2.300 Accelerated Deductions from Gross Income

Accelerated Deductions from Gross Income

2.300

400.3

358.3

345.9

327.7

314.5

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2.301
Modified Accelerated Cost Recovery System on Rental Housing

Landlords and investors in rental housing may use accelerated methods of depreciation for new and used rental housing. Straight-line depreciation over the property's expected useful life is the generally accepted method for recovering cost, which is close to economic depreciation. However, through the past decades, systems which adopt accelerated depreciation methods have been introduced. The current system is MACRS (Modified Accelerated Cost Recovery System) which was enacted in 1986. This system further accelerated the rate of recovery of depreciation than under ACRS (Accelerated Cost Recovery System) which was enacted in 1981. Differences between MACRS and ACRS are 1) deductions from the 150% declining balance method to 200-percent declining balance; 2) certain assets were reclassified and the number of asset classes (80) was increased; and 3) the recovery period for residential rental property was extended to 27.5 years and for nonresidential real property to 39 years. For details, refer to the document, Background and Present Law Relating to Cost Recovery and Domestic Production Activities, which was published by the Joint Committee on Taxation in their homepage on March 6th, 2012.

The excess of allowable depreciation over economic depreciation constitutes a tax expenditure, resulting in a deferral of tax or an interest-free loan.

IRC, § 168

4.2

2.303
Expenditures to Remove Architectural and Transportation Barriers to the Handicapped and Elderly

Taxpayers may elect to deduct up to $15,000 of the costs of removing architectural or transportation barriers to the handicapped in the year these costs are incurred. The immediate deduction of these expenditures, which would otherwise have to be capitalized and depreciated over a longer period, constitutes a tax expenditure, resulting in a deferral of tax or an interest-free loan.

IRC, § 190

0.4

2.304
Election to Deduct and Amortize Business Start-up Costs

Taxpayers who pay or incur business start-up costs and who subsequently enter the trade or business can elect to expense to the lesser of the amount of start-up expenditures with respect to the active trade or business or $5,000 of the costs. The $5,000 deduction amount is reduced dollar for dollar when the start-up expenses exceed $50,000. The balance of start-up expenses, if any, is amortized over a period of 180 months, starting with the month in which the business begins. The election must be made no later than the date (including extensions) for filing the return for the tax year in which the business begins or is acquired. A taxpayer is deemed to have made an election to deduct and amortize start-up expenses for the tax year in which the active trade or business to which the expenses relate begins. A taxpayer who does not make the election must capitalize the expenses.

IRC, § 195

0.8

2.305
Modified Accelerated Cost Recovery System for Equipment

For depreciable tangible personal property placed in service after 1980, capital costs may be recovered using the Accelerated Cost Recovery System (ACRS), which applies accelerated methods of depreciation over set recovery periods. For property placed in service after 1987, Massachusetts has adopted the Modified Accelerated Cost Recovery System (MACRS), which consists of General Depreciation System (GDS) and Alternative Depreciation System (GDS). GDS generally uses accelerated depreciation, while ADS uses straight-line depreciation. The accelerated depreciation is double declining balance depreciation over specified periods that are substantially shorter than actual useful lives (200% declining balance for 3-, 5-, 7- and 10-year recovery property and 150% declining balance for 15- and 20-year property). The excess of accelerated depreciation over straight-line depreciation constitutes a tax expenditure, resulting in a deferral of tax or an interest-free loan.

According to the TCJA, the General Depreciation System period for farming equipment and machinery placed into service after December 31, 2017 changed from 7 years to 5 years. In addition, such equipment may also be depreciated using the 200% declining balance method. Previously, such equipment had to be depreciated using the 150% declining balance method.

For the past decade, the federal government has allowed "bonus depreciation" which further accelerates depreciation for assets placed in service in certain years. However, Massachusetts is decoupled from it. For further discussion, see TIR 03-25 .

