Web Content Viewer
Actions

Income - Bonus Depreciation

Income - Bonus Depreciation

Generally, Ohio’s income tax begins with federal adjusted gross income. However, in order to smooth the revenue impact of accelerated I.R.C. §179 and §168(k) depreciation expenses, Ohio requires taxpayers to add back certain amounts of accelerated depreciation expense in the year they are allowed by I.R.C. §179 and §168(k). Ohio then allows the taxpayer to deduct those amounts more gradually over a period of years.

As a general rule, a taxpayer will add back the accelerated depreciation expense in year 1, and then take a deduction in the subsequent years until all of the Ohio depreciation add-back is claimed on the Ohio tax return. For federal tax purposes, the depreciation expense amounts are calculated on IRS form 4562.

See R.C. 5747.01(A)(17) and (18).

The following persons are required to make Ohio’s depreciation adjustments on their tax return:

  • Individual income taxpayers (on form IT 1040);
  • Trust and estate income taxpayers (on Ohio form IT 1041); AND
  • Pass-through entity taxpayers (on form IT 4708) and qualifying entities (on form IT 1140).

However, a person is not required to make Ohio’s depreciation add-back in either of the following circumstances:

  • The depreciation is from a pass-through entity, and the person owns less than 5% of the entity. This is true even if the pass-through entity performed the add-back on its Ohio filing (i.e. the IT 1140 or IT 4708); OR
  • The depreciation is from a business that increased its Ohio employer withholding, and the depreciation is less than or equal to that increase.

See R.C. 5747.01(A)(17), 5747.01(S)(14), and 5733.40(A)(5).

The amount of the add-back depends on a few different circumstances. First, the taxpayer must compute the amount of federal depreciation subject to add-back. The amount subject to the add-back is the taxpayer’s total §179 expense less $25,000 plus all of the taxpayer’s §168(k) depreciation expense. This includes depreciation from their own business, as well as their proportionate share of depreciation from any pass-through entity in which the taxpayer is an investor.

Note: The calculation of the amount subject to add-back is separate and distinct for each person. As such, the amount added back on an investor’s return might vary from the amount added back by a pass-through entity on its return.

Then, the amount subject to the add-back is multiplied by one of the following fractions:

  • 6/6 if the taxpayer, in the year of the depreciation expense, had a federal net operating loss (NOL);
  • 2/3 if the business, in the year of the depreciation expense, increased its Ohio employer withholding by at least 10% over the previous year; OR
  • 5/6 for all other taxpayers.

Example 1: Mark has $125,000 of §179 depreciation expense and $80,000 of §168(k) depreciation expense included in his federal adjusted gross income for the current tax year. The §179 depreciation is from his sole proprietorship, while the §168(k) depreciation is from his 100% ownership in ABC LLC.  Mark’s total amount of depreciation subject to add-back is calculated as:

  • Depreciation subject to add-back: (§179 - 25,000) + §168k
  • Mark’s depreciation subject to add-back: ($125,000 – 25,000) + $80,000 = $180,000

Neither Mark nor ABC LLC have a federal NOL or any changes to their Ohio employer withholding amounts. Thus, Mark would calculate his deprecation add-back as:

  • Mark’s total depreciation add-back: 5/6 x $180,000 = $150,000

Example 2: Mark still has $180,000 subject to add-back for the current tax year. However, ABC LLC increased its Ohio employer withholding for its employees by at least 10% over its Ohio employer withholding for the previous tax year. Mark must use a different add-back fraction for each source of depreciation, and thus would calculate his deprecation add-back as:

  • Mark’s add-back from ABC LLC: 2/3 x $80,000 = $53,333
  • Mark’s add-back from his sole proprietorship: 5/6 x ($125,000 – 25,000) = 5/6 x $100,000 = $83,333
  • Mark’s total depreciation add-back: $53,333 + 83,333 = $136,666

Example 3: Mark still has $180,000 subject to add-back for the current tax year, but his federal adjusted gross income is -$100,000 (i.e. Mark has a federal NOL). Mark would calculate his depreciation add-back as:

  • Mark’s total depreciation add-back: 6/6 x $180,000 = $180,000

See R.C. 5747.01(A)(17).

The amount of the deduction depends solely on the amount of the add-back. Taxpayers can only deduct amounts that they added back in a prior year. This deduction can be claimed even if the taxpayer no longer directly or indirectly owns the asset. The deduction is not transferable from one taxpayer to another.

