The United States allows for depreciation of tangible and real property and allows for amortization of purchased intangible property for assets used in a trade or business. Depreciation is calculated based on a set number of years for the useful life of the asset. Depreciation for assets used in the United States can be accelerated under the double-declining balance method. Additionally, assets placed in service in the current year may be eligible for one-time additional deduction to further accelerate depreciation.
Below are the general lives used for the assets described:
|Commercial buildings||39 years|
|Residential buildings||27 – 1/2 years|
|Manufacturing equipment||5 or 7 years|
|Computer equipment||5 years|
|Computer software||3 years|
|Automobiles (subject to significant dollar limitation for tax deduction)||5 years|
Land is not depreciable.
Acquired intangible property is generally amortized on a straight-line basis over 15 years.
Some states follow the federal rules for depreciation while other states require adjustments. Generally, a one-time additional deduction in the year in which assets are placed in service is not allowed for state purposes.
The United States allows a credit against a taxpayer’s federal income tax liability for the amount of foreign taxes paid, subject to limitation. The amount a taxpayer can claim as a foreign tax credit depends on the amount of foreign-source income the taxpayer earns and the foreign tax rates at which it is taxed. Generally, a taxpayer cannot claim a credit for foreign tax that exceeds the amount of U.S. tax that would apply on the same income. This limitation is applied separately to passive income (e.g., dividends, interest, etc.) and to general income (e.g., business profits, wages, etc.). Excess foreign taxes paid in a given year may be able to be carried back for 1 year or carried forward for 10 years.
The United States allows various credits as a direct reduction of the federal income tax; however, the credits for business entities are restricted to particular industries or geographical locations and, therefore, are generally not a significant factor in determining the amount of tax which must be paid.
Some of the states which impose an income tax on business profits also permit tax credits to spur investment within that particular state. For example, some states offer an investment tax credit (i.e., a reduction of the business tax due to the state) in the year in which property is put into service for manufacturing purposes; however, there is no provision for an investment tax credit under federal law.
Corporations that incur a taxable loss (“net operating loss”) in a given tax year can carry back the NOL for 2 years or carry it forward for 20 years. States vary on the ability to carry back or carry forward an NOL.