What Are Connecticut’s Bonus Depreciation Rules?

Federal tax law provides for bonus depreciation, which allows businesses to deduct a large portion of the cost of qualifying business property in the year it is placed into service. This accelerated deduction can reduce a company’s federal taxable income. The rules for this deduction are established under federal law. However, businesses operating in Connecticut must follow a different set of regulations, as the state has its own specific approach to depreciation that does not align with the federal bonus depreciation rules, creating a separate compliance requirement for state income tax purposes.

Connecticut’s Decoupling from Federal Bonus Depreciation

Connecticut has formally “decoupled” from the federal bonus depreciation rules, meaning it does not permit businesses to take the special first-year depreciation allowance on their state tax returns. While Connecticut generally follows federal depreciation rules under the Modified Accelerated Cost Recovery System (MACRS), it has specifically disallowed the bonus depreciation provided under Internal Revenue Code Section 168(k). This decision impacts a wide range of business assets that would otherwise qualify for the federal bonus.

The state’s non-conformity applies to tangible property with a recovery period of 20 years or less, which includes common business purchases like machinery, equipment, computers, and furniture. It also extends to certain software and even used property that may qualify for bonus depreciation at the federal level. For Connecticut tax purposes, the depreciation of these assets must be calculated as if the federal bonus depreciation provision does not exist. This creates a different basis for depreciation for state tax filings compared to federal filings.

The state requires businesses to make specific adjustments on their corporate business or personal income tax returns to account for this difference. The core of the issue is a timing difference; while the federal government allows a large upfront deduction, Connecticut requires the depreciation to be taken over the asset’s entire useful life. This ensures that the total depreciation taken over the life of the asset is the same for both federal and state purposes, but the timing of those deductions is different.

Calculating the Required Income Addition

In the year a business places a qualifying asset into service and claims bonus depreciation on its federal return, it must make an adjustment on its Connecticut return. Specifically, the entire amount of the bonus depreciation claimed for federal purposes must be added back to the federal taxable income when calculating Connecticut taxable income.

For example, if a business purchases a piece of equipment for $100,000 and claims 40% bonus depreciation on its 2025 federal return, it would take a $40,000 bonus depreciation deduction. On its Connecticut corporation business tax return, the company must report an addition modification of that same $40,000. This add-back is reported on specific schedules designed for modifications, such as Schedule A of Form CT-1120 for corporations.

This required addition ensures that the starting point for calculating Connecticut tax liability is a figure that does not include the federal bonus depreciation. The remaining basis of the asset is then used to calculate regular depreciation for federal purposes. For Connecticut, however, the depreciation calculation begins with the asset’s original cost basis, without any reduction for bonus depreciation.

Claiming the Depreciation Subtraction in Subsequent Years

After adding back the bonus depreciation in the first year, businesses are permitted to recover that amount through a series of subtractions on their Connecticut tax returns in later years. To recover the disallowed amount, Connecticut law allows a subtraction of 25% of the total bonus depreciation add-back in each of the four tax years following the year of the add-back.

This subtraction is claimed annually until the asset is fully depreciated for Connecticut purposes. For instance, if $40,000 in bonus depreciation was added back in year one, the business would be able to subtract $10,000 (25% of $40,000) in each of the next four years. Taxpayers must maintain separate depreciation records for Connecticut to accurately track the basis of their assets and calculate the correct subtraction amount each year.