How Ohio Handles Federal Bonus Depreciation

Bonus depreciation is a federal tax incentive allowing businesses to deduct a large portion of an asset’s cost in the year of purchase. While this accelerates federal tax savings, Ohio does not conform to these regulations. Businesses in Ohio must instead follow a multi-step process involving adjustments on their state tax return. This begins with adding back a portion of the federal deduction in the first year and then claiming it over subsequent years.

Federal Bonus Depreciation Overview

The federal government provides a tax deduction known as bonus depreciation under Internal Revenue Code (IRC) Section 168. This provision permits the immediate deduction of a percentage of the cost of qualifying business assets when placed in service. The rules apply to tangible property with a recovery period of 20 years or less, such as machinery, equipment, and furniture. It also extends to certain intangible assets like computer software.

The Tax Cuts and Jobs Act of 2017 expanded the provision, allowing a 100% first-year deduction for both new and used qualifying property. This incentive began a scheduled phase-down, reducing the deductible percentage over several years. For property placed in service before January 1, 2023, the deduction was 100%. The rate decreased to 80% for property placed in service during 2023 and is 60% for 2024. The percentage will continue to decrease by 20 points each year until it is eliminated in 2027, unless new legislation is passed.

This federal deduction is automatically applied unless a business elects out of it for a specific class of property on its federal tax return using Form 4562, Depreciation and Amortization. The total bonus depreciation claimed on the federal return is the starting point for the calculations required on an Ohio tax return.

Ohio’s Add-Back Requirement

Because Ohio is a “decoupled” state, its tax laws do not adopt the federal bonus depreciation rules. Businesses that claim the deduction on their federal return must make an adjustment on their Ohio tax return known as an “add-back.” This adjustment cancels out a portion of the federal tax benefit for state income tax purposes in the year the asset is acquired.

The most common adjustment requires taxpayers to add back five-sixths (5/6) of the federal bonus depreciation deduction to their Ohio taxable income. For example, if a business claims a $60,000 federal bonus depreciation deduction, it must calculate the Ohio adjustment. The business would multiply the federal deduction by 5/6, resulting in a $50,000 add-back. This $50,000 is added to the business’s income on its Ohio tax return, increasing its state tax liability for that year.

While the 5/6 add-back is standard, Ohio law provides for different fractions in less common circumstances. A 6/6 add-back, or 100% of the bonus depreciation, is required if the taxpayer has a federal net operating loss for the tax year. A 2/3 add-back may apply if a business significantly increases its employee withholding. This initial add-back is a mandatory step that sets the stage for future deductions.

The Subsequent Ohio Depreciation Deduction

The Ohio add-back is a timing difference, not a permanent disallowance of the depreciation expense. After a business adds back a portion of the federal deduction, it can deduct that same amount over subsequent years. This allows the business to recover the amount it was initially required to add back to its income.

The deduction period corresponds to the fraction used for the initial add-back. For the common 5/6 add-back, the business deducts the added-back amount in five equal installments over the next five tax years. This means the business takes a deduction equal to one-fifth (1/5) of the add-back amount each year. This deduction can be claimed even if the business disposes of the asset during the five-year period.

Continuing the previous example, the business with a $50,000 add-back will see a benefit in later years. Starting in the tax year after the asset was placed in service, the business can deduct $10,000 ($50,000 x 1/5) from its Ohio income. This $10,000 deduction is available for five consecutive years, totaling the original $50,000 add-back.

Reporting on Ohio Tax Forms

Ohio bonus depreciation adjustments are reported on specific state tax forms. Sole proprietors and owners of pass-through entities make these adjustments on the Ohio Schedule of Adjustments, filed with the individual income tax return, Form IT 1040. The initial add-back is entered as a positive number to increase income. The subsequent annual deduction is entered as a negative number to reduce income.

Pass-through entities calculate and report these adjustments on Form IT 1140. This form includes a schedule for the current year’s add-back and deductions from prior years. The information is then passed to the owners on the Ohio IT K-1 so they can report the correct amounts on their personal IT 1040. C corporations report these adjustments on their franchise tax forms, following the same principle of adding back the initial amount and deducting it over time.