How Does Idaho Handle Bonus Depreciation?
Idaho's tax code handles business asset write-offs differently than federal law, creating a separate depreciation schedule for your state return.
Federal tax law provides businesses with an accelerated depreciation deduction known as bonus depreciation. This allows for the immediate write-off of a significant percentage of an eligible business asset’s cost. While this is a federal rule, each state determines the extent to which it will conform, leading to different tax treatments across the country.
Idaho’s Non-Conformity with Federal Bonus Depreciation
Idaho does not conform to the federal bonus depreciation rules, a practice known as “decoupling.” For assets acquired after 2009, Idaho law disallows the first-year bonus allowance permitted under federal law. This requires businesses to perform two separate depreciation calculations for the same asset: one for their federal return and another for their Idaho return.
The consequence of this non-conformity is a difference in taxable income between the two filings. A business might show a lower taxable income on its federal return due to a large bonus depreciation deduction, but its Idaho taxable income will be higher in the first year because that deduction is disallowed.
This difference necessitates specific adjustments on the Idaho tax return. Taxpayers must maintain separate depreciation schedules to track the asset’s value for both federal and state purposes throughout its useful life. The state’s non-conformity extends to the phase-down of bonus depreciation, meaning as the federal bonus percentage drops to 40% in 2025, Idaho’s position of complete disallowance remains unchanged.
Required Idaho Tax Adjustments
To account for the state’s non-conformity, taxpayers must make specific modifications on their Idaho income tax return. These adjustments reconcile the difference between federal taxable income and Idaho taxable income. The process involves two steps that alter the income reported to the state.
The first step is an addition modification. On the Idaho return, the taxpayer must add back the full amount of bonus depreciation claimed on their federal return. This adjustment cancels the accelerated deduction for state purposes and increases the taxpayer’s income subject to Idaho tax. This add-back is reported on a state tax form, such as Form 41 for corporations or Form 39R for individuals.
Following the addition, the taxpayer makes a subtraction modification. The taxpayer is permitted to subtract the amount of regular depreciation that Idaho law allows for the asset. This regular depreciation is calculated on the full cost of the asset, as if bonus depreciation never existed. These two adjustments create a temporary difference between federal and Idaho taxable income that will reverse over the life of the asset.
Calculating Idaho Depreciation and Basis
Idaho’s non-conformity rules impact both annual depreciation calculations and the asset’s tax basis. A numerical example illustrates this. Consider a business that purchases a qualifying asset for $100,000 and places it in service during 2025. For federal purposes, the business could claim 40% bonus depreciation ($40,000). Regular depreciation, using a method like MACRS over a five-year recovery period, is then calculated on the remaining $60,000 basis, resulting in a $12,000 deduction for the first year, for a total federal deduction of $52,000.
For the Idaho return, the process is different. The taxpayer must first make an addition modification of $40,000, adding back the federal bonus depreciation claimed. Then, they calculate the regular depreciation allowed by Idaho on the full $100,000 cost basis. Using the same five-year MACRS method, the first-year Idaho depreciation deduction would be $20,000 (20% of $100,000), which is taken as a subtraction modification.
This process creates two separate tax bases for the asset. After the first year, the federal adjusted basis would be $48,000 ($100,000 cost – $52,000 federal depreciation). The Idaho adjusted basis would be $80,000 ($100,000 cost – $20,000 Idaho depreciation).
In subsequent years, the annual depreciation deductions will continue to differ. Federal deductions will be based on the remaining $60,000 basis, while Idaho deductions will be calculated from the higher remaining basis. When the asset is eventually sold, the gain or loss will be different for federal and Idaho tax purposes. Since the bases are different, the resulting taxable event will also differ, requiring another adjustment on the Idaho return in the year of sale.