If a corporation modified an asset's Nebraska basis because of a bonus depreciation or enhanced Section 179 addback, can it also take the 20%-per-year recovery deduction?

Plain-English summary

In the early 2000s Nebraska decoupled from two federal write-offs -- bonus depreciation and the enhanced Section 179 expensing -- by requiring taxpayers to add back part of those deductions and then recover the added-back amount later. This ruling (which supersedes Revenue Ruling 24-06-1) explains that a taxpayer cannot get the benefit twice.

The addback-and-recovery mechanism:

• Bonus depreciation -- for tax years 2000 through 2005, Neb. Rev. Stat. § 77-2716(9) required corporations to increase federal taxable income by 85% of the bonus depreciation claimed federally. The added-back amount is then subtracted at 20% per year over five years (amounts added back in 2000-2002 start being subtracted in the first tax year beginning on or after January 1, 2005; amounts added back in 2003-2005 start with the first tax year beginning on or after January 1, 2006).
• Enhanced Section 179 expense -- for tax years 2003 through 2005, § 77-2716(10) required adding back the enhanced Section 179 deduction, again recovered at 20% per year over five years, starting with the first tax year beginning on or after January 1, 2006.

The problem the ruling fixes. Because the addback is recovered through that separate 20%-per-year subtraction, no Nebraska adjustment should have been made to the asset's basis, to its ongoing (non-bonus) depreciation, or to the gain or loss on disposition. Some corporations instead modified the asset's Nebraska basis and computed standard Nebraska depreciation on the modified basis -- which already recovers part of the added-back amount each year over the asset's life.

The conclusion. A corporation that used that modified-basis method will not also be allowed the 20%-per-year deduction of the previously added-back amount, because taking both would claim the same deduction twice -- an unintended windfall. Instead, such a corporation must continue the modified Nebraska depreciation method until the asset is fully depreciated or disposed of. If the asset is disposed of before it is fully depreciated on the modified Nebraska schedule, the federal gain or loss must also be modified for Nebraska. Documentation supporting any adjustment to federal depreciation or federal gain/loss must be attached to the Nebraska return. These provisions also apply to individuals and fiduciaries.

What this means for you

Corporations that modified an asset's Nebraska basis for a bonus depreciation or Section 179 addback

You cannot also claim the 20%-per-year recovery of that addback -- that would double-count it. Keep computing Nebraska depreciation on the modified basis until the asset is fully depreciated or disposed of, and if you sell it early, modify the federal gain or loss for Nebraska too. Attach documentation supporting the adjustments.

Corporations (and individuals/fiduciaries) that handled the addback correctly

If you left the asset's basis, ongoing depreciation, and gain/loss alone and simply recovered the addback at 20% per year over five years, you followed the intended method. The ruling's restriction targets those who instead modified basis and would otherwise take both benefits.

Common questions

Q: Can I both modify the asset's basis and take the 20%/year recovery?
A: No. Recovering the addback through a modified basis already returns part of it each year; also taking the 20%-per-year deduction would claim the same deduction twice, which the ruling disallows as an unintended windfall.

Q: What was supposed to happen to the asset's basis?
A: Nothing. Because the addback is recovered as a separate 20%-per-year subtraction, no Nebraska adjustment should have been made to the asset's basis, its ongoing depreciation, or its gain or loss.

Q: I already used the modified-basis method -- what now?
A: Continue that modified Nebraska depreciation method until the asset is fully depreciated or disposed of; if disposed of early, modify the federal gain or loss for Nebraska and attach supporting documentation.

Q: Does this apply only to corporations?
A: No. The same provisions also apply to individuals and fiduciaries. The ruling supersedes Revenue Ruling 24-06-1.

Citations and references

• Neb. Rev. Stat. § 77-2716(9) -- required adding back 85% of bonus depreciation (tax years 2000-2005), recovered at 20% per year over five years.
• Neb. Rev. Stat. § 77-2716(10) -- required adding back the enhanced Section 179 expense (tax years 2003-2005), recovered at 20% per year over five years.
• Revenue Ruling 24-06-1 -- the earlier ruling this ruling supersedes.
• Applies to individuals and fiduciaries as well as corporations.

