Information Release

PI & CFT 2002-02 - Ohio Bonus Depreciation Adjustments and the Internal Revenue Code's Passive Activity Loss, Basis Limitation and At-Risk Rules - November 7, 2002

An Ohio taxpayer claiming IRC section 168(k) bonus depreciation for federal income tax purposes for taxable years ending before June 5, 2002 must either (i) compute Ohio taxable income for that taxable year as if IRC section 168(k) had not been enacted or (ii) except as set forth below, add back five-sixths of the bonus depreciation claimed for that taxable year and then in each of the five subsequent taxable years deduct one-fifth of the amount previously added back. For taxable years ending after June 4, 2002 taxpayers cannot compute Ohio taxable income as if IRC section 168(k) had not been enacted; rather, taxpayers must generally add back five-sixths of the bonus depreciation claimed for the taxable year and then in each of the five subsequent taxable years deduct one-fifth of the amount previously added back. Applicable to assets which the taxpayer acquired during taxable years ending in 2001, 2002, 2003, and 2004, these adjustments also apply to depreciable assets acquired by the taxpayer's disregarded entities and to depreciable assets acquired by pass-through entities in which the taxpayer directly or indirectly has an equity interest of at least five percent.

If the taxpayer is a five percent or more equity investor in a pass-through entity which has claimed the IRC section 168(k) bonus depreciation and if, because of the Internal Revenue Code's passive activity loss limitation rules, basis limitation rules, or at-risk limitation rules, the taxpayer is unable to fully deduct a loss passing through from the pass-through entity to the taxpayer, then to the extent that the taxpayer does not currently recognize the loss the taxpayer can defer making the "5/6 add-back" until the taxable year or years for which the taxpayer deducts the pass-through entity loss and receives a federal tax benefit from the bonus depreciation amount claimed by the pass-through entity. Of course, the taxpayer cannot begin claiming the related five-subsequent-years deduction until the first taxable year immediately following the taxable year for which the taxpayer makes the 5/6 add-back.

If you have questions, please e-mail us.

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Applicable law: Ohio Revised Code sections 5733.04(I)(17), 5733.04(I)(18), 5733.40(A)(5), 5747.01(A)(20), 5747.01(A)(21), and 5747.01(S)(14).

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1 For detailed information regarding this adjustment, see the Department’s July 31, 2002 information release entitled, "Recently-enacted Ohio Legislation Affects Depreciation Deductions for Taxable Years Ending in 2001 and Thereafter" available at http://tax.ohio.gov/divisions/communications/information_releases/picft200201.html.