in-20260610-IR-045260171NRA: Information Bulletin #118

DEPARTMENT OF STATE REVENUE Information Bulletin #118 Income Tax May 2026 Effective Date: July 4, 2025 (Retroactive) (Replaces Bulletin #118, dated March 2023) SUBJECT: Bonus Depreciation, Section 179 Expensing, and Qualified Production Property Treatment for Indiana Income Tax Purposes REFERENCES: IC 6-3-1-3.5; IC 6-3-1-33; IC 6-3-2-29; IC 6-5.5-1-2; IC 6-5.5-1-20 DISCLAIMER: Information bulletins are intended to provide nontechnical assistance to the general public. Every attempt is made to provide information that is consistent with the appropriate statutes, rules, and court decisions. Any information that is not consistent with the law, regulations, or court decisions is not binding on either the department or the taxpayer. Therefore, the information provided herein should serve only as a foundation for further investigation and study of the current law and procedures related to the subject matter covered herein. SUMMARY OF CHANGES Other than nonsubstantive, technical changes, this bulletin has been updated to reflect Indiana's treatment of qualified production property and to reflect new reporting for circumstances when a taxpayer has both a depreciation modification and a disallowed federal excess business loss. INTRODUCTION Since 2002, Indiana has largely decoupled from the federal allowances for bonus depreciation and Section 179 expensing. Under Senate Enrolled Act 243 (2026), Indiana extended the decoupling to qualified production property created under federal H.R. 1 (P.L. 119-21). This bulletin sets forth how Indiana follows federal law, where Indiana has differed from following federal law, and reporting of necessary adjustments. While specific reporting codes are provided for adjustments, some returns and schedules have specific lines for reporting these adjustments. Any reference to a reporting code also applies to the specified return or schedule line. DEFINITIONS AND ASSUMPTIONS For purposes of this Bulletin, “Section 1031 Income” refers to income from the sale or exchange of property that would have been deferred under IRC § 1031 prior to January 1, 2018, but which is no longer deferred after December 31, 2017. This income results from like-kind exchanges of tangible personal property. However, Section 1031 Income does not refer to property not of a like-kind exchanged for tangible personal property, such as cash or other property. This can be computed by determining the income from the like-kind exchange and subtracting the amount that would have been income under pre-2018 IRS Form 8824. “Section 179 Allowance” refers to the expensing that a taxpayer elects to claim under IRC Section 179. References to a Federal Section 179 Allowance are to the federal deduction, while references to an Indiana Section 179 Allowance are to the portion (if any) allowed for Indiana tax purposes. “Bonus depreciation” is defined in IC 6-3-1-33 to be an amount equal to that part of any depreciation allowance allowed in computing the taxpayer's federal adjusted gross income or federal taxable income that is attributable to the additional first year special depreciation allowance (bonus depreciation) for qualified property allowed under Section 168(k) of the Internal Revenue Code. However, bonus depreciation does not include that portion of the added depreciation allowance attributable to Section 1031 Income and for which a Federal Section 179 Allowance was not claimed. “Qualified production property expensing” refers to the special expensing allowance for property allowed under Section 168(n) of the Internal Revenue Code if the taxpayer has made an election to claim full expensing for that property. Throughout this bulletin, it will be assumed for the sake of simplicity for bonus depreciation and the Section 179 Allowance that: SECTION 179 ADJUSTMENTS In general, if a taxpayer makes an election to claim a Federal Section 179 Allowance, Indiana caps the overall Indiana Section 179 Allowance at $25,000 against such property. In the first year, the difference between the Federal Section 179 Allowance and the Indiana Section 179 Allowance is an add-back for Indiana tax purposes. In subsequent years, the difference between depreciation computed using the Federal Section 179 Allowance and the Indiana Section 179 Allowance will be permitted as a deduction. For reporting purposes, use Code 105 for reporting any add-back or deduction on the appropriate Indiana income tax return. Year Federal Expensing State expensing allowance State depreciation Code 105 add-back 1 225,000 25,000 40,000 160,000 2 - - 64,000 (64,000) 3 - - 38,400 (38,400) 4 - - 23,040 (23,040) 5 - - 23,040 (23,040) 6 - - 11,520 (11,520) Retroactive to January 1, 2018, a portion of the Federal Section 179 Allowance is fully allowable for Indiana tax purposes. This exception applies to property that would have been