State Considers Eliminating Bonus Depreciation

November 10, 2011 - 4:23pm

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A proposed package of tax incentives currently being considered by the Illinois General Assembly includes eliminating tax relief known as “bonus depreciation” already provided to businesses for 2011 through a federal tax change that the State currently conforms to.

Among other provisions, Senate Bill 397 provides tax credits to specific companies that have publicly stated they are considering leaving the state and an increase in the earned income tax credit (EITC) from 5% to 10% in 2012 and 15% in 2013. The bill proposes partially paying for these tax changes, also referred to as “tax expenditures,” by retroactively recouping the bonus depreciation credit, a tax incentive tied to capital investments.

Bonus depreciation is a federal rule that allows businesses to take an upfront deduction from their annual taxable income for the cost of capital investments in machinery or equipment. The amount of corporate income that is taxable in Illinois conforms to the federal tax code, so the State experiences reduced taxable corporate income associated with these sorts of changes in the federal tax code. The bonus depreciation benefit for corporations, also called “expensing,” was passed by the U.S. Congress as part of a package of tax cuts added to a bill to extend unemployment payments for individuals whose unemployment benefits were set to expire at the end of 2010. The change allows businesses to deduct from their taxable income 100% of the cost of equipment and machinery purchased and put into operation between September 8, 2010 and December 31, 2011. In the 2012 calendar year, the law allows businesses to continue to reduce their taxable income but only by 50% of the cost of capital equipment purchases. Normally businesses must spread out depreciation of their capital investments incrementally over the entire useable life of the equipment. Federal bonus depreciation was previously enacted by Congress in 2003 for 30% of the cost of capital equipment investments and in 2005 and subsequent years for 50% of the cost.

In 2003 Illinois decoupled from the 30% federal bonus depreciation and from the 50% bonus depreciation in 2005. However, these provisions in the Illinois tax statute do not apply to the 100% bonus depreciation because it specifically instructs only corporations that have taken either a 30% or 50% bonus depreciation deduction to add the amounts back into their taxable income for their Illinois tax filing. Without the new language added, as proposed in SB397, the 100% bonus depreciation does not need to be added back into the company’s taxable income. Although the Governor’s FY2012 recommended budget proposed decoupling from the 100% bonus depreciation, the legislature did not take action on the change. The Governor’s office projected that not decoupling from this federal provision would reduce corporate income tax receipts by between $50 million and $115 million in FY2011 and between $520 million and $615 million in FY2012. As proposed in the current tax incentive measure, the decoupling is reported to be worth $570 million in additional revenues for FY2012 and $340 million in FY2013.

If the decoupling is now enacted retroactively as proposed, businesses that have already taken advantage of the tax credit will have to repay to the State amounts already credited during the previous year. In the long term companies will be able to recoup the lost benefit over the usable life of the equipment through normal annual capital depreciation rules. 

Although the House Revenue Committee took testimony regarding the bill earlier this week, the bill has reportedly stalled. It could be taken up during a special session that will be held on November 29

The treatment of the current federal bonus depreciation statute and past versions has varied greatly from state to state. A full list describing historic trends in decoupling or conforming to bonus depreciation is available here


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