Does New York Allow Bonus Depreciation?

Federal tax law allows businesses to recover the cost of certain assets through bonus depreciation. Governed by Internal Revenue Code (IRC) Section 168(k), this provision allows for the immediate deduction of a large percentage of an asset’s purchase price in the year it is placed in service. The Tax Cuts and Jobs Act of 2017 (TCJA) temporarily allowed for a 100% first-year deduction, but this rate is phasing out annually. This accelerated deduction reduces a business’s federal taxable income, but its treatment can vary at the state level.

New York’s Stance on Bonus Depreciation

New York State does not conform to the federal bonus depreciation rules. For state tax purposes, businesses cannot claim the large, front-loaded deduction available on their federal returns because the state has formally “decoupled” from this federal provision. This decoupling applies to both corporate franchise taxes and personal income taxes for owners of pass-through entities like S corporations and partnerships.

This non-conformity requires businesses to compute depreciation for New York using a different method than for federal filing. Instead of taking the bonus deduction, taxpayers must calculate depreciation over the asset’s standard life, creating a disparity between federal and New York taxable income. This policy ensures the state’s income recognition is more evenly spread over the property’s life, contrasting with the federal goal of incentivizing immediate business investment.

Calculating New York Depreciation

For New York tax purposes, businesses must disregard bonus depreciation and calculate their deduction using the standard Modified Accelerated Cost Recovery System (MACRS) from the first year. The New York calculation is based on the full cost basis of the asset, spread over its designated recovery period. The federal return, in contrast, shows a bonus depreciation amount and then subsequent MACRS deductions on a reduced basis.

To illustrate, consider a business that purchases a $100,000 piece of equipment with a five-year MACRS life in 2025. For federal purposes, with a 40% bonus depreciation rate, the business would deduct $40,000 immediately. The remaining $60,000 basis is then depreciated under the regular MACRS schedule, resulting in a first-year MACRS deduction of $12,000 (20% of $60,000), for a total federal deduction of $52,000.

For New York, the calculation is different as the state does not allow the $40,000 bonus deduction. Instead, the business calculates standard MACRS depreciation on the full $100,000 cost basis. The first-year MACRS deduction for a five-year asset is 20%, resulting in a $20,000 depreciation deduction for New York tax purposes.

Required Tax Form Adjustments

The discrepancy between federal and New York depreciation requires specific adjustments on the state tax return. In the year the asset is acquired, a taxpayer must make an “addition modification,” which involves adding back the amount of bonus depreciation claimed on the federal return. Corporations report this adjustment on Form CT-225, New York State Modifications, while individuals and pass-through entities report this on Form IT-225.

In all subsequent years of the asset’s life, the process is reversed through a “subtraction modification.” Because the asset’s basis for New York purposes is higher, the annual New York MACRS depreciation deduction will be larger than the federal deduction. This annual difference is subtracted from federal income on the New York return. This subtraction continues each year until the asset is fully depreciated or sold, so taxpayers must track the basis of each asset to ensure adjustments are made correctly.