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 buildings, which have 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 buildings 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. Since 1993, the Code has allowed nonresidential buildings to be depreciated using straight-line depreciation over 39 years. The Code refers to this method as "accelerated". The Code also provides an option to use straight-line depreciation over a period of 40 years. This method is considered to conform to traditional financial accounting rules. The benefit of using the 39-year recovery period instead of the 40-year recovery period is a federal tax expenditure to which Massachusetts conforms.
The expenditure also reflects more favorable federal depreciation rules in effect for nonresidential buildings prior to 1993. These rules allowed a larger depreciation deduction over a shorter recovery period than the current Code rules. For example, a building placed in service in 1992 could be depreciated over 31.5 years. Some of buildings placed in service prior to 1993 are still in service and continue to be depreciated under these historical rules. For such legacy buildings, the Code allows more of the cost of the property to be deducted than would be allowed under the current depreciation rules. This legacy effect is also considered to be part of the federal tax expenditure.
Massachusetts generally adopts the business expense deductions allowed under the Code, including the federal deduction for depreciation. Specifically, Massachusetts allows the use of the 39-year accelerated recovery period for nonresidential buildings under the current Code and adopts the favorable historic rules applicable to legacy buildings under the Code. These rules allow a larger depreciation deduction in the earlier years of the useful life of nonresidential buildings than would be available under traditional accounting concepts. However, the depreciation deduction is smaller in the later years. The net result is a temporary reduction, or deferral, of tax. The 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
2.307
Modified Accelerated Depreciation on Buildings (other than Rental Housing)
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 buildings, which have 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 buildings 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><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. Since 1993, the Code has allowed nonresidential buildings to be depreciated using straight-line depreciation over 39 years. The Code refers to this method as "accelerated". The Code also provides an option to use straight-line depreciation over a period of 40 years. This method is considered to conform to traditional financial accounting rules. The benefit of using the 39-year recovery period instead of the 40-year recovery period is a federal tax expenditure to which Massachusetts conforms. <BR><BR>The expenditure also reflects more favorable federal depreciation rules in effect for nonresidential buildings prior to 1993. These rules allowed a larger depreciation deduction over a shorter recovery period than the current Code rules. For example, a building placed in service in 1992 could be depreciated over 31.5 years. Some of buildings placed in service prior to 1993 are still in service and continue to be depreciated under these historical rules. For such legacy buildings, the Code allows more of the cost of the property to be deducted than would be allowed under the current depreciation rules. This legacy effect is also considered to be part of the federal tax expenditure. <BR><BR>Massachusetts generally adopts the business expense deductions allowed under the Code, including the federal deduction for depreciation. Specifically, Massachusetts allows the use of the 39-year accelerated recovery period for nonresidential buildings under the current Code and adopts the favorable historic rules applicable to legacy buildings under the Code. These rules allow a larger depreciation deduction in the earlier years of the useful life of nonresidential buildings than would be available under traditional accounting concepts. However, the depreciation deduction is smaller in the later years. The net result is a temporary reduction, or deferral, of tax. 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_00000168----000-.html" target="_blank">IRC § 168</a>
1.9
1.7
1.7
1.7
2.3
