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Special (Bonus) Depreciation for non-conforming states when moving states or on non-resident state returns

This is a topic not mentioned much that leaves me a bit confused what to do.

 

The general rule for depreciation is that when selling a property, all depreciation that was "allowed or allowable" must be recaptured.  What that means is you have to pay full depreciation recapture tax on it even if you didn't take full depreciate deductions when you could have.

 

Special (bonus) depreciation then confuses things further.  This is a form of accelerated depreciation taken in the year that the property is placed in service on federal returns, typically a percentage like 30%, 50% or even 100% of the original cost basis.  Some state incomes taxes also conform and recognize this, others partially conform, and yet others do not conform at all.  The result is in some states you have to depreciate the property as if the bonus depreciation never happened, resulting in no special depreciation deduction in the year the property is placed in service, but a higher annual depreciation amount in all subsequent years on that state's tax returns only.

 

However, this gets messy and even more confusing if, in a future year, you move states or otherwise need to file a non-resident state return in a non-conforming state. Obviously, you did not file a return in the state in the year the property was placed into service to remove the bonus depreciation, because you had no idea you'd have a future filing requirement in that state.  So the question is: how should the annual depreciation amount be determined in the future for a non-conforming state that you didn't previously file taxes with?

 

Originally, I figured to just compute the annual depreciation for the new state the same as if the past state returns had been filed in that state. That means I'd treat the state as strictly decoupled from the federal depreciation all along and take a higher state depreciation all the same. But that could be dicey, too. I am getting indications now that it may not be the correct approach. Historically, federal and state tax departments have taken the position that if a taxpayer fails to take depreciation when required by statute, the depreciation is permanently disallowed.

 

New Jersey has furthermore indicated on the instructions to their form GIT-DEP (the depreciation adjustment worksheet):

Note: If the initially required New Jersey depreciation adjustment for an asset was not reported, whether due to a reporting error that was not corrected by the Division of Taxation or because the partnership, S corporation, sole proprietor or the owner of rental property or other income-producing depreciable asset did not have a New Jersey filing requirement, then the asset’s New Jersey basis and allowable depreciation will be the same as for federal tax purposes, and a New Jersey depreciation adjustment is neither required nor allowable in subsequent years.

 

Now I'm inclined to follow New Jersey's interpretation of this situation for all non-conforming states, which results in a permanently lower state depreciation deduction than I would otherwise be allowed, though it matches the federal depreciation and is more straightforward. I guess what concerns me if I'm wrong with this interpretation is that I will be stuck with the lower, incorrect depreciation amount, plus also become subject to a future state depreciation recapture that could exceed actual depreciation deductions taken.

 

So looking for opinions here on this interpretation and my concerns, and if people recommend handling the depreciation on these assets in such states any differently?  Maybe this issue isn't even such a big deal?

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