no taxable income for federal or Oklahoma due to the bonus depreciation, BUT I would be fully taxed in Ohio since I'm not paying anything in Oklahoma taxes to credit my Ohio taxes. Additionally, in the following years, Ohio only allows a 1/6 depreciation allowance each year over 6 years to depreciate the property if I would use bonus depreciation. The equipment is only 5 year property so it would take me longer to depreciate it in Ohio with bonus depreciation than just taking straight-line depreciation for federal, OK, and OH. I wanted the bonus depreciation to free up additional money to purchase new equipment now, but I'm not going to pay Ohio taxes now on current equipment being depreciated to get this additional money. I doesn't make sense to me that bonus depreciation is 100% or nothing. It would make sense to have the option to take any amount of bonus depreciation up to 100% and use regular MACRS straight-line depreciation on the rest.. The bonus depreciation is a great idea in theory, but only if the states involved also conform.
With all that being said, I will probably do straight-line depreciation on the equipment. It is not going to be placed in service until mid-November, but I may not be getting the first lease payment until January. Do I still claim depreciation this year even though I won't receive any payment until January? I am currently not in Oklahoma's tax system at all. Do I still file a return with Oklahoma for 2021 to establish depreciation even though I will have zero Oklahoma sourced income this year?
You need to reevaluate your thinking on this.
You are going to elect out of bonus depreciation JUST because it is an addback in Ohio for the initial year?
So this means instead of just paying tax to Ohio at a low state rate, you are now okay with paying federal tax, OK and OH income tax by switching to straight-line?
Once again, you need to run some hypothetical examples to see where you pay the least amount of tax.
The straight-line depreciation will exactly cover all the income I will receive on the investment over the 5 year depreciation period with federal, OK, and OH. Doing bonus depreciation will obviously cancel all tax liability initially for federal and OK on the investment, and will get me money back from the IRS on taxes I have paid in this year on wage income, but I will owe taxes on all the investment income for the first year in Ohio because I will have no depreciation deduction for the first year. Additionally, since I can only take 1/6 of the bonus depreciation in subsequent years on my Ohio return, the depreciation will not be enough to fully cover the income received during those years on the investment and I will have to pay some taxes each year in Ohio. I would prefer to defer taxes as long as possible (5 years). Also, I will be moving to TN within the next two years (no income tax state), so I really don't want to be paying Ohio any taxes on this investment before the move if I can help it. Does this reasoning make sense, or am I missing something here? Any additional comments or suggestions are welcome.
Too little detailed information to do much more or provide more thoughts on this.
It is clearly a numbers game and dependent on your facts and what you anticipate happening in the next few years.
A forum such as this is just not optimal to address too specifically.