What Is Indiana Schedule 2 (Add-Backs)?
Learn how Indiana Schedule 2 modifies your federal adjusted gross income for your state return by accounting for specific income and deduction differences.
Indiana Schedule 1 is a supplemental form filed with the state’s primary individual income tax return, Form IT-40. Its purpose is to account for specific add-backs required on an Indiana tax return that are not added when calculating federal adjusted gross income (AGI). Because Indiana’s starting point for taxation is the federal AGI, this schedule provides the mechanism to make these state-specific adjustments, thereby increasing the amount of income subject to Indiana tax. It ensures that taxpayers correctly report income unique to Indiana law.
Who Must File Indiana Schedule 1
You are required to file Indiana Schedule 1 if your federal tax return includes certain income items that are taxable in Indiana but not at the federal level, or if you’ve claimed specific federal deductions that Indiana law limits or disallows. The requirement to file is most commonly triggered by holding municipal bonds issued by a state or locality outside of Indiana. Another frequent reason for filing is related to business asset depreciation if you claimed federal bonus depreciation or took a Section 179 expense deduction for an amount greater than what Indiana allows. You must also file if you claimed a net operating loss (NOL) deduction on your federal return or deducted state income taxes on a federal business schedule.
Required Information for Indiana Schedule 1 Add-Backs
To accurately complete Schedule 1, you must gather specific documents and figures from your federal tax filing. Each add-back corresponds to a specific line on your federal return or associated forms.
Tax-Exempt Interest
The most common add-back relates to interest from out-of-state municipal bonds. Indiana taxes interest earned from obligations of states other than its own if the obligation was acquired after December 31, 2011. To prepare, you will need your federal Form 1099-INT statements. You must review Box 8 of these forms to identify interest income from non-Indiana issuers.
Federal Depreciation
Indiana’s treatment of depreciation differs from federal rules, particularly concerning bonus depreciation and the Section 179 expense deduction. If you claimed bonus depreciation on your federal return, you must add back the full amount. For the Section 179 expense deduction, you must add back the portion of your federal deduction that exceeds the amount Indiana allows. For example, the state’s deduction was capped at $25,000 in recent years. You will need your completed federal Form 4562, Depreciation and Amortization, to find these figures.
Net Operating Loss Deduction
If your business sustained a loss in a prior year, you might have carried it forward as a Net Operating Loss (NOL) deduction on your federal return. Indiana requires this federal NOL deduction to be added back. The necessary information is located on your federal Form 1040, specifically on Schedule 1. Indiana has its own NOL calculation, which is handled separately.
Other Add-Backs
Several other add-backs may apply. You must add back any deductions claimed on federal Schedules C, E, or F for taxes that are based on or measured by income, which applies only to taxes levied at the state level; do not add back property taxes. Another add-back is for reporting any net operating loss carryforwards that were eliminated from your federal taxes as a result of a debt discharge. Also, if you are a beneficiary of a trust or a shareholder in an S corporation, your Schedule K-1 will report any state-specific add-backs required for Indiana.
Completing and Filing Your Schedule 1
Once you have gathered all the necessary figures from your federal tax documents, the process of filling out Schedule 1 is a matter of transferring those numbers to the correct lines. You should proceed line by line, entering the specific amounts you previously identified. You will begin by entering the total interest from non-Indiana municipal bonds. Following that, you will report the add-back for any bonus depreciation and the portion of your Section 179 expense that exceeds Indiana’s limit.
Next, you will input the amount of any federal Net Operating Loss deduction you claimed. The form also includes lines for other specific add-backs, such as the tax add-back for income-based state taxes deducted on federal business schedules. After filling in all the individual add-back amounts, you will sum them up to calculate the “Total Add-Backs.”
This final sum is then carried from Schedule 1 directly to the specified line on your main Indiana income tax return, Form IT-40. This amount will be included in the calculation of your Indiana adjusted gross income.