SUBJECT: Bonus Depreciation and Section 179 Expensing Treatment for Indiana Income Tax Purposes

REFERENCE: IC 6-3-1-3.5; IC 6-3-1-33; IC 6-5.5-1-2; IC 6-5.5-1-20

DISCLAIMER: Information bulletins are intended to provide nontechnical assistance to the general public. Every attempt is made to provide the information that is consistent with the appropriate statutes, rules, and court decisions. Any information that is not consistent with the law, rules, or court decisions is not binding on either the department or the taxpayer. Therefore, the information provided herein should serve only as a foundation for further investigation and study of the current law and procedures related to the subject matter covered herein.

SUMMARY OF CHANGES

This bulletin is a replacement for Commissioner's Directive #19. This bulletin explains Indiana's treatment of bonus depreciation and Section 179 expensing, including special rules for certain like-kind exchanges.

I. INTRODUCTION

Since 2002, Indiana has largely decoupled from the federal allowances for bonus depreciation and Section 179 expensing. This Bulletin sets forth how Indiana follows federal law and where Indiana has differed from following federal law, and also sets forth reporting of necessary adjustments.

II. DEFINITIONS AND ASSUMPTIONS

For purposes of this Bulletin, "Section 1031 Income" refers to income from the sale or exchange of property that would have been deferred under IRC § 1031 prior to January 1, 2018, but which is no longer deferred after December 31, 2017. This income results from like-kind exchanges of tangible personal property. However, Section 1031 Income does not refer to property not of a like-kind exchanged for tangible personal property, such as cash or other property. This can be computed by determining the income from the like-kind exchange and subtracting the amount that would have been income under pre-2018 IRS Form 8824.

"Section 179 Allowance" refers to the expensing that a taxpayer elects to claim under IRC Section 179. References to a Federal Section 179 Allowance are to the federal deduction, while references to an Indiana Section 179 Allowance are to the portion (if any) allowed for Indiana tax purposes.

"Bonus depreciation" is defined in IC 6-3-1-33 to be an amount equal to that part of any depreciation allowance allowed in computing the taxpayer's federal adjusted gross income or federal taxable income that is attributable to the additional first year special depreciation allowance (bonus depreciation) for qualified property allowed under Section 168(k) of the Internal Revenue Code. However, bonus depreciation does not include that portion of the added depreciation allowance attributable to Section 1031 Income and for which a Federal Section 179 Allowance was not claimed.

Throughout this bulletin, it will be assumed for the sake of simplicity that:

III. SECTION 179 ADJUSTMENTS

In general, if a taxpayer makes an election to claim a Federal Section 179 Allowance, Indiana caps the overall Indiana Section 179 Allowance at $25,000 against such property. In the first year, the difference between the Federal Section 179 Allowance and the Indiana Section 179 Allowance is an addback for Indiana tax purposes. In subsequent years, the difference between depreciation computed using the Federal Section 179 Allowance and the Indiana Section 179 Allowance will be permitted as a deduction. For reporting purposes, use Code 105 for reporting any addback or deduction on the appropriate Indiana income tax return.

Retroactive to January 1, 2018, a portion of the Federal Section 179 Allowance is fully allowable for Indiana tax purposes. This exception applies to property that would have been eligible for tax deferral under IRC Section 1031 prior to the 2017 Tax Cuts and Jobs Act but is subject to tax after passage of the 2017 Tax Cuts and Jobs Act.

The additional portion of Federal Section 179 Allowance that is allowable is equal to the lesser of the Section 1031 Income or the Federal Section 179 Allowance claimed with regard to such property. This special rule is to be applied on an item-by-item basis. However, the Indiana $25,000 limitation on the Indiana Section 179 Allowance still applies to other property acquired and for which a Federal Section 179 Allowance was claimed as well as any Federal Section 179 Allowance on property in excess of the Section 1031 Income on that property.

While Indiana has a cap on the amount of Indiana Section 179 Allowance that can be claimed during the first year, Indiana follows the federal phase-out thresholds. Thus, Indiana follows the $2,500,000 threshold for phase-out under IRC Section 179(b)(2) as opposed to the pre-2003 $200,000 threshold.

IV. BONUS DEPRECIATION

Prior to 2018, any taxpayer that owns property for which bonus depreciation was allowed in the current or an earlier taxable year is required to make an adjustment to reflect Indiana's disallowance of bonus depreciation. The adjustment is equal to the amount that would have been computed if an election had not been made to apply the bonus depreciation to the property in the year that it was placed in service.

Effective for taxable years 2018 and later, a portion of bonus depreciation is allowable for Indiana purposes. The portion allowable is equal to the Section 1031 Income on the property reduced by the Federal Section 179 Allowance claimed on the same property, but not below zero. For reporting purposes, use either the specifically designated line of the form or use Code 104 to report any adjustment on the appropriate tax return.

V. DISPOSITION

Upon the sale or other taxable disposition of property subject to either bonus depreciation adjustment or a Section 179 Allowance, the taxpayer should determine the difference between the depreciation computed for federal purposes and the depreciation computed for state purposes and report this under the appropriate code (Code 104 or Code 105, depending on whether the adjustment was to bonus depreciation or to Section 179 expensing).

VI. SPECIAL RULES REGARDING ZERO-BASIS PARTNERS AND SHAREHOLDERS

For property placed in service prior to 2020, taxpayers claiming either bonus depreciation or Section 179 expensing adjustments should continue to report these adjustments in the manner the adjustment was initially reported for Indiana purposes. For taxable years 2020 and later, any adjustment (including zero basis) should be computed:

VII. TREATMENT OF PROPERTY WHEN THE BUSINESS LEAVES INDIANA OR ENTERS INDIANA AFTER THE PROPERTY IS PLACED INTO SERVICE

If property was placed into service while a taxpayer was doing business in Indiana but subsequently the taxpayer ceases doing business in Indiana, the depreciation allowable continues to accrue. However, the depreciation generally is subject to zero apportionment for Indiana tax purposes. In addition, if the taxpayer resumes doing business in Indiana at a later time, any deduction to make up for the previously disallowed deduction is not permitted.

Likewise, if property was placed into service while a taxpayer was not doing business in Indiana but subsequently the taxpayer begins doing business in Indiana, the depreciation adjustments shall be permitted in the same manner as if the taxpayer had been doing business in Indiana the entire time.

Similar rules also apply if a taxpayer is an individual or trust and the taxpayer changes residence.

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Adam J. Krupp

Commissioner