IRC, § 168

248.9

2.306
Deduction for Excess First-Year Depreciation

Taxpayers may elect to expense certain business assets purchased during the taxable year. The TCJA increased the benefits, making changes to IRC sec. 179. For tax year 2018, Massachusetts adopted the increased federal amounts provided by IRC sec. 179. The total deduction cannot exceed $1 million; for taxpayers whose investment in eligible assets exceeds $2.5 million in the year, the $500,000 ceiling is reduced by $1 for each dollar of investment above $2.5 million. Any remaining cost may be depreciated according to MACRS as described in item 2.305. The annual deduction of $1 million available for 2018 will be indexed to inflation.

In addition, there were also changes to IRC § 179 to allow improvements to the interior of any nonresidential real property, as well as roofs, heating, ventilation, and air-conditioning property, fire protection and alarm systems, and security systems installed on such property to qualify for expensing. The exclusion from expensing for tangible personal property used in connection with lodging facilities (such as residential rental property) has also been eliminated.

The immediate deduction constitutes a tax expenditure, resulting in a deferral of tax or an interest-free loan.

IRC, § 179

14.2

2.307
Modified Accelerated Depreciation on Buildings (other than Rental Housing)

Construction may be depreciated under methods which produce faster depreciation than economic depreciation. The precise rules have been changed repeatedly in recent years by revisions of the federal tax code. For structures (other than housing) placed in service after May 13, 1993, federal law requires straight-line depreciation over a 39 year life. The excess of accelerated depreciation over straight-line depreciation is a tax expenditure. For a more detailed description of accelerated depreciation, see the description for item 2.301.

The TCJA provides that an electing real property trade or business must use the alternative depreciation system for its residential or nonresidential real property. The alternative depreciation system period for nonresidential real property remains 40 years, while the period for residential real property is now 30 years.

IRC, § 168

1.6

2.308
Expensing Research and Development Expenditures in One Year

Taxpayers may elect to treat research or experimental expenditures incurred in connection with a trade or business as immediately deductible expenses. Under generally accepted accounting principles, at least some of these costs would otherwise be treated as capital expenditures and depreciated or amortized over a period of years. Their immediate deduction constitutes a tax expenditure, resulting in a deferral of tax or an interest-free loan.

IRC, § 174

42.0

2.309
Expensing Exploration and Development Costs

Certain capital costs incurred in bringing a known mineral deposit into production are deductible in the year incurred. A portion of domestic mining exploration costs can also be expensed, although they will be recaptured if the mine reaches the production stage. Certain intangible drilling and development costs of domestic oil, gas, and geothermal wells are deductible when made, but to a certain extent may be recaptured upon disposition of oil, gas, or geothermal property to which they are properly chargeable. The immediate expensing of these costs, which would otherwise be capitalized and recovered through depreciation or through depletion as the natural resource is removed from the ground, results in a deferral of tax or an interest-free loan.

IRC, §§ 193, 263(c), 616, 617; M.G.L. c. 63, § 30.4.

Negligible

2.311
Five-Year Amortization of Pollution Control Facilities

Taxpayers may elect to amortize the cost of a certified pollution control facility over a five-year period, allowing for accelerated recovery of these costs. Accelerated recovery is only available for pollution control facilities subsequently added to plants that were in operation before 1976. The excess of accelerated recovery over depreciation deductions otherwise allowable results in a deferral of tax or an interest-free loan.

IRC, § 169

2.2

2.312
Expensing of Alternative Energy Units

In determining net income, a corporation may elect to take an immediate deduction for expenditures made for certain solar or wind powered systems or units located in Massachusetts and used exclusively in the business, in lieu of all other deductions and credits including the deduction for depreciation. Without this provision, such expenditures would have to be capitalized and depreciated. The immediate deduction results in a deferral of tax or an interest-free loan.

M.G.L. c. 63, § 38H

Not Active

2.313
Seven-Year Amortization for Reforestation

Taxpayers may elect to amortize reforestation costs for qualified timber property over a seven-year period. In the absence of this special provision, these costs would be capitalized and depreciated over a longer period or recovered when the timber is sold. The accelerated cost recovery results in a deferral of tax or an interest-free loan.

IRC, § 194

0.1

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