States May React Unexpectedly to Expensing Under New Tax Law

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By Che Odom

States that normally conform automatically to federal tax changes may not need to lift a finger to avoid full, immediate expensing of large equipment purchases—a key element of the new 2017 tax law.

That’s because the provision will replace one already on the books—one many states already opt not to follow.

“The interesting thing is that regardless of whether they are rolling or fixed conformity states, it won’t matter since I think they will still be decoupled from IRC 168(k),” Steve Wlodychak, a principal with Ernst & Young LLP’s Indirect Tax Practice, told Bloomberg Tax Dec. 22.

A revised Internal Revenue Code Section 168(k), one of a number of provisions of the new federal tax law (Pub. L. No. 115-97), will allow businesses to fully and immediately deduct the cost of certain equipment purchased after Sept. 27, 2017, and before Jan. 1, 2023. After that, the percentage of cost that could be immediately deducted would gradually phase down.

Many states have already decoupled from Section 168(k)'s 50 percent bonus depreciation because to link to that provision would cost states money. Full expensing also would hurt state revenue, and that’s why many states may not conform to it, Joseph Bishop-Henchman, executive vice president at the Tax Foundation, said during a meeting of the National Conference of State Legislatures last month in Miami Beach.

Taxpayers, however, may feel very differently. Signing the tax bill Dec. 22 in the Oval Office, President Donald Trump said companies would go “wild” about being able to immediately write of the full cost of equipment they buy.


States conform to the federal code to make administering their tax systems easier, as well as to make compliance easier for taxpayers. The vast majority of states conform as soon as a change occurs to the federal code or on a specific date.

Though rolling-conformity states “immediately conform to the changes to the new federal base, their existing decoupling from IRC 168(k) likely carries over under federal tax reform and, thus, they wouldn’t have to do anything to decouple,” Wlodychak said.

The same goes for states that conform as of a specific date, he said, adding that “the decoupling from the IRC 168(k) provision will carry over.”

Taxpayer Impact

Many states decoupled from bonus depreciation because of its impact on state taxable income, which suggests they will do the same with full expensing, Mark Nebergall, president of the Software Finance and Tax Executives Council, told Bloomberg Tax.

“Two-thirds of states do not conform to the 50 percent bonus depreciation,” Karl Frieden, vice president and general counsel of the Council On State Taxation, said Nov. 18 at the NCSL meeting.

Section 168(k)'s impact on taxpayers will depend on what states do in response to the new 2017 tax law, Nebergall said.

“It could result in complexity if taxpayers have to calculate depreciation differently for federal and state purposes, and could cause different bases in assets for federal and state tax purposes,” he said.

To contact the reporter on this story: Che Odom at

To contact the editor responsible for this story: Ryan C. Tuck at

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