Bonus depreciation in Kentucky
No — Kentucky does not follow the federal bonus depreciation rules. 100% of the federal bonus deduction is added back to your Kentucky taxable income in year one, so your state bill does not fall the way your federal bill does. It also caps Section 179 expensing at $100,000, below the federal limit.
The rule
- Follows federal §168(k) bonus
- No
- Federal bonus added back in year one
- 100%
- State §179 cap
- $100,000
Full bonus add-back. Schedule M (740) Part I line 3 adds back ALL federal Form 4562 depreciation and Part II line 12 subtracts depreciation recomputed on a 'created' Kentucky Form 4562, on which the taxpayer is told to strike out and ignore the special depreciation allowance line — so the bonus is recovered as ordinary MACRS over the asset's life, never as a year-one deduction. Kentucky is STATICALLY conformed for depreciation to the IRC in effect 12/31/2003 (12/31/2001 for property placed in service 9/11/2001-12/31/2019), so OBBBA's permanent 100% bonus never reaches a Kentucky return. Section 179 is capped at $100,000 for property placed in service on or after 1/1/2020, and the federal investment phase-out threshold does not apply for Kentucky purposes.
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 Kentucky return
- $250,000
- Kentucky 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 Kentucky allow bonus depreciation?
- No — Kentucky does not follow the federal bonus depreciation rules. 100% of the federal bonus deduction is added back to your Kentucky taxable income in year one, so your state bill does not fall the way your federal bill does. It also caps Section 179 expensing at $100,000, below the federal limit.
- 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. Full bonus add-back. Schedule M (740) Part I line 3 adds back ALL federal Form 4562 depreciation and Part II line 12 subtracts depreciation recomputed on a 'created' Kentucky Form 4562, on which the taxpayer is told to strike out and ignore the special depreciation allowance line — so the bonus is recovered as ordinary MACRS over the asset's life, never as a year-one deduction. Kentucky is STATICALLY conformed for depreciation to the IRC in effect 12/31/2003 (12/31/2001 for property placed in service 9/11/2001-12/31/2019), so OBBBA's permanent 100% bonus never reaches a Kentucky return. Section 179 is capped at $100,000 for property placed in service on or after 1/1/2020, and the federal investment phase-out threshold does not apply for Kentucky purposes.
Sources
- Kentucky Schedule M (Form 740), tax year 2025, 42A740-M (10-25), Instructions for Line 12 — Depreciation, Section 179 Deduction and Gains/Losses From Disposition of Assets — Read directly. States: 'In Part II, strikethrough and ignore line 14, Special depreciation allowance for qualified property placed in service during the tax year.' Also directs use of 'the IRC in effect on December 31, 2003 for property placed into service on or after January 1, 2020.'
- Kentucky Schedule M (Form 740), tax year 2025, Line 12 instructions, 'Create a Kentucky Form 4562' paragraph — Read directly. 'For property placed into service on or after January 1, 2020: in Part I, line 1 enter the Kentucky limit of $100,000 and the phaseout threshold does not apply for purposes of determining Kentucky depreciation.' (Prior period: $25,000 limit / $200,000 phase-out.)
- docs/05-tax-reference.md §6 — state conformity shifts yearly — a maintained feed re-checked against current DOR guidance, not a fixed fact
- docs/05a-tax-deep-dive.md §R — year-one add-back signal only; the state-side recovery schedule (state depreciation on the added-back basis) is deferred to the depreciation engine
State conformity shifts from year to year. These figures are maintained against current Department of Revenue guidance, and the citation above is what they were checked against — verify before relying on them for a filing. Model your own year.