New York (Aug. 7, 2003) -- Recent federal legislation liberalizing depreciation and business expensing rules creates a potential tax trap for those who live in states which have adopted some form of the federal rules but whose business or rental property is in a state which hasn't, according to a New York CPA.

 The same trap applies to those who live in a state that hasn’t adopted some form of the federal rules but whose business or rental property is in a state that has.

Some business owners who take advantage of these rules will cost themselves more in state taxes than they save in federal taxes, according to Jeffrey Pretsfelder, CPA.

"When an individual has a business or rental property in a state other than his resident state, he is subject to tax on the income from the business or rental property in both the nonresident state and the resident state," explained Pretsfelder, a state tax specialist with RIA, a Thomson business.  "He then gets a credit on his resident state return, so that he doesn’t end up paying two state taxes on the same income. The trap results from the fact that that credit equals the lower of the tax paid to the other state or the tax that the resident state imposes on the same income."

"When you take bonus depreciation or business expensing, you get a high depreciation deduction in the year you buy the property and lower or no deductions in future years," said Pretsfelder. "If either of the two states allows bonus depreciation/expensing and the other state doesn’t, you will be punished because the lower of the two amounts will end up being lower than it would have been had both states followed the same rules.  In other words, your credit will be lowered because of the mismatch between the two states’ rules."

-- Roger Russell

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