Taxpayers who added back:

  • 5/6 of their depreciation expense in a given tax year should deduct 1/5 of the amount added back in the subsequent five years;
  • 2/3 of their depreciation expense in a given tax year (because of a 10% increase in Ohio employer withholding) should deduct 1/2 of the amount added back in the subsequent two years; OR
  • All of their depreciation expense in a given tax year (because of a federal net operating loss (NOL)) should deduct 1/6 of the amount added back in the subsequent six years.

Example 1: Mark added back $150,000 (5/6) of depreciation for the current tax year. For each of the 5 subsequent tax years, Mark can deduct:

  • Mark’s annual depreciation deduction: $16,667 + $13,333 = $30,000

If instead, Mark added back $120,000 (2/3) for the current tax year, for each of the 2 subsequent tax years, he can deduct:

  • Mark’s annual depreciation deduction: $33,333 + $26,667 = $60,000

Finally, if Mark added back $180,000 (6/6) for the current tax year, for each of the 6 subsequent tax years, he can deduct:

  • Mark’s annual depreciation deduction: $16,667 + $13,333 = $30,000

Exception: A person generally eligible for a depreciation deduction cannot claim the deduction in any tax year that includes a federal NOL, an NOL carryback, or an NOL carryforward. Instead, the person must carry forward the deduction to the return for the next subsequent tax year that does not report an NOL.

Example 2: Mark added back $150,000 (5/6) of depreciation for the current tax year. The following table shows Mark’s federal adjusted gross income for the subsequent 5 years:

Tax Year Current Year Year 1 Year 2 Year 3 Year 4 Year 5
Mark's FAGI $100,000 -$50,000 -$90,000 $45,000 $75,000

$125,000

Because of the NOLs, Mark cannot claim his Ohio depreciation deduction in years 1 or 2. Instead, he must carry each of them forward to the first year without an NOL (year 3). The following table shows Mark’s Ohio depreciation deduction for the applicable period:

Tax Year Year 1 Year 2 Year 3 Year 4 Year 5
Mark's Ohio Depreciation Deduction $0 $0 $90,000* $30,000 $30,000

*Year 3 depreciation deduction: Deduction from tax years 1, 2 and 3 = $30,000 + $30,000 + $30,000

The Department of Taxation provides a worksheet to assist in the calculation of future tax year’s depreciation deductions that can be found in the “Worksheets” section of the IT 1040 and SD 100 instructions.

See R.C. 5747.01(A)(18)(a) and (c).

No. The add-back must be made in the year the bonus depreciation was allowed by I.R.C. §179 and §168(k). If the tax year in which you should have made the add-back is still in statute, you should file an amended return to properly add-back the depreciation.

See R.C. 5747.01(A)(17).

No. The deduction is only available for amounts that you actually added back in a prior year. However, if the prior year is still in statute, you should file an amended return for that tax year to make the required add-back, and then take the appropriate deductions in subsequent tax years.

See R.C. 5747.01(A)(18).

The deduction cannot be accelerated; it must be taken in equal increments over the subsequent tax years. Additionally, Ohio law specifically states the Ohio depreciation adjustments do not adjust or modify the adjusted basis in any asset. As such, the gain you report on your Ohio return should match the gain you recognized on your federal return.

However, the taxpayer is still able to take the deduction for the remaining years, even if the taxpayer no longer owns the underlying asset.

See R.C. 5747.01(A)(17)(b) and 5747.01(A)(18)(a). 

No. The deduction cannot be accelerated; it must be taken in equal increments over the subsequent tax years. If the taxpayer has other Ohio sourced income, the deduction can be used to offset the tax liability on their future Ohio returns.

See R.C. 5747.01(A)(18)(a).

No. The deduction must be taken in equal increments in consecutive tax years and any unused portion from any given tax year is not eligible to be carried forward. 

See R.C. 5747.01(A)(18)(a).

These adjustments do not constitute “business income” and thus should not be included on the IT BUS. They are adjustments claimed on an individual’s personal return, and are not items of business gain or loss.

See R.C. 5747.01(A)(28) and 5747.01(B).

The amount of I.R.C. §179 and §168(k) bonus depreciation subject to add-back is not affected by limitations contained in other sections of the Internal Revenue Code (for example, the excess business losses limitation, passive activity loss limitations, at-risk loss limitations). Additionally, the amount is not limited based on the taxpayer’s computation of federal adjusted gross income.

You must add back the appropriate fraction (5/6, 2/3, 6/6) of the total depreciation expenses allowed by I.R.C. §168(k) and §179.

See R.C. 5747.01(A)(17)(a).

Additional Resources

Additional Resources