Does Colorado Allow Bonus Depreciation?
Colorado does not conform to federal bonus depreciation, requiring a state-level adjustment. Learn how to correctly reconcile asset depreciation over time.
Federal tax law allows businesses to use bonus depreciation, a provision in Internal Revenue Code Section 168(k). This lets a business immediately deduct a percentage of the cost of qualifying assets in the year they are acquired, rather than writing them off over their useful life. This accelerated deduction lowers a business’s federal taxable income.
While bonus depreciation is a federal rule, its application at the state level varies. Each state decides whether to conform to the federal tax code, meaning a business’s depreciation deduction can differ for its federal and state income tax returns.
Colorado’s Position on Bonus Depreciation
Colorado conforms to the federal bonus depreciation rules. For Colorado income tax purposes, businesses can take the same bonus depreciation deduction that is allowed on their federal return.
This conformity simplifies tax preparation, as Colorado does not require businesses to make any adjustments, such as an “addback” of the bonus amount. The depreciation deduction calculated for the federal return is the same one used for the Colorado return.
How Bonus Depreciation Works in Colorado
The federal bonus depreciation rate is scheduled to decrease over time. The rate is 60% for assets placed in service in 2024, 40% for 2025, and 20% for 2026. As Colorado follows the federal rules, these rates apply for state tax purposes as well.
For example, if a business buys qualifying equipment for $100,000 and places it in service during 2025, the calculation is as follows:
- Bonus Depreciation Deduction: The business can immediately deduct 40% of the cost, which is $40,000.
- Remaining Basis: The remaining basis for regular depreciation is $60,000 ($100,000 – $40,000).
- Regular Depreciation (MACRS): If the equipment has a 5-year recovery period, the first-year regular depreciation is 20% of the remaining basis, or $12,000.
- Total First-Year Deduction: The total depreciation deduction for the first year is $52,000 ($40,000 bonus + $12,000 regular).
This $52,000 deduction would be claimed on both the federal and Colorado income tax returns.
Reporting Bonus Depreciation in Colorado
A business’s federal taxable income, which already includes the bonus depreciation deduction, is the starting point for the Colorado tax return. This figure is transferred to the appropriate state form, such as Form DR 0104 for individuals or Form DR 0112 for C corporations.