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. The Internal Revenue Code (the "Code") adopts this approach in providing depreciation schedules applicable to different classes of property. The net income measure of the Massachusetts corporate excise and the Massachusetts personal income tax both adopt the federal depreciation rules, with modifications not relevant to this report.
Code § 179 allows taxpayers an election to immediately deduct in a given year 100% of the cost of depreciable property placed in service in that year, up to a limit of $1 million. If the taxpayer's asset purchases for the year exceed $2.5 million, the deduction is reduced on a dollar-for-dollar basis for each additional dollar spent. Both these thresholds are adjusted annually for inflation. The Code § 179 deduction is allowed in addition to the allowable depreciation deduction, but the basis for depreciation is reduced by the amount of the deduction. Massachusetts conforms to the Code § 179 deduction for both corporate excise net income tax and personal income tax purposes. The Massachusetts tax expenditure is a result of this conformity. The Code § 179 deduction is a tax expenditure because it allows the cost of eligible assets to be deducted earlier in an asset's useful life, resulting in a temporary reduction of tax. The tax reduction is temporary because it reduces the allowable depreciation deduction later in the asset's useful life. The deferral of tax can be viewed as an interest-free loan from the Commonwealth to taxpayers.
Origin: IRC § 179
Corporate Excise Tax
Accelerated Deductions from Gross Income
2.306
Expense Deduction for Excess First-Year Business Assets
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. The Internal Revenue Code (the "Code") adopts this approach in providing depreciation schedules applicable to different classes of property. The net income measure of the Massachusetts corporate excise and the Massachusetts personal income tax both adopt the federal depreciation rules, with modifications not relevant to this report. <BR><BR><a href="http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000179----000-.html" target="_blank">Code § 179</a> allows taxpayers an election to immediately deduct in a given year 100% of the cost of depreciable property placed in service in that year, up to a limit of $1 million. If the taxpayer's asset purchases for the year exceed $2.5 million, the deduction is reduced on a dollar-for-dollar basis for each additional dollar spent. Both these thresholds are adjusted annually for inflation. The <a href="http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000179----000-.html" target="_blank">Code § 179</a> deduction is allowed in addition to the allowable depreciation deduction, but the basis for depreciation is reduced by the amount of the deduction. Massachusetts conforms to the <a href="http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000179----000-.html" target="_blank">Code § 179</a> deduction for both corporate excise net income tax and personal income tax purposes. The Massachusetts tax expenditure is a result of this conformity. The <a href="http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000179----000-.html" target="_blank">Code § 179</a> deduction is a tax expenditure because it allows the cost of eligible assets to be deducted earlier in an asset's useful life, resulting in a temporary reduction of tax. The tax reduction is temporary because it reduces the allowable depreciation deduction later in the asset's useful life. The 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_00000179----000-.html" target="_blank">IRC § 179</a>
10.6
9.5
8.5
7.7
10.0
