Arizona does not fully conform to the federal bonus depreciation provisions under Internal Revenue Code (IRC) §168(k). As a result, taxpayers who claim federal bonus depreciation may be required to make Arizona-specific depreciation adjustments when computing Arizona taxable income.
Arizona Bonus Depreciation Adjustment Concept
- When federal bonus depreciation is claimed under IRC §168(k), Arizona generally requires an addition adjustment equal to 20% of the federal bonus depreciation deduction claimed for the taxable year. The remaining difference is generally recovered through subtraction adjustments in subsequent taxable years, as provided under Arizona law.
- These adjustments ensure that Arizona taxable income reflects Arizona's nonconformity to the federal bonus depreciation rules while allowing taxpayers to recover the adjustment over time.
How Arizona Depreciation Is Treated
Federal Bonus Depreciation Adjustment: If federal bonus depreciation under IRC §168(k) is claimed, Arizona generally requires an addition adjustment equal to 20% of the federal bonus depreciation deduction, as prescribed by Arizona law.
Future Subtraction Adjustments: After the required addition adjustment, taxpayers may claim Arizona subtraction adjustments in future taxable years to recover the remaining depreciation difference in accordance with Arizona statutes.
Section 179 Expensing: Arizona's treatment of Section 179 expensing differs from its treatment of federal bonus depreciation. Taxpayers should apply the Arizona conformity rules applicable to Section 179 separately from the bonus depreciation adjustment rules.
Pass-Through Entity Adjustments: Taxpayers may receive Arizona bonus depreciation addition or subtraction adjustments from partnerships, S corporations, estates, and trusts. These adjustments are generally reported to owners or beneficiaries on Arizona Schedule K-1 and must be reported on the Arizona income tax return as required.
Important Notes
- Arizona's bonus depreciation adjustments apply only when federal bonus depreciation under IRC §168(k) has been claimed.
- Taxpayers should maintain adequate records to support Arizona depreciation adjustments and any related basis differences for Arizona income tax purposes.
- Arizona depreciation adjustments are reported on the applicable addition or subtraction lines of the Arizona individual income tax return, as instructed in the current Form 140 Instructions.
Source:
Form ITP 16-2
Form 140
Disclaimer: Always verify with the current Federal and State Department of Revenue Forms and Instructions. Tax rules may change annually. For complex situations, consult a CPA or tax attorney.