The economic stimulus plan passed by Congress earlier this year includes many provisions aimed to spur reinvestment in capital-intensive businesses like heavy construction.  

The bill provides increased allowances for depreciating new equipment, which offers firms a chance to take advantage of a 30 percent first-year deduction bonus for capital equipment in the year it is placed into service (assuming the purchase is made between Sept, 10, 2001, and Sept. 10, 2004).  

From a federal tax standpoint, this was good news for construction companies.  State governments, however, were not pleased with this measure and several have taken actions that contractors need to be aware of.

States React Quickly
The states argued that this measure will significantly undermine their ability to collect tax revenue in current and upcoming fiscal years.  Faced with their own budgetary shortfalls, many responded by decoupling their business depreciation rules from the federal rules for the period of time that the bonus depreciation is in effect.  

At the very least, this creates a tax-reporting hazard for contractors by placing the onus on the contractor to keep track of which states adopted the federal precedent and which have decoupled.  Under most circumstances, states try to conform to federal tax rules to make compliance and administration simpler.  

But according to a report from the Center on Budget and Policy Priorities, a research organization and policy institute that studies a range of government policies and programs, 10 states that previously followed federal rules have now decoupled from the bonus depreciation provision. Those states are Arkansas, Georgia, Idaho, Indiana, Iowa, Massachusetts, Mississippi, Nebraska, Texas, and Virginia, as well as the District of Columbia.  

In addition, Connecticut, Maryland, Wisconsin, Arizona, Illinois, Ohio, Minnesota, New Jersey, Pennsylvania, and Vermont have either advanced legislation to decouple or have indicated that they are considering such a measure.

Because there are now different sets of depreciation rules, many contractors will have to make an adjustment between their federal and state returns.  Those contractors that work in California are probably already aware of the adjustments necessary because California previously had its own depreciation schedules.  Multi-state operators need to pay special attention to the changing rules.

Some Sooner Than Others
It is important to remember that even in states not adopting the bonus depreciation, contractors will still recover the full basis of their investment over the life of the asset.  

The taxpayer ultimately receives the same tax benefit, but contractors operating in some states will receive full benefits sooner rather than later, depending on whether or not those states have adopted the federal rules.