Contact Information

States Cool To Federal ‘Stimulus,’ CCH Says

(RIVERWOODS, ILL., September 5, 2002) – Federal action to stimulate the economy with tax breaks for business has been too much for many states to swallow, according to CCH INCORPORATED (CCH), a leading provider of tax and business information and software. The Job Creation and Worker Assistance Act of 2002 (JCWA), signed into law by President Bush on March 9 of this year, created several changes to the tax laws that were retroactive to the 2001 tax year, affecting 2001 tax returns that had already been filed or were about to be filed. Since most states use the Internal Revenue Code as the base for their state income taxes, the federal tax cuts threatened to reduce state revenues, as well, but state legislatures have, for the most part, forestalled that possibility.

Businesses – from large corporations to self-employed individuals – received the lion’s share of the tax breaks under the JCWA. The two main tax-saving provisions were a temporary 30% depreciation "bonus" and a five-year carryback period for net operating losses (NOLs). Both applied retroactively to affect 2001 tax returns.

To qualify for bonus depreciation, property must be new and acquired after September 10, 2001 and before September 11, 2004 and it must be placed in service generally before January 1, 2005. The NOL provision applies to 2002, as well.

The federal stimulus package as passed was much smaller than the one originally proposed by the Bush administration, but its implications for state budgets were still too large for many state legislators to go along with, according to John Logan, JD, CCH senior state tax analyst.

"With many states already facing budget shortfalls because of the slowdown in the economy, the prospect of losing additional tax dollars was very unattractive to their legislatures," Logan said.

Through legislative action or inaction, a majority of states have declined to fully adopt both the depreciation "bonus" and the NOL provisions. As a result, more tax dollars will flow into straitened state treasuries, but businesses will face increased complexity as they account for their income and assets differently for state and federal purposes.

The depreciation "bonus" in the JCWA allows taxpayers an additional first-year depreciation deduction equal to 30% of the adjusted basis of qualified property. On federal returns, the 30% "bonus" depreciation is allowable for regular and alternative minimum tax (AMT) purposes for the tax year in which the property is placed in service.

The basis of the property and the depreciation allowances in the year of purchase and in later years must be adjusted to reflect the additional first-year depreciation deduction.

Only thirteen states have laws that conform to the new federal provisions on "bonus" depreciation. Twenty-four states plus the District of Columbia have not conformed. Of the remaining nine states with personal income taxes, corporate income taxes or other business taxes that are substantially similar to corporate income taxes, most require taxpayers to add back a portion of the federal depreciation "bonus" when figuring their state tax, but then allow for the remainder of the "bonus" to be taken in future years. South Dakota, which does not have a corporate income tax but which does impose a financial institutions franchise tax, allows an additional depreciation subtraction for the excess of the state undepreciated tax basis over the federal depreciable basis.

"Businesses in states that chose not to conform fully with the depreciation ‘bonus’ will find themselves having to keep multiple sets of books on the current cost basis for each asset that qualifies for the federal provision," Logan noted.

Ordinarily, federal taxpayers can carry back NOLs two years. The new law temporarily extends that general carryback period from two to five years. In addition, certain NOLs that are ordinarily carried back for three years, such as casualty losses, can also be carried back five years under the JCWA.

This enhanced federal carryback applies only to losses that arise in tax years ending in 2001 and 2002. Taxpayers are given one opportunity to elect out of this treatment and their election is final. The new law also allows a taxpayer’s NOL deduction to reduce its alternative minimum taxable income (AMTI) up to 100%.

Only seven states have adopted the NOL provisions and only four of those – Alaska, North Dakota, Oklahoma and Vermont – have adopted the provisions as written in the federal law. Delaware, New York and Wisconsin adopted the basic NOL provision but limited the amounts that can be carried back.

Of the remaining jurisdictions, 40 states and the District of Columbia have not adopted the NOL provisions thus far, while Nevada, Washington and Wyoming don’t impose corporate or personal income taxes.

The fact that a state is out of conformity with the JCWA now doesn’t mean that it will necessarily remain so.

"A number of states ordinarily synchronize their laws to the federal provisions as of January 1 of each year. Since the JCWA was passed in March of this year, in those states that are out of conformity simply because they synchronize with the IRC as of January 1, the JCWA could become a part of state law in January 2003. But, with state legislatures scrambling for dollars, it may not be ‘business as usual," Logan observed.

A summary of states’ conformity to the new provisions is included at the end of this release.

About CCH INCORPORATED

CCH INCORPORATED, headquartered in Riverwoods, Ill., was founded in 1913 and has served four generations of business professionals and their clients. The company produces more than 700 electronic and print products for the tax, legal, securities, insurance, human resources, health care and small business markets. CCH is a wholly owned subsidiary of Wolters Kluwer North America. The CCH web site can be accessed at cch.com. The CCH tax and accounting web site can be accessed at tax.cchgroup.com.

nb-02-98

For a detailed analysis of state reaction to the JWCA, see the CCH Tax Briefing at http://tax.cchgroup.com/specialreport/.