Does NJ Allow Section 179 Depreciation?

Section 179 of the Internal Revenue Code allows businesses to deduct the full purchase price of qualifying equipment and/or software during the year it is placed into service, rather than depreciating it over several years. This provision aims to incentivize business investment by providing an immediate tax benefit for certain capital expenditures. However, state tax laws do not always conform to federal tax provisions. This article will explore whether New Jersey permits Section 179 depreciation and how its rules differ from the federal framework.

New Jersey’s Decoupling from Federal Rules

New Jersey generally operates under a “decoupling” principle concerning federal tax law changes, particularly those related to depreciation and expensing provisions. This means the state does not automatically adopt updates to the Internal Revenue Code (IRC) as they are enacted by the federal government. For businesses operating in New Jersey, this often necessitates separate calculations for state income tax purposes compared to their federal tax filings.

The state’s approach began with legislation in the early 2000s, which specifically disallowed federal bonus depreciation and decoupled from federal Section 179 deductions. Consequently, while federal law might permit immediate expensing of certain assets, New Jersey typically requires businesses to follow different depreciation methods for their state tax returns.

New Jersey’s Specific Section 179 Treatment

New Jersey does not fully conform to the federal Section 179 election, requiring businesses to make specific adjustments. For both Corporation Business Tax (CBT) and Gross Income Tax (GIT) purposes, the state’s rules for Section 179 deductions are based on the federal Internal Revenue Code in effect on December 31, 2002.

For taxpayers subject to the Gross Income Tax, such as individuals, partnerships, and S corporations, New Jersey permits a maximum Section 179 deduction of $25,000. This state-specific limit is applied without business income limitations and any unused deductions cannot be carried forward to future tax years. An exception exists for qualified Liberty Zone property, where the maximum Section 179 deduction can be up to $60,000, combining New Jersey’s $25,000 limit with an additional federally allowed amount.

Businesses generally must add back the amount of federal Section 179 deduction claimed when calculating their New Jersey taxable income. After this add-back, they can then apply New Jersey’s own depreciation rules, which align with the state’s established Section 179 provisions and standard depreciation methods for other assets. This ensures that while New Jersey provides its own limited expensing, it maintains its distinct tax base separate from current federal expensing incentives.

Impact on New Jersey Tax Filings

The decoupling of New Jersey’s tax laws from federal depreciation rules has direct implications for businesses when preparing their state tax returns. Taxpayers are typically required to maintain separate depreciation records for federal and New Jersey purposes.

For those filing under the Gross Income Tax, adjustments related to depreciation and Section 179 are calculated on the Gross Income Tax Depreciation Adjustment Worksheet, Form GIT-DEP. This worksheet helps determine the New Jersey-allowable Section 179 expense, any state special depreciation allowance, and the New Jersey depreciable basis of assets. It also addresses adjustments for federal Section 179 recapture income or gains/losses from asset dispositions where a New Jersey depreciation adjustment was previously required.

For businesses subject to the Corporation Business Tax, adjustments for federal Section 179 and bonus depreciation are typically reported on Schedule S-Part II (B) of the Corporation Business Tax return. This schedule facilitates the necessary add-backs and subtractions to reconcile federal taxable income with New Jersey’s distinct tax base.