Question about Section 179 Depreciation and State's Partial Conformity

[ndc24075]

In 2023, my company acquired software and equipment assets worth $100,000. I am interested in using Section 179 for depreciation, but it appears that my state only partially conforms to Section 179, allowing a maximum allowance of $25,000.

I would like to clarify whether the depreciation allowed under Section 179 is in addition to the regular depreciation. Let's assume that the assets have a lifespan of 5 years, and without Section 179, the depreciation amount would be $20,000 annually. In light of this, does it mean that with Section 179, the depreciation on the $100,000 assets, within the state conformity, can be $45,000 ($20,000 + $25,000)?

In addition, if the answer to the former question is positive, what about next year's depreciation? Will my company be allowed to take section 179 deprecation state maximum $25,000 on the assets (that is, total depreciation of $45,000)?

[Mike9241]

what state since those that do not onform to federal each have their own rules?

also need state to look into possible 168K deprecition in liey of 179

[ndc24075]

It is Maryland. But my case may be a little confusing. It is a Delaware LLC and we moved the operation to Maryland in 2023 after we acquired the assets. According to my understanding, Delaware conforms fully to section 179 and bonus depreciation while Maryland has $25,000 limit for section 179 and does not conform at all to bonus depreciation.

[Carl]

I would like to clarify whether the depreciation allowed under Section 179 is in addition to the regular depreciation.

No, it is not. If you fully depreciate the item in the first year under SEC179, then you are done with depreciation of that asset totally and completely. Generally, using SEC179 to fully depreciate an asset it's first year in service only makes sense if you have the taxable business income in that year, to claim it against.

[ndc24075]

@Carl Yeah I understand that. But my situation is that the assets were acquired in 2023 and normal depreciation is only 20% assuming 5 year lifespan. My question is that with state's partial conformity, how much can I take depreciation in 2023, is it the state limit $25,000 or "normal depreciation + state limit" that is equal to $45,000?

[Carl]

My question is that with state's partial conformity, how much can I take depreciation in 2023, is it the state limit $25,000 or "normal depreciation + state limit" that is equal to $45,000?

Federal depreciation and state depreciation are two completely separate things. One has no impact or affect on the other. You will have a maximum total federal depreciation you can take, and a completely separate and unrelated maximum state depreciation you can take.

Using your numbers, you'd be able to exclude $50K from taxation by the IRS on your federal return, and $25K from taxation by the state on your state return.  It's all based on the same income, taxed by two different and unrelated taxing authorities.

[ndc24075]

@Carl Thanks. I understand the federal and state are different. My question is more about state taxation because it is where conformity issue comes from. I am not so sure about the 25k you said. Did you mean the 100k assets I acquired in 2023 is only allowed to have 25k depreciation in total for 2023 although it would have been 20k already even if we do not apply section 179?

[ndc24075]

@Carl Hi, I just wanted to check in to confirm whether there is an answer to my question. Thanks.

[AmeliesUncle]

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@ndc24075 wrote:

without Section 179, the depreciation amount would be $20,000 annually. In light of this, does it mean that with Section 179, the depreciation on the $100,000 assets, within the state conformity, can be $45,000 ($20,000 + $25,000)?

Will my company be allowed to take section 179 deprecation state maximum $25,000 on the assets (that is, total depreciation of $45,000)?

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While I can't state for certain that Maryland does it this way, I would THINK the same methodology would be used as how Federal does things when it hits the limit:

1) With $100,000 of assets and $25,000 of Section 179, that leaves $75,000 in depreciable Basis.  So using straight-line depreciation, that is $15,000 per year.  But the first year usually only gets 1/2 of that (and the other 1/2 happens on the 6th year).  But yes, that is added to the $25,000 for the first year.

2) No, section 179 only applies for the year it was "placed in service".   So for years 2 through 5, you will get $15,000 a year (if you are using straight-line depreciation, but I think TurboTax defaults to 200%DB "accelerated" depreciation which give high deductions in the early years, and lower deduction in the later years).

[AmeliesUncle]

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@ndc24075 wrote:

my company acquired software and equipment assets

Let's assume that the assets have a lifespan of 5 years,

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Most likely they won't actually have a "Recovery Period" of 5 years (the actual lifespan does not matter).  Off-the-shelf software is 3 years (custom made software is different), and equipment is usually 7 years (but it can depend on the specifics of the equipment and what it is used for).

As a business owner, you would really benefit from the guidance of a good, local tax professional.