The passing of the Tax Cuts and Jobs Act in December 2017 increased the federal bonus depreciation deduction from 50% to 100%, providing taxpayers the ability to completely expense the full purchase price of eligible assets like machinery and equipment, and even some improvements. Unfortunately for taxpayers, most states – including Ohio – do not conform to the federal bonus depreciation deduction and require some addback adjustment to the federal depreciation amount.
In this article, we’ll cover the state of Ohio’s adjustment rules in hopes to simplify this complexity and help taxpayers successfully navigate these regulations.
Ohio’s Rules for Bonus Depreciation
There are three different addback/deduction scenarios for the state of Ohio surrounding federal bonus depreciation:
- addback 5/6 in year one and deduct 1/5 in subsequent years
- addback 6/6 in year one and deduct 1/6 in subsequent years
- addback 2/3 in year one and deduct 1/2 in subsequent years
We’ll focus on the two most common situations; the 5/6 and 6/6 addbacks. The less common 2/3 addback is required if, in a given tax year, the taxpayer’s business increased its Ohio employer withholding by at least 10% over the prior year.
5/6 addback
If the taxpayer has positive federal adjusted gross income (FAGI), they must addback 5/6 of federal bonus depreciation. They can then deduct 1/5 of the remaining amount over the following five years as shown in the example below:
| Fed Bonus Dep. | 100,000 | |||||
|---|---|---|---|---|---|---|
| Ohio | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 |
| Addback | 83,333.33 | |||||
| Deduction | 16,666.67 | 16,666.67 | 16,666.67 | 16,666.67 | 16,666.67 |
It’s important to note that amounts may only be deducted if they were added back in a prior year. Additionally, the deduction can still be claimed even if the taxpayer has disposed of the asset responsible for the bonus adjustment. The deduction is nontransferable to another entity or taxpayer.
6/6 addback
The taxpayer is required to addback all bonus depreciation if FAGI is negative (i.e. a net operating loss or NOL) for the tax year. They may then deduct 1/6 of the addback amount over the following six-year period, as shown in the example below:
| Fed Bonus Dep. | 100,000 | ||||||
|---|---|---|---|---|---|---|---|
| Ohio | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 |
| Addback | 100,000 | ||||||
| Deduction | 16,666.67 | 16,666.67 | 16,666.67 | 16,666.67 | 16,666.67 |
Exception
If the taxpayer’s federal return includes an NOL carryback/carryforward, they are not eligible to take any deduction for bonus depreciation in that year. They will instead carry the amount forward to subsequent years and may take the deduction in a year with positive FAGI.
Conclusion
The pandemic has caused businesses to face an economic environment that’s not only challenging, but also unprecedented. Unfortunately, the slowdown in business activity has substantially increased the likelihood of potential losses. It’s therefore important to understand the above rules to ensure compliance, and prudent to give thoughtful consideration to whether you would take bonus depreciation in a given year or delay to future years.
Please contact your Schneider Downs tax advisor if you would like to discuss the provisions of the Ohio bonus depreciation addback/deduction or have any other questions.
