Does NYS Allow Section 179 Depreciation?

Depreciation is a fundamental accounting concept that allows businesses to recover the cost of certain assets over their useful life, reducing taxable income. Federal Section 179 of the Internal Revenue Code permits accelerated deductions for qualifying business investments. However, state tax laws often differ from federal provisions, leading to questions about how federal depreciation, such as Section 179, applies at the state level.

Understanding Federal Section 179

Federal Section 179 of the Internal Revenue Code allows businesses to deduct the full purchase price of qualifying equipment and off-the-shelf software in the year it is placed in service, rather than depreciating it over several years. This provision aims to stimulate economic growth by encouraging businesses to invest in themselves. Eligible property includes tangible personal property like machinery, equipment, office furniture, computers, and certain real property improvements such as roofs, HVAC, fire protection, and security systems. To qualify, the property must be used more than 50% for business purposes and be “new to you,” meaning it was not previously owned or used by the taxpayer.

For the 2024 tax year, the maximum Section 179 deduction is $1,220,000. This deduction begins to phase out if the total cost of qualifying property placed in service exceeds $3,050,000, and is entirely eliminated once qualified purchases reach $4,270,000. The Section 179 deduction cannot exceed the business’s taxable income for the year, though any unused portion may be carried forward to future tax years. For certain sport utility vehicles placed in service in 2024, the maximum Section 179 expense deduction is capped at $30,500.

New York State Depreciation Rules

New York State generally does not conform to the federal Section 179 expense election or federal bonus depreciation. This non-conformity means that businesses cannot simply adopt their federal Section 179 deduction for New York State tax purposes. Instead, a separate calculation is required to determine the allowable depreciation under state law, necessitating adjustments when preparing state tax returns.

For assets placed in service, New York State generally requires taxpayers to calculate depreciation using the Modified Accelerated Cost Recovery System (MACRS), or methods permitted under Internal Revenue Code Section 167 as it existed on December 31, 1980. This requirement applies even if Section 179 or bonus depreciation was claimed on the federal return. Consequently, businesses must “add back” the federal Section 179 deduction to their federal adjusted gross income or taxable income when computing their New York State tax base. After this addback, businesses then calculate and deduct depreciation according to New York’s specific rules, typically using MACRS.

This mandated difference creates a basis disparity between federal and state tax records for the depreciable assets. The initial federal expensing under Section 179 reduces the federal basis much faster than the New York State basis. Over the asset’s life, this difference reverses, as the New York depreciation deductions continue while the federal deductions may have ceased or significantly decreased. New York State Tax Law, particularly Article 9-A for corporations, outlines these provisions and the necessary modifications.

Calculating State Depreciation Differences

Reconciling federal and New York State depreciation involves a precise calculation to account for the non-conformity. Businesses first determine the total depreciation claimed on their federal tax return, which includes any Section 179 expense or bonus depreciation. Subsequently, they must calculate the depreciation for the same assets as if no Section 179 or bonus depreciation had been elected, using the Modified Accelerated Cost Recovery System (MACRS) or other allowable methods under New York State rules. This involves applying the New York State’s prescribed recovery periods and conventions to the asset’s cost.

The difference between the federal depreciation amount and the New York State calculated depreciation amount results in either an “addback” or a “subtraction” modification. In the year an asset is placed in service, if federal Section 179 was claimed, the federal depreciation will typically be higher than the New York State allowable depreciation. This difference necessitates an “addback” to federal adjusted gross income or taxable income for New York State tax purposes, effectively increasing the state tax base. In subsequent years, as the New York State depreciation continues to be claimed while federal depreciation may have been fully utilized or significantly reduced, the New York State depreciation amount can exceed the federal amount.

These later differences result in “subtraction” modifications, which reduce the New York State tax base. The cumulative effect of these annual adjustments is to ensure that, over the asset’s entire depreciable life, the total depreciation deducted for New York State purposes equals the asset’s cost. This ongoing reconciliation also creates distinct federal and state tax bases for each asset. Businesses must meticulously track these basis differences to accurately compute gain or loss upon the eventual disposition of the asset for both federal and state tax reporting.

Reporting New York State Depreciation Adjustments

Once the depreciation differences between federal and New York State are calculated, these adjustments must be properly reported on the relevant state tax forms. For individuals and pass-through entities, New York State requires the use of specific forms to report these modifications. Form IT-225, New York State Modifications, is a general form used to report additions and subtractions to federal adjusted gross income. For adjustments specifically related to federal bonus depreciation (Section 168(k) property), Form IT-398, New York State Depreciation Schedule, is utilized. Additionally, Form IT-399, New York State Depreciation Schedule, addresses other depreciation adjustments, including those for ACRS/MACRS property from certain periods.

These forms require taxpayers to detail the federal depreciation deduction taken and the corresponding New York State allowable depreciation. The resulting difference, whether an addback or a subtraction, is then carried to the main New York State income tax return, such as Form IT-201 for residents or Form IT-203 for non-residents and part-year residents. For corporations, adjustments related to depreciation are typically reported on Form CT-399, Depreciation Adjustment Schedule. Properly completing these forms ensures compliance with New York State’s tax laws, reflecting the state’s non-conformity to certain federal depreciation provisions.