eligible for tax deferral under IRC Section 1031 prior to the 2017 Tax Cuts and Jobs Act but is subject to tax after passage of the 2017 Tax Cuts and Jobs Act. The additional portion of Federal Section 179 Allowance that is allowable is equal to the lesser of the Section 1031 Income or the Federal Section 179 Allowance claimed with regard to such property. This special rule is to be applied on an item-by-item basis. However, the Indiana $25,000 limitation on the Indiana Section 179 Allowance still applies to other property acquired and for which a Federal Section 179 Allowance was claimed as well as any Federal Section 179 Allowance on property in excess of the Section 1031 Income on that property. Year Federal Expensing Section 1031 Income Section 179 Otherwise Allowable Total Section 179 Allowance State Regular Depreciation Code 105 add-back 1 350,000 200,000 25,000 225,000 25,000 100,000 2 - - - - 40,000 (40,000) 3 - - - - 24,000 (24,000) 4 - - - - 14,400 (14,400) 5 - - - - 14,400 (14,400) 6 - - - - 7,200 (7,200) While Indiana has a cap on the amount of Indiana Section 179 Allowance that can be claimed during the first year, Indiana follows the federal phase-out thresholds. Thus, Indiana follows the $2,500,000 threshold for phase-out under IRC Section 179(b)(2) and adjusted for inflation as opposed to the pre-2003 $200,000 threshold. BONUS DEPRECIATION In general, a taxpayer that owns property for which bonus depreciation was allowed in the current or an earlier taxable year is required to make an adjustment to reflect Indiana's disallowance of bonus depreciation. The adjustment is equal to the difference between the federal depreciation claimed on the property minus depreciation that would have been computed if an election had been made to not apply the bonus depreciation to the property in the year that it was placed in service. This will result in a first-year add-back for an item of property followed by negative adjustments in subsequent years except in uncommon circumstances. Effective for taxable years 2018 and later, a portion of bonus depreciation is allowable for Indiana purposes. The portion allowable is equal to the Section 1031 Income on the property reduced by the Federal Section 179 Allowance claimed on the same property, but not below zero. For reporting purposes, use either the specifically designated line of the form or use Code 104 to report any adjustment on the appropriate tax return. Year Federal Bonus Depreciation Section 1031 Income Depreciation Remaining State Depreciation Code 104 Add-back 1 4,000,000 3,000,000 200,000 800,000 2 - - 320,000 (320,000) 3 - - 192,000 (192,000) 4 - - 115,200 (115,200) 5 - - 115,200 (115,200) 6 - - 57,600 (57,600) QUALIFIED PRODUCTION PROPERTY EXPENSING A taxpayer is required to make an adjustment to reflect Indiana's disallowance of qualified production property expensing. The adjustment is equal to the amount that would have been computed if an election had not been made to apply the bonus depreciation to the property in the year that it was placed in service. This will result in a first-year add-back for an item of property followed by negative adjustments in subsequent years except in uncommon circumstances. In addition, if a taxpayer makes an election to claim qualified production property expensing for federal purposes, various accelerated depreciation allowances under Section 168 of the Internal Revenue Code are disallowed. Indiana follows the disallowance of the specific depreciation allowances. For purposes of determining depreciation allowable for Indiana purposes, the qualified production property shall be depreciated as nonresidential real property over a 39-year period, using the mid-month convention or other convention required for federal purposes and straight-line depreciation. If property for which qualified production property expensing was elected is no longer used for a qualifying production activity and is subject to recapture of the previously-claimed expensing under Section 168(n)(5) of the Internal Revenue Code, Indiana will recognize the federally-reported gain required to be recognized on the property. However, any gain will be subject to a one-time negative adjustment to report the difference between the depreciation allowed for federal purposes and the cumulative depreciation allowed for Indiana purposes. After the recapture, depreciation and other attributes related to the property will follow federal allowances permitted for the property. For 2025 only, use Code 120 to report any adjustments related to qualified production property. For 2026 and thereafter, use Code 157 to report any required adjustments. DISPOSITION Upon the sale or other taxable disposition of property subject to either bonus depreciation adjustment, a Section 179 Allowance, or qualified production property expensing adjustment, the taxpayer should determine the difference