Tax & Assurance Guidance

Key Issues Associated with Tracking Fixed Assets for Multi-State and International Companies

Posted on September 14, 2017 by

Margaret Amsden

Margaret Amsden

Share This

Share on facebook
Share on twitter
Share on linkedin
Share on email

Businesses operating in multiple states or across international borders should be aware of common issues associated with tracking fixed assets and related depreciation. If these differences are not acknowledged these common issues can result in unexpected tax liabilities.

Section 179 & Bonus Depreciation

The starting point for calculating a company’s state tax liability begins with its federal taxable income. This is then adjusted for a variety of modifications such as state tax expense or depreciation. Depreciation expense is the most common modification encountered when calculating a state’s taxable base by virtually every company doing business on a multi-state basis.  These adjustments are specifically caused by the expensing election under Internal Revenue Code Section 179 and bonus depreciation.  The adjustment exists because many states do not conform to these federal depreciation laws.

For federal purposes, Section 179 allows for the immediate dollar-for-dollar expensing of qualified property up to $510,000 (2017) subject to a dollar-for-dollar phase out in excess of the limit. The expensing is granted once purchases exceed $2,030,000. This expensing election, which has varied over time, was made permanent through the enactment of the Protect Americans from Tax Hike (PATH) Act in December 2015. Although permanent for federal calculations, several states do not conform to the enacted federal amount. For example, California allows a maximum Section 179 deduction of $25,000. As a result, when computing California taxable income, any amount expensed under Section 179 in excess of $25,000 must be adjusted (added back) in the year the asset is placed in service. The amount also must be depreciated (subtracted out) in future years in order to arrive at the California taxable base.

Similarly, bonus depreciation, which allows for the immediate first year deduction of 50% on eligible property placed in service during a year for federal purposes, is treated differently by some states.  As a result, adjustments must be made for states that do not conform to the federal bonus depreciation rules under Section 168(k).

Impacts on Gain/Loss at Disposal – Gain & Recapture

As a result of the adjustments between federal and state tax laws, complications also arise when eligible property is disposed of and, as a result of such modifications, the net tax value of the underlying property differs for state purposes. This difference in net tax value will result in the capital gain (loss) as well as depreciation recapture.  For those unfamiliar with the concept of depreciation recapture, it results from the sale of business property at a gain that has been previously depreciated. Since the taxpayer has previously benefited from an ordinary deduction through depreciation, a portion or possibly the entire gain, must be recognized as ordinary income as opposed to capital gain.

Difference in Depreciation of Asset Used Domestically and Internationally

Lastly, it is important to note that property located outside the US must use a different method of cost recovery than property located within the US.  Property being used internationally is required to be recovered using the Alternative Depreciation System (ADS). This depreciation method is calculated using the straight-line method while disregarding salvage value, resulting in a slower recovery of the assets cost.  This method differs from the how companies depreciate assets within the US, which uses an accelerated recovery method under the General Deprecation System (GDS) and takes less time than the ADS.

Knowledge of the differences in depreciation rules across jurisdictions, both international and multi-state, is the first step to ensuring taxpayers are achieving their maximum tax benefit. If one of the above mentioned adjustments applies to your company, Clayton & McKervey can ensure companies are meeting compliance requirements while simultaneously maximizing tax opportunities.

Margaret Amsden

Shareholder

Leading the firm’s private client services group, Margaret’s strategic & educational approach fosters a culture of learning among clients and colleagues.

Related Insights

Tax & Assurance Guidance

Foreign Tax Withholding: What You Need to Know

Posted on April 26, 2022 by

Rob Cheyne
Making service payments to a foreign person is a common cross-border transaction. U.S. taxpayers need to be aware of the applicability of withholding tax and related reporting requirements to ensure they comply and avoid unintended consequences. A U.S. payor must collect withholding tax and remit it to the IRS in the case it is applicable.

Tax & Assurance Guidance

SALT Relief for Partners and S Corps

Posted on February 23, 2022 by

Miroslav Georgiev
With small businesses supporting nearly 47% of U.S. employees, states have been advocating for pass-through entities, operating partnerships and S corporations that have been harshly impacted by the Tax Cuts and Job Act ‘s state and local taxes deduction limit. Recent legislative activity is finally providing relief for many of these businesses. 

Tax & Assurance Guidance

IRS Provides Relief on K-2 and K-3

Posted on February 17, 2022 by

Margaret Amsden
In an attempt to provide more transparency with regard to reporting of foreign activity and/or information to foreign owners, the IRS came out with two new forms: Schedule K-2 (an addendum to the Schedule K) and Schedule K-3 (an addendum to the Schedule K-1). Learn about the latest K-2 and K-3 reporting requirements issued by the IRS.

Sign up for our newsletters

Get general business and industry-specific news and knowledge straight from our accounting specialists.

The Sound of Automation Podcast

The Sound of Automation Podcast

Industrial automation businesses are the driving force behind Industry 4.0, and Clayton & McKervey is here to help.

Insights & Perspectives

Data-driven decision making: 3 key insights for business owners

What does it take to build a data-driven business? For self-reliant leaders who feel they’ve hit a plateau when it comes to scaling a business, adopting a data-driven approach can be a breakthrough success strategy. Using data in a more focused way helps good engineers become good entrepreneurs. It’s about creating balance. Here we take a look at key insights for business owners when using data in decision making.

Read More

The Sound of Automation Podcast

Industrial automation businesses are the driving force behind Industry 4.0, and Clayton & McKervey is here to help.

Skip to content