An essential characteristic of a business income tax is that it is imposed on the net of business receipts over deductible business expenses. However, an immediate deduction is generally not allowed for the full cost of durable business property that has a useful life measured in years. Rather, the cost of such property must be capitalized and deducted as depreciation expense over a number of years based on the property's useful life. Traditional financial accounting rules required the cost of depreciable tangible personal property to be recovered pro rata over a period intended to approximate the property's anticipated actual useful life. This depreciation schedule is referred to as the "straight-line" method.
The Internal Revenue Code (the "Code") follows the general approach to cost recovery described above by providing depreciation schedules applicable to different classes of property. However, the Code permits taxpayers to use depreciation schedules that are more favorable than straight-line depreciation. Specifically, the Code adopts the Modified Accelerated Cost Recovery System (MACRS), which allows accelerated cost recovery over a period that is shorter than the property's anticipated useful life and allows more of the cost of the property to be deducted in the first few years of an asset's life, and relatively less later. In addition to such accelerated depreciation, MACRS allows taxpayers to elect to use an alternative method that conforms more closely to traditional financial accounting rules by requiring the use of straight-line depreciation.
Massachusetts conforms to MACRS for purposes of determining taxable net income under the corporate excise and taxable income under the personal income tax. The state tax expenditure is a result of this conformity. Allowing accelerated depreciation under MACRS is a tax expenditure because it allows a larger depreciation deduction earlier in an asset's life than would be allowed under alternative depreciation. To the extent that taxpayers employ accelerated depreciation instead of alternative depreciation, a temporary reduction of tax results. The reduction is temporary because the depreciation deduction is smaller in the later years of an asset's useful life. The temporary deferral of tax can be viewed as an interest-free loan from the Commonwealth to taxpayers.
Origin: IRC § 168
Corporate Excise Tax
Accelerated Deductions from Gross Income
2.305
Modified Accelerated Cost Recovery System for Equipment
An essential characteristic of a business income tax is that it is imposed on the net of business receipts over deductible business expenses. However, an immediate deduction is generally not allowed for the full cost of durable business property that has a useful life measured in years. Rather, the cost of such property must be capitalized and deducted as depreciation expense over a number of years based on the property's useful life. Traditional financial accounting rules required the cost of depreciable tangible personal property to be recovered pro rata over a period intended to approximate the property's anticipated actual useful life. This depreciation schedule is referred to as the "straight-line" method. <BR>The Internal Revenue Code (the "Code") follows the general approach to cost recovery described above by providing depreciation schedules applicable to different classes of property. However, the Code permits taxpayers to use depreciation schedules that are more favorable than straight-line depreciation. Specifically, the Code adopts the Modified Accelerated Cost Recovery System (MACRS), which allows accelerated cost recovery over a period that is shorter than the property's anticipated useful life and allows more of the cost of the property to be deducted in the first few years of an asset's life, and relatively less later. In addition to such accelerated depreciation, MACRS allows taxpayers to elect to use an alternative method that conforms more closely to traditional financial accounting rules by requiring the use of straight-line depreciation. <BR>Massachusetts conforms to MACRS for purposes of determining taxable net income under the corporate excise and taxable income under the personal income tax. The state tax expenditure is a result of this conformity. Allowing accelerated depreciation under MACRS is a tax expenditure because it allows a larger depreciation deduction earlier in an asset's life than would be allowed under alternative depreciation. To the extent that taxpayers employ accelerated depreciation instead of alternative depreciation, a temporary reduction of tax results. The reduction is temporary because the depreciation deduction is smaller in the later years of an asset's useful life. The temporary deferral of tax can be viewed as an interest-free loan from the Commonwealth to taxpayers.
<a href="http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000168----000-.html" target="_blank">IRC § 168</a>
258.5
227.9
187.6
155.5
121.0
