Bonus depreciation in Illinois

The rule

Follows federal §168(k) bonus

No

Federal bonus added back in year one

100%

State §179 cap

Follows federal

Illinois has rolling IRC conformity but a standing §203 addition modification that reverses bonus depreciation, so the entire federal §168(k) bonus is added back in year one on Form IL-4562 Step 2 and flows to Schedule M; the deferral is not lost — Step 3 gives an annual subtraction for the regular depreciation Illinois allows on the un-reduced basis over the asset's life, with any unrecovered balance released on disposition. Note the moving parts for 2025–2026: federal bonus is 100% for property acquired and placed in service after Jan. 19, 2025 (a 40%/60% election exists for the first taxable year ending after that date, which would scale the Illinois add-back correspondingly), and P.A. 104-0453 separately decoupled Illinois from §168(n) qualified-production-property bonus for tax years beginning on or after Jan. 1, 2026. Illinois has no §179 cap of its own — IL-4562 instructions direct that §179 amounts are not reported on the form.

What that costs, worked

Take a cost-segregation study that produces $250,000 of federal bonus depreciation and $50,000 of §179 in the first year — a realistic result on a single short-term rental.

Federal bonus depreciation

$250,000

Added back on the Illinois return

$250,000

Illinois taxable income is higher by

$250,000

A year-one figure. The state-side recovery of the added-back amount in later years is a separate schedule and is not modelled here.

Where this sits in the year

State conformity is the last thing that happens to a deduction, not the first. Before it matters, the property has to clear the seven-day average-stay test and the material participation tests, and the loss has to survive basis, at-risk, and the §461(l) cap — $256,000 single and $512,000 married filing jointly for 2026. The path is laid out in does my short-term rental qualify.

Common questions

Does Illinois allow bonus depreciation?

No — Illinois does not follow the federal bonus depreciation rules. 100% of the federal bonus deduction is added back to your Illinois taxable income in year one, so your state bill does not fall the way your federal bill does.

Does this change my federal deduction?

No. State conformity affects only your state return. The federal bonus deduction is unchanged — which is why a cost-segregation study can still be worth doing in a state that decouples, just for a smaller total benefit.

Is the added-back amount lost?

Not usually. States that require an add-back generally let you recover the amount through ordinary depreciation on the state's own schedule in later years. Illinois has rolling IRC conformity but a standing §203 addition modification that reverses bonus depreciation, so the entire federal §168(k) bonus is added back in year one on Form IL-4562 Step 2 and flows to Schedule M; the deferral is not lost — Step 3 gives an annual subtraction for the regular depreciation Illinois allows on the un-reduced basis over the asset's life, with any unrecovered balance released on disposition. Note the moving parts for 2025–2026: federal bonus is 100% for property acquired and placed in service after Jan. 19, 2025 (a 40%/60% election exists for the first taxable year ending after that date, which would scale the Illinois add-back correspondingly), and P.A. 104-0453 separately decoupled Illinois from §168(n) qualified-production-property bonus for tax years beginning on or after Jan. 1, 2026. Illinois has no §179 cap of its own — IL-4562 instructions direct that §179 amounts are not reported on the form.