Does New Jersey Allow Bonus Depreciation?
Understand New Jersey's unique depreciation rules. Learn how state tax treatment differs from federal bonus depreciation, affecting your business's taxable income.
Understand New Jersey's unique depreciation rules. Learn how state tax treatment differs from federal bonus depreciation, affecting your business's taxable income.
Depreciation allows businesses to allocate the cost of a tangible asset over its useful life, rather than expensing the entire cost in the year of purchase. Assets like machinery, vehicles, and buildings are subject to depreciation. By systematically deducting a portion of an asset’s cost each year, businesses can reduce their taxable income.
Bonus depreciation is a federal tax provision that accelerates depreciation deductions. It allows businesses to deduct a significant percentage of an asset’s cost in the first year it is placed in service, rather than over its useful life. Its purpose is to stimulate economic growth by encouraging investment in new equipment and qualifying property.
Qualified property generally includes new and used Modified Accelerated Cost Recovery System (MACRS) property with a recovery period of 20 years or less, such as machinery, equipment, and certain computer software. While the federal deduction was 100% for property placed in service after September 27, 2017, and before January 1, 2023, it has begun to phase down. For instance, the rate was 80% for property placed in service in 2023, 60% for 2024, and is scheduled to be 40% for 2025, and 20% for 2026, reaching 0% in 2027, unless legislative changes occur.
New Jersey does not conform to federal bonus depreciation rules for its Corporation Business Tax (CBT) and Gross Income Tax (GIT). This means businesses cannot take the accelerated deduction on state tax returns, even if claimed federally. The state decoupled from these federal provisions, requiring taxpayers to adjust their taxable income.
New Jersey decoupled from federal bonus depreciation for Corporation Business Tax privilege periods beginning on or after January 1, 2002, and for Gross Income Tax purposes for taxable years beginning on or after January 1, 2004. This means any federal bonus depreciation amount must be added back to taxable income when calculating New Jersey state tax liability.
Beyond bonus depreciation, New Jersey also decouples from federal Section 179 expensing rules. For state tax purposes, the Section 179 deduction is limited to amounts based on federal Internal Revenue Code provisions in effect on December 31, 2002, with a $25,000 cap. Consequently, if a taxpayer claims a higher Section 179 deduction federally, an add-back adjustment is necessary for New Jersey tax calculations.
Due to New Jersey’s non-conformity with federal bonus depreciation, businesses must calculate depreciation separately for state tax purposes. New Jersey requires depreciation to be calculated using methods similar to federal Modified Accelerated Cost Recovery System (MACRS), but without the accelerated bonus allowance. This necessitates maintaining distinct depreciation records for federal and New Jersey tax filings.
For New Jersey, businesses depreciate assets over their standard MACRS recovery periods, as if bonus depreciation were not available. For instance, if an asset has a 5-year MACRS life, its cost would be spread over those five years for New Jersey tax purposes, even if 100% of its cost was deducted federally in the first year.
The separate calculation of depreciation for New Jersey ensures that the state’s tax base reflects its specific legislative intent. Accurate tracking of an asset’s New Jersey basis (original cost less state-allowed depreciation) is important for future calculations, including when the asset is sold or disposed of. This distinct basis will impact the gain or loss recognized for state tax purposes upon disposition.
To reconcile federal and New Jersey depreciation differences, taxpayers must make specific adjustments on their New Jersey tax returns. For Corporation Business Tax filers, the federal bonus depreciation amount must be added back to federal taxable income on Schedule A of Form CBT-100, in Part II.
For individuals, partnerships, and S corporations subject to Gross Income Tax, similar adjustments are required. These entities use the Gross Income Tax Depreciation Adjustment Worksheet, Form GIT-DEP, to calculate necessary add-backs for federal bonus depreciation and any excess Section 179 deduction. This adjustment impacts net profits from business or the net pro rata share of S corporation income reported on Form NJ-1040 or related schedules.
Maintaining records for each depreciable asset is important to track its original cost, federal depreciation, and New Jersey depreciation. This record-keeping enables businesses to calculate annual add-back adjustments and determine the asset’s remaining basis for New Jersey tax purposes. The cumulative effect of these adjustments can significantly impact a business’s overall state tax liability.