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Major conformity issues income to 30% of adjusted taxable on a pre-apportioned basis. Where an
Four of the most significant state con- income (ATI) plus floor plan financing addback is required, the Massachusetts
formity issues resulting from the TCJA interest for tax years beginning in 2018 business interest expense deduction
and CARES Act relate to the treatment and thereafter. The CARES Act tem- is determined after first reducing the
of: (1) bonus depreciation; (2) the Sec. porarily increased the ATI percentage current-year business interest expense
163(j) business interest expense deduc- threshold from 30% to 50% for tax years by the amount of the required addback.
tion limitation; (3) the Sec. 179 cost re- beginning in 2019 and 2020 and allowed Any amount of business interest expense
covery deduction; and (4) net operating taxpayers to elect to use their 2019 ATI that is disallowed due to a Massachu-
losses (NOLs). for purposes of calculating their allow- setts addback may not be deducted in
Bonus depreciation deduction: able interest expense deduction in 2020. the current year or carried forward.
The TCJA amended Sec. 168(k) to As for the state tax implications of Sec. 179 cost recovery deduction:
provide 100% bonus depreciation for Sec. 163(j), some states have decoupled Under Sec. 179, taxpayers may deduct
property placed in service after Sept. 27, from Sec. 163(j) and allow a 100% busi- the cost of certain property as an ex-
2017, and before Jan. 1, 2023. The bonus ness interest deduction. Other states pense when the property is placed in
depreciation rate then phases down for conformed to the TCJA’s 30% limitation service. For tax years beginning after
the next five years as follows: 80% in but did not conform to the temporary 2017, the TCJA increased the maxi-
2023, 60% in 2024, 40% in 2025, 20% in 50% limitation under the CARES mum Sec. 179 expense deduction from
2026, and 0% beginning with the 2027 Act. A third group of states conformed $500,000 to $1 million, and the phase-
tax year. The CARES Act included a to the CARES Act and temporarily out threshold was increased from $2
retroactive technical correction to make increased the limitation to 50%. As a million to $2.5 million. These amounts
qualified improvement property (QIP) result, a state’s Sec. 163(j) limitation and are indexed for inflation for tax years
eligible for the TCJA’s 100% bonus de- carryforward to future years may differ beginning after 2018. The deduction ap-
preciation provision. from the federal limitation, in some plies to tangible personal property such
Given the significant effect on the tax cases dramatically. Separate calculations as machinery and equipment purchased
base in the year in which taxpayers pur- may be required in separate company for use in a trade or business and, if the
chase qualifying property, many states do reporting states and those states where taxpayer elects, qualified real property.
not conform to the TCJA’s 100% bonus the filing group differs from the federal While many states conform to the
depreciation, either by rejecting the con- consolidated group. increased expensing limitation, there are
cept out of hand or applying their own Taxpayers also must consider related- notable exceptions, including California,
state-specific depreciation method. For party addback rules and their interplay Kentucky, Maryland, New Jersey, and
those states that do follow the federal with the Sec. 163(j) limitation. In some North Carolina. If a state conforms to
approach, the phaseout of 100% bonus situations, a related-party addback may the current version of Sec. 179 with the
depreciation beginning in 2023 will be substantially reduce or eliminate the increased limitations, taxpayers are more
an issue to watch. These states will need available interest expense deduction. likely to use this provision because the
to decide whether to continue to follow Taxpayers need to determine how to cal- potential deduction is much greater. For
federal law and phase out bonus depre- culate the interest deduction when both this reason, the deduction becomes more
ciation or decouple from federal law and provisions apply to interest that is paid. attractive for larger businesses in the year
retain a full bonus depreciation policy. A few states have enacted legislation or in which the asset is purchased.
Oklahoma addressed this issue in issued guidance on the related-party ad- In 2022, Arkansas enacted legisla-
2022 by enacting legislation providing dback issue. In states such as Alabama, tion changing its conformity to Sec. 179
taxpayers with the option of immediate Illinois, New Jersey, and Pennsylvania, (Ark. Act 2 (S.B. 1), 2022 Third Extra.
and full expensing for qualified property the Sec. 163(j) limitation is applied be- Session). For tax years beginning on or
and QIP for tax years beginning after fore considering the state related-party after Jan. 1, 2022, Arkansas adopts Sec.
Dec. 31, 2021 (Okla. H.B. 3418, Laws interest limitations. 179 as in effect on Jan. 1, 2022, for pur-
2022). Other states that wish to main- Massachusetts, however, follows a poses of computing state tax liability for
tain front-loaded deductions may follow different approach (Mass. Dep’t of Rev., property purchased in tax years begin-
a similar approach. Technical Information Release 19-17 (Dec. ning after 2021. Prior to this legislation,
Interest deduction limitation: 18, 2019)). The addback adjustments Arkansas had adopted Sec. 179 as in
Under Sec. 163(j), the TCJA generally to a member’s separately determined effect on Jan. 1, 2009, for property pur-
limits the deduction for net business Massachusetts business interest expense chased in tax years beginning after 2013.
interest expense in excess of interest must be made at the separate-entity level This legislation should benefit taxpayers

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