Decoupling from Federal Income Tax Laws
Generally, Maryland law conforms to changes to federal income tax laws, unless either of the following decoupling actions occurs:
- If the Maryland legislature enacts new tax legislation that does not follow an amendment to the Internal Revenue Code, then decoupling will occur. The Maryland General Assembly meets every year for 90 days, from mid-January through mid-April (not including special sessions).
- If the Comptroller of Maryland determines that the impact of an amendment to the Internal Revenue Code on Maryland income tax revenue for the fiscal year that begins during the calendar year in which the amendment is enacted will be greater than $5 million, then decoupling will automatically occur for that taxable year.
Chapter 587, Acts of 2007
Chapter 587, Acts of 2007, amended Tax-General Article §10-210.1 to clarify that the Maryland is "decoupled" from the increased expensing allowed under Section 179 of the Internal Revenue Code as enacted by the federal Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA). Previously, the state decoupled from increasing Section 179 expensing allowed by the federal Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) and the American Jobs Creation Act (AJCA) of 2004. Accordingly, taxpayers are required to make an adjustment to their Maryland adjusted gross income to reflect the changes made to the maximum aggregate cost of expensing enacted by JGTRRA, AJCA and TIPRA.
Prior to JGTRRA, businesses could expense up to $25,000 under Section 179. The amount that could be expensed was reduced on a dollar-for-dollar basis by the amount by which the cost of qualifying property exceeded $200,000. Therefore, capital investments over $225,000 did not qualify. For Maryland tax purposes, these pre-JGTRRA limits are still in effect for tax year 2007.
JGTRRA amended Section 179 to increase the maximum amount of expensing to $100,000 and the phase-out to $400,000, allowing purchases of qualifying property up to $500,000 in cost to qualify. JGTRRA applied to tax years 2003 through 2005. AJCA extended JGTRRA's provisions to tax year 2006 and 2007, while TIPRA extended increased expensing for small businesses to tax year 2008 and 2009.
The federal Small Business and Work Opportunity Tax Act of 2007 (SBWOTA) was signed into law on May 25, 2007. It increases the maximum amount of expensing to $125,000 and the phase-out to $500,000, beginning in tax year 2007 and extending through tax year 2010. Pursuant to Tax-General Article §10-108, Maryland is "decoupled" from the increased expensing provisions of SBWOTA for tax year 2007.
For Maryland tax purposes, taxpayers are only allowed to expense up to $25,000, reduced dollar-for-dollar by the amount over $200,000, of the cost of depreciable tangible personal property that is purchased for use in the active conduct of a trade or business for tax year 2007.
Chapter 587, Acts of 2007, became effective July 1, 2007, and applies to all taxable years beginning after December 31, 2006.
Budget Reconciliation and Financing Act of 2004
The Budget Reconciliation and Financing Act of 2004 made permanent Maryland's decoupling from costs that a taxpayer may treat as an expense under Section 179 of the Internal Revenue Code.
In addition, BRFA 2004 defines heavy duty SUVs and adopts IRS depreciation deduction limits, as if these vehicles were rated at 6,000 pounds or less. The American Jobs Creation Act of 2004 changed the federal depreciation for heavy duty SUVs placed in service after October 23, 2004, which, in most cases, results in a decoupling modification on the Maryland return.
Budget Reconciliation and Financing Act of 2002
The Budget Reconciliation and Financing Act of 2002 (BRFA) provided for a decoupling from federal income tax law for Maryland purposes with regard to two components of the Job Creation and Worker Assistance Act of 2002:
- Special 30 percent depreciation allowance.
- Five-year net operating loss carryback.
Some provisions of BRFA require decoupling from two components of the Jobs and Growth Tax Relief and Reconciliation Act of 2003:
- Special 50 percent depreciation allowance.
- Expanded federal Section 179 expensing.
For more information, see Administrative Release No.38, Decoupling from Federal Income Tax Laws.