Bonus Depreciation

If you generated a loss in an activity that cannot be deducted in the current tax year, you may reduce bonus depreciation reported on federal Form 4562 by the amount of the loss not allowed from the activity, up to the bonus depreciation claimed by the activity.

In a future year, you must include the bonus depreciation as an addition when the tax year suspended loss is allowed. The bonus depreciation is treated as the last suspended loss allowed.

If a partnership or S corporation chose the special depreciation allowance for qualified property on its federal forms, this bonus depreciation must flow through to the partners or shareholders.

For Minnesota tax purposes, the business entity reports the bonus depreciation to partners on Schedule KPI or Schedule KPC and to shareholders on Schedule KS.

Partners and shareholders must add back 80% of the bonus depreciation amount to their Minnesota taxable income for the year the bonus depreciation was claimed. They may recover the remaining depreciation by subtracting 20% of the addback amount in each of the next five years. See Minnesota Statutes 290.0131, subdivision 9, and M.S. 290.0132, subd. 9.

On the federal bonus depreciation line of the Schedule KPI, Schedule KPC, or Schedule KS, report each partner's or shareholder's share of the partnership's or S corporation's entire federal bonus depreciation. Do not multiply this amount by 80%. Each partner or shareholder will calculate their own addback amount when completing their Minnesota income tax return.

For example, if a partnership or s corporation has $1,000 in federal bonus depreciation and two 50% partners or shareholders, report $500 on each Schedule KPI, Schedule KPC, or Schedule KS.

You must add back 80% of allowable bonus depreciation when calculating Minnesota taxable income. You may recover this amount when you subtract it from taxable income over the next five years. See Minnesota Statutes, section 290.0133, subdivision 11.

Federal limitations include:

• Passive activity loss
• Loss in excess of basis
• Excess business loss

To qualify for a subtraction, both of the following must be true:

• You deducted bonus depreciation on your federal tax return in one or more of the five previous years
• You added back 80% of that deduction on your Minnesota return in the same year

If you qualify, you may subtract 20% of the required addition from taxable income in each of the five taxable years following the year the addition is required. See M.S. 290.0132, subd. 9, and M.S. 290.0134, subd. 13.

Sale or Disposition of Assets

If you sell or dispose of an asset during the five-year subtraction period, you may not take the remainder of the subtraction in the year of sale or disposition. Instead, you must continue with the five-year schedule.

Do not adjust your federal gain or loss on the sale or disposition of the asset due to the Minnesota treatment of the bonus depreciation.

Conversion from C Corporation to S Corporation

If you own an S corporation that converted from a C corporation, you may claim prorated subtractions of the predecessor’s remaining bonus depreciation subtractions. See M.S. 290.0123, subd. 9.

Kelly, a nonresident of Minnesota, is a 60% shareholder of Capital T, an S corporation that had 50% of its sales in Minnesota.

For tax year 2022, she received a federal Schedule K-1 from Capital T showing her share of bonus depreciation in the amount of $75,000. Kelly uses this amount when filing her federal return.

The $75,000 represents 100% of her share of the basis in the qualifying property placed in service in 2022. She will see her Federal Adjusted Gross Income reduced by $75,000, which reduces the income listed on line 1 of the Form M1. When she completes her Schedule M1MB, Business Income Additions and Subtractions, she will need to add back $60,000 (80% of $75,000) to her Minnesota taxable income.

To determine her tax liability for 2022, she files the Minnesota return using Schedule M1NR, Nonresidents/Part-Year Residents.

Kelly calculates her bonus depreciation addition and subtraction on Schedule M1MR:

• Line 10, Column A: $60,000 (full addback reported on Schedule M1M)
• Line 10, Column B: $60,000 x 0.50 (business ratio) = $30,000

Note: The 2022 bonus depreciation addition reported on line 10, column A ($60,000), is the same amount reported on the Federal Bonus Depreciation addition line of Schedule M1M, Income Additions and Subtractions.

Sam, a resident of Minnesota, is a 60% shareholder of SAM, Inc., an S corporation.

For tax year 2023, Sam received a federal Schedule K-1 from SAM, Inc. showing her share of bonus depreciation in the amount of $30,000. Sam did not have any other bonus depreciation.

When Sam prepares her federal income tax return, $10,000 of the federal bonus depreciation generated a loss that could not be deducted on her 2023 federal return.

Sam will complete and file Schedule M1MB, Business Income Addition and Subtraction, with her 2023 Minnesota income tax return. Since Sam is not allowed to use $10,000 of the bonus depreciation in 2023, she is only required to addback 80% of the amount that was deducted federally.

Because $10,000 of her share of the reported federal bonus depreciation generated a loss that could not be deducted on her 2023 return, Sam will include $20,000 in step 2 rather than her full $30,000 share of bonus depreciation from SAM, Inc.

Because Sam did not have any other bonus depreciation, she will enter $16,000 on line 1 of her Schedule M1MB.

Sam will complete the worksheet for line 1 of Schedule M1MB located in the instructions as follows:

For tax year 2023, Sam received a federal Schedule K-1 from SAM, Inc. showing her share of bonus depreciation in the amount of $50,000. The entire $50,000 may be deducted on her 2023 federal return. Additionally, Sam determined the $10,000 suspended bonus depreciation from 2022 may be deducted on her 2023 federal return.

Sam will complete and file Schedule M1MB, Business Income Addition and Subtraction, with her 2023 Minnesota income tax return. Since Sam deducts the $50,000 bonus depreciation from the 2023 tax year and the $10,000 suspended bonus depreciation from the 2022 tax year on her 2023 federal return, she is required to addback 80% of $60,000 (the amount that was deducted federally).

Schedule M1MB, Business Income Additions and Subtractions

Worksheet for Line 1, Federal bonus depreciation addition

Note: Sam is allowed a bonus depreciation subtraction on her 2023 Minnesota income tax return in the amount of $4,000 (20% of $16,000).