Does Massachusetts Allow Bonus Depreciation on Tax Returns?

Businesses often use bonus depreciation to accelerate tax deductions on asset purchases, reducing taxable income in the year of acquisition. However, not all states follow federal rules, creating differences between state and federal tax filings.

Massachusetts has its own approach to depreciation that taxpayers must consider when filing state returns. Understanding how the state treats bonus depreciation is necessary to ensure compliance.

Massachusetts Depreciation Provisions

Massachusetts does not conform to federal bonus depreciation rules under Internal Revenue Code (IRC) 168(k). Instead, businesses must follow the state’s depreciation framework, which generally aligns with the Modified Accelerated Cost Recovery System (MACRS) but without federal first-year expensing benefits. While a business may claim 100% bonus depreciation on its federal return, Massachusetts requires a different depreciation schedule.

For most assets, Massachusetts follows federal MACRS recovery periods but without immediate expensing. If a company purchases machinery with a five-year federal recovery period and claims full bonus depreciation federally, Massachusetts instead requires depreciation over five years. This timing difference increases taxable income in Massachusetts in the first year.

Massachusetts also does not conform to the increased Section 179 expensing limits set at the federal level. While the federal government allows businesses to deduct up to $1.22 million in 2024, Massachusetts caps this deduction at $25,000. Any excess must be depreciated over the asset’s useful life, further delaying cost recovery.

Required Add-Backs for Bonus Depreciation

Massachusetts tax law requires businesses to add back any bonus depreciation claimed on their federal returns. This adjustment increases taxable income for Massachusetts in the year the deduction was taken federally, creating a discrepancy between state and federal tax liabilities. The add-back applies to corporations, partnerships, and sole proprietors.

If a business claims 100% bonus depreciation under IRC 168(k), the full amount must be reversed for Massachusetts tax purposes. For example, if a company purchases equipment for $500,000 and takes full bonus depreciation federally, it must add back the entire $500,000 on its Massachusetts return. If partial bonus depreciation is used—such as the 80% rate for assets placed in service in 2023—the add-back is limited to the portion deducted federally.

Massachusetts does not permanently disallow the deduction but instead requires businesses to recover the expense over time. The state allows taxpayers to depreciate the added-back amount using a straight-line method over the asset’s useful life, resulting in smaller annual deductions rather than a large upfront expense.

Filing Adjustments on Tax Returns

When preparing a Massachusetts tax return, businesses must adjust depreciation calculations to align with state requirements. Since Massachusetts does not recognize federal bonus depreciation, taxpayers must track separate depreciation schedules for federal and state purposes. This often requires maintaining detailed records, especially for businesses with large asset purchases.

To properly report depreciation adjustments, taxpayers must reconcile their federal taxable income with Massachusetts state income. This is done by making modifications on Massachusetts Schedule E-1 for corporate filers or Schedule C for sole proprietors. These forms require businesses to report depreciation differences to ensure the correct taxable income is calculated. Errors can lead to misstatements, potentially triggering penalties or audits.

Taxpayers should also consider the impact of these adjustments on estimated tax payments. Because Massachusetts taxable income is higher in the year of asset acquisition due to the add-back requirement, businesses may owe more in estimated taxes. Failure to account for this difference could result in underpayment penalties. The Massachusetts Department of Revenue imposes penalties for underpayment, calculated at an annual interest rate based on the federal short-term rate plus four percentage points.