Does Alabama Allow Bonus Depreciation?

Bonus depreciation allows businesses to immediately deduct a large percentage of eligible property costs in the year it is placed in service, rather than depreciating it over many years. This accelerated method, governed by Internal Revenue Code (IRC) Section 168(k), offers significant federal tax benefits. However, state-specific rules are important, as many states, including Alabama, have distinct approaches to bonus depreciation.

Alabama’s Approach to Bonus Depreciation

Alabama has generally decoupled from federal bonus depreciation provisions, meaning it does not conform to the federal allowance for bonus depreciation. This means that for Alabama state income tax purposes, depreciation must be calculated using the Modified Accelerated Cost Recovery System (MACRS) or other standard depreciation methods without applying the federal bonus depreciation percentages. While Alabama generally follows IRC Sections 167 and 168 for depreciation, it has not adopted the specific bonus depreciation allowances. Businesses must therefore maintain separate depreciation schedules for federal and state tax purposes to account for these differences.

Required Adjustments for Alabama Tax Returns

Because Alabama does not allow federal bonus depreciation, taxpayers must “add back” the amount of bonus depreciation claimed on their federal return when calculating their Alabama taxable income. This add-back involves determining the difference between the depreciation amount claimed on the federal return and the depreciation amount allowable for Alabama purposes, which is calculated using standard MACRS. This difference represents an increase to Alabama taxable income.

This adjustment creates a basis difference between assets for federal and state tax purposes. The federal basis will be lower due to the accelerated depreciation, while the Alabama basis will remain higher, reflecting the slower MACRS depreciation. Taxpayers must track this basis difference carefully, as it impacts subsequent depreciation deductions in future years for Alabama tax calculations. The cumulative effect of these annual adjustments ensures that the total depreciation recognized over the asset’s life is consistent with Alabama’s non-bonus depreciation rules.

How to Report Depreciation on Alabama Forms

The add-back for federal bonus depreciation and any subsequent adjustments are reported on specific lines of Alabama state income tax forms. For individuals, this adjustment is made on Alabama Form 40, the Individual Income Tax Return. The difference in depreciation amounts is entered on Alabama Schedule A (Form 40) or a similar schedule that allows for additions to income.

Businesses, such as corporations or pass-through entities, will report these adjustments on their respective Alabama income tax forms. Corporations generally use Alabama Form 20C, the Corporation Income Tax Return. An important form for corporations is Schedule FTI, the Schedule of Adjustments to Federal Taxable Income, which is used to reconcile differences between federal taxable income and Alabama taxable income, including depreciation adjustments. Pass-through entities, such as S corporations and partnerships, would report similar adjustments on their Alabama Form 20S or Form 65, respectively, impacting the income passed through to their owners.