Bonus Depreciation and Enhanced Section 179 Expense Deduction for Nebraska Income Tax Purposes

Federal Provisions

Generally, the Internal Revenue Code allows taxpayers who purchase qualified property during certain tax periods an additional thirty percent (30%) or fifty percent (50%) bonus depreciation deduction and/or an enhanced Section 179 expense deduction. Federally, the basis of the property and the depreciation allowances in the year of purchase and in later years are adjusted to reflect the additional first-year depreciation and/or expense deduction.

Nebraska Provision

The Nebraska Legislature passed LB 1085 in 2002 and LB 596 in 2003, requiring a portion of the bonus depreciation and the entire enhanced Section 179 expense to be added back and then reclaimed in later years for Nebraska tax purposes.

Overview of Special Bonus Depreciation and Enhanced Section 179 Expense Deduction

For income tax returns filed after September 10, 2001, and before tax year 2006, federal adjusted gross income or, for corporations and fiduciaries, federal taxable income shall be increased by eighty-five percent (85%) of the amount of any federal bonus depreciation received under the federal Job Creation and Worker Assistance Act of 2002 or the federal Jobs and Growth Tax Relief Reconciliation Act of 2003, under section 168(k) or section 1400L of the Internal Revenue Code of 1986, as amended, for assets placed in service after September 10, 2001, and before December 31, 2005.

For tax years 2003 through 2005, federal adjusted gross income or, for corporations, federal taxable income shall be increased by one hundred percent (100%) of any amount of federal enhanced section 179 expense deduction claimed for each tax year.

For tax years beginning on and after January 1, 2006, taxpayers are not required to add-back any bonus depreciation or enhanced section 179 expense deduction taken on their federal return.

Recovery of Nebraska Bonus Depreciation and Enhanced Section 179 Expense Deduction Previously Added-back

(Individuals, C corporations)

For bonus depreciation added-back in tax years 2000 through 2002, twenty percent (20%) of the total amount may be subtracted in the first taxable year beginning or deemed to begin on or after January 1, 2005, and twenty percent in each of the four following taxable years.

For bonus depreciation and enhanced section 179 expense deduction add-back in tax years 2003 through 2005, twenty percent (20%) of the total amount may be subtracted in the first taxable year beginning or deemed to begin on or after January 1, 2006, and twenty percent (20%) in each of the four following taxable years.

Partnerships and S corporations cannot take a deduction for any bonus depreciation or enhanced section 179 expense deduction previously added-back. Any such add-back was required to facilitate the calculation of withholding for nonresident individual partners or shareholders.

A partner or shareholder, which added-back bonus depreciation or enhanced section 179 expense deduction on its Nebraska income tax return, may recover such amount(s) as indicated in the above "Recovery" section. A nonresident individual partner or shareholder who chose to have the partnership or S corporation withhold on his or her Nebraska income and who did not file a Nebraska Individual Income Tax Return for such year(s) may recover the bonus depreciation and enhanced section 179 expense deduction previously added-back by the entity in calculating his or her Nebraska income and withholding. To recover the amount(s) previously added-back, the nonresident individual must file a Nebraska Individual Income Tax Return for each recovery year. The amount recoverable in each tax year is addressed in the above "Recovery" section.

Nebraska's treatment of disposed assets. A taxpayer which sells or otherwise disposes of an asset on which it previously added back bonus depreciation or Section 179 expense should not compute a separate basis for such asset for Nebraska tax purposes. Instead, Nebraska recognizes the federal basis. The bonus depreciation and enhanced Section 179 expense deduction on such assets must be recovered in the same manner and at the same time as the bonus depreciation and enhanced Section 179 expense deduction on all other assets.

Taxpayers who cease to do business in Nebraska. A corporation which goes out of business or ceases to do business in Nebraska may only recover twenty percent (20%) of the bonus depreciation and enhanced Section 179 expense deduction in each recovery year in which the corporation is "active" in this state. Any remaining bonus depreciation or enhanced Section 179 expense deduction cannot be reclaimed. In addition, individual taxpayers who no longer have a filing requirement in this state may only recover bonus depreciation or enhanced Section 179 expense deductions up to and including the last year filed.

C corporations subsequently electing S corporations status cannot deduct any bonus depreciation or enhanced section 179 expense deduction previously added-back by the C corporation. However, the shareholders may subtract their share of any bonus depreciation or enhanced Section 179 expense deduction previously added back by the C corporation.

In order for the shareholders to take such a subtraction, the various tax returns should be completed as follows. The S corporation will not reduce its income for any bonus depreciation or enhanced Section 179 expense deduction previously added back by the C corporation. When completing the Nebraska K-1 equivalent for a shareholder, the S corporation will report, each year, the amount of bonus depreciation or enhanced Section 179 expense deduction that would have been subtracted by the C corporation (had it still been in existence) and which was attributable to the shareholder based on the percent of income received by the shareholder. In addition, if the S corporation is taxable in one or more other states, the enhanced Section 179 expense deduction attributable to the shareholder will be multiplied by the S corporation's apportionment factor. The S corporation may not deduct the bonus depreciation or enhanced Section 179 expense deduction when calculating Nebraska withholding for a nonresident individual shareholder who did not file a Form 12N. Shareholders may use the bonus depreciation and enhanced Section 179 expense deduction information provided by the S corporation to take a deduction on their Nebraska individual income tax return. As indicated above, if the S corporation is taxable in another state, the shareholder's deduction is limited to his or her share of the bonus depreciation and enhanced Section 179 expense deduction multiplied by the S corporation's Nebraska apportionment factor. A copy of the Nebraska K-1 equivalent, including the bonus depreciation and enhanced Section 179 expense deduction information must be attached to the shareholder's income tax return.

Fiduciary. An estate or trust may recover the undistributed bonus depreciation it previously added back in the manner indicated in the "Recovery" section above. An estate or trust which is terminated may only recover twenty percent (20%) of the undistributed bonus depreciation in each recovery year prior to and including the termination year. Any remaining undistributed bonus depreciation cannot be reclaimed.

Individual beneficiaries may recover distributed bonus depreciation in the same manner as partners of a partnership and shareholders of an S corporation. Refer to the above information on partnerships and S corporations for details.

For previous year add-back instructions, click on Tax Forms on the Home Page and see the specific tax year's form and its attached instructions.