Source

• Landing page: https://revenue.nebraska.gov/about/legal-information/revenue-rulings-issued-tax-commissioner
• Original PDF: https://revenue.nebraska.gov/sites/revenue.nebraska.gov/files/doc/legal/rulings/rr240802.pdf

Original ruling text

Revenue Ruling 24-08-2
Corporate Income Tax

Supersedes Revenue Ruling 24-06-1

October 6, 2008

Bonus Depreciation and Enhanced Section 179 Expense DeductionS
Issue:
Can corporations that improperly modified the basis of an asset for Nebraska purposes because a
portion of the bonus depreciation deduction or enhanced Section 179 expense deduction claimed
on their federal returns was required to be added back, deduct the amount of bonus depreciation or
enhanced Section 179 expense previously added back?
Conclusion:
Any corporation which modified the basis of an asset due to the bonus depreciation or enhanced
Section 179 expense deduction added back, and calculated its standard depreciation expense for
Nebraska on such modified basis, will not be allowed to take the deduction (20% per year over a
five tax year period) of the bonus depreciation or enhanced Section 179 expense previously added
back.
Analysis:
For tax years 2000 through 2005, corporate taxpayers are required by Neb. Rev. Stat. §77-2716(9)
to increase federal taxable income by eighty-five percent of any bonus depreciation claimed on
their federal income tax returns. For bonus depreciation added back in tax years 2000 through
2002, twenty percent of the total amount previously added back may be subtracted in the first
taxable year beginning on or after January 1, 2005, and twenty percent in each of the following
four tax years. For bonus depreciation added back in tax years 2003 through 2005, twenty percent
of the total amount previously added back may be subtracted in the first taxable year beginning on
or after January 1, 2006, and twenty percent in each of the following four tax years.
For tax years 2003 through 2005, corporate taxpayers are required by Neb. Rev. Stat. §77-2716(10)
to increase federal taxable income by the amount of the enhanced Section 179 expense deduction
claimed on their federal income tax return. Twenty percent of the total enhanced Section 179
expense deduction previously added back may be subtracted in the first taxable year beginning on
or after January 1, 2006, and twenty percent in each of the following four tax years.
Since the amount added back is allowed as a deduction in later tax years, no Nebraska adjustments
should have been made to an asset’s basis, the depreciation allowed (other than bonus depreciation
or enhanced Section 179 expense), or the gain or loss on the disposition of the asset.
The use of such a modified depreciation method for Nebraska results in recovering part of the
bonus depreciation or enhanced Section 179 expense added back in each year of the life of the

Nebraska Department of Revenue, P.O. Box 94818, Lincoln, Nebraska 68509-4818

Revenue Ruling 24-08-2

October 6, 2008

Page 2 of 2

asset beginning in the year the asset was placed in service. Allowing an additional twenty percent
deduction for the tax years in the “recovery period” would allow the taxpayer to claim the same
deduction twice and result in an unintended windfall for the taxpayer.
Therefore, corporations which modified the Nebraska basis of an asset due to the bonus depreciation
or enhanced Section 179 expense deduction must continue to calculate their Nebraska depreciation
expense using such method until the asset is fully depreciated or the asset is disposed of. If the asset
is disposed of prior to being fully depreciated on the modified Nebraska depreciation schedule,
the federal gain or loss realized on such disposal must also be modified for Nebraska purposes.
Documentation must be attached to the Nebraska corporate return supporting any adjustment to its
federal depreciation expense or its federal gain or loss on the sale of the asset.
The above provisions also apply to individuals and fiduciaries. The provisions of Revenue Ruling
24-06-1 are superseded by this Revenue Ruling.
APPROVED:

Douglas A. Ewald
Tax Commissioner
October 6, 2008