between the depreciation computed for federal purposes and the depreciation computed for state purposes and report this under the appropriate code (Code 104, Code 105, or Code 157 depending on whether the adjustment was to bonus depreciation, to Section 179 expensing, or to qualified production property expensing, respectively). SPECIAL RULES REGARDING ZERO-BASIS PARTNERS AND SHAREHOLDERS For property placed in service prior to 2020, taxpayers claiming bonus depreciation, Section 179 expensing, or qualified production property expensing adjustments should continue to report these adjustments in the manner the adjustment was initially reported for Indiana purposes. For taxable years 2020 and later, any adjustment (including zero basis) should be computed: TREATMENT OF PROPERTY WHEN THE BUSINESS LEAVES INDIANA OR ENTERS INDIANA AFTER THE PROPERTY IS PLACED INTO SERVICE If property was placed into service while a taxpayer was doing business in Indiana but subsequently the taxpayer ceases doing business in Indiana, the depreciation allowable continues to accrue. However, the depreciation generally is subject to zero apportionment for Indiana tax purposes. In addition, if the taxpayer resumes doing business in Indiana at a later time, any deduction to make up for the previously disallowed deduction is not permitted. Likewise, if property was placed into service while a taxpayer was not doing business in Indiana but subsequently the taxpayer begins doing business in Indiana, the depreciation adjustments shall be permitted in the same manner as if the taxpayer had been doing business in Indiana the entire time. Similar rules also apply if a taxpayer is an individual or trust and the taxpayer changes residence. SPECIAL RULE FOR PROPERTY PLACED INTO SERVICE FOR TAXABLE YEARS ENDING BEFORE JULY 1, 2019 If a taxpayer acquired property that would have had additional depreciation or expensing allowable because the acquisition was part of an exchange that resulted in Section 1031 Income for a taxable year ending before July 1, 2019, the taxpayer may elect one of three options. These options are available only if a return for an affected taxable year was filed on or before October 31, 2019. Option 1 is to amend previously-filed returns to reflect the newly-allowable extra depreciation based on Section 1031 Income. Option 2 is to treat the additional allowed depreciation or expensing as occurring in the first taxable year ending after June 30, 2019. However, the combined 2018 and 2019 depreciation and expensing cannot exceed the amount that would have been allowable if the depreciation and expensing had been claimed in the taxable year in which the Section 1031 Income had been realized. Option 3 is to treat the depreciation as if the amendments to allow additional bonus depreciation or expensing had not been enacted. Taxpayers must be consistent with their reporting of depreciation and expensing in these cases and must maintain books and records sufficient to document how the depreciation and expensing was reported. In addition, if a pass-through entity has filed a return on behalf of its owners, the pass-through entity's choice of how the depreciation related to Section 1031 expensing will control for its owners. SPECIAL PROVISIONS FOR EXCESS BUSINESS LOSSES For 2018 through 2020, if a taxpayer has an excess business loss that has been disallowed under IC 6-3-1-3.5(a)(29) or IC 6-3-1-3.5(f)(14), and a portion of the disallowed loss is the result of bonus depreciation or Section 179 Allowance for property placed into service in the taxable year, a portion of the otherwise required modifications will be treated as occurring in the taxable year following the loss year. The portion of the modification required to be taken into account in the following year is the lesser of: Any remaining modification should be treated as a current-year modification. If modifications result from both bonus depreciation and the difference between the Federal Section 179 Allowance and Indiana Section 179 Allowance, then the modification to be moved to the next year is first allocated to the bonus depreciation modification and only to the Section 179 Allowance once no remaining bonus depreciation modifications remain to be reallocated. If a taxpayer: then the taxpayer can reduce the add-back for current-year property placed in service to reflect what their Indiana adjusted gross income would have been without the federal excess business loss limitation. This reduction will be reported using Code 151. However, the Indiana net operating loss resulting from the federal excess business loss will be reduced by the Code 151 amount. Please see the instructions for individual and fiduciary returns, as well as for Schedule NOL-MOD for further information. If you have any questions concerning this bulletin, please contact the Tax Policy Division at taxpolicy@dor.in.gov.