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 in the tax year the 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. The bonus depreciation may flow through an estate or trust to its beneficiaries on Schedule KF. 

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. 

Report each partner's or shareholder's share of the entity’s entire federal bonus depreciation on the federal bonus depreciation line of one of these forms:

• Schedule KPI, Partner’s Share of Income, Credits and Modifications
• Schedule KPC, Partner’s Share of Income, Credits, and Modifications
• Schedule KS, Shareholder’s Share of Income, Credits and Modifications

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.

Note: A beneficiary’s share of bonus depreciation on the Schedule KF, Beneficiary’s Share of Minnesota Taxable Income, is reported at 80% of the federal bonus depreciation amount. See Form M2, Income Tax Return for Estates and Trusts, instructions for more details. 

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.

If bonus depreciation generated a loss in an activity that cannot be deducted this year due to a federal limitation, your bonus depreciation must be reduced by the amount of loss not allowed from the activity for the tax year, up to the bonus depreciation claimed by the activity.

Federal limitations include:

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

To qualify for the subtraction, both 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. 

Nonresidents filing a Form M1NR, Nonresidents/Part-Year Residents, would use the current tax year’s Minnesota apportionment ratio to calculate the Minnesota portion of the subtraction.

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. 290.0132, subd. 9.

Unused Subtractions of Deceased Individuals

If an individual has unused bonus depreciation subtractions when they die, the subtractions are not allowed to be carried to the income tax return of the individual’s estate or trust. 

Use this table to determine on which form to claim the subtraction. 

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 2024, Kelly received their share of ordinary income from Capital T on federal Schedule K-1, which includes their share of bonus depreciation. Kelly reports the ordinary income on federal Schedule E when filing the federal return.

When Capital T files its Minnesota Form M8, S Corporation Return, it will report Kelly’s share of bonus depreciation on Schedule KS, Shareholder’s Share of Income, Credits and Modifications. Assume Kelly’s 100% share of federal bonus depreciation is $75,000. 

When Kelly completes Schedule M1MB, Business Income Additions and Subtractions, they will need to add back $60,000 (80% of $75,000) to their Minnesota taxable income.

To determine their tax liability for 2024, they file the Minnesota return using Schedule M1NR, Nonresidents/Part-Year Residents.

Kelly calculates the bonus depreciation addition and subtraction on Schedule M1NR:

• Column A: $60,000 (full addback reported on Schedule M1MB)
• Column B: $60,000 x 0.50 (apportionment ratio) = $30,000

Note: The 2024 bonus depreciation addition reported in column A ($60,000) is the same amount reported on the Federal Bonus Depreciation addition line of Schedule M1MB, Business Income Additions and Subtractions.

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

For Tax Year 2023

Sam received their share of the ordinary loss from ACME, Inc. on federal Schedule K-1 in the amount of ($10,000), which includes their share of bonus depreciation. Due to a federal loss limitation, Sam must report $0 on their federal Schedule E when filing the federal return.

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

When ACME, Inc. files its Minnesota Form M8, S Corporation Return, it will report Sam’s share of bonus depreciation on Schedule KS, Shareholder’s Share of Income, Credits and Modifications. Assume Sam’s 100% share of federal bonus depreciation is $30,000.

Sam will complete and file Schedule M1MB, Business Income Addition and Subtraction with their 2023 Minnesota income tax return. Since Sam is not allowed to use $10,000 of the bonus depreciation in 2023 due to the federal loss limitation, they are only required to addback 80% of the amount deducted federally. Sam will include $20,000 ($30,000 less $10,000) in step 2 of the Schedule M1MB bonus depreciation worksheet. 

Sam will complete the Schedule M1MB bonus depreciation worksheet located in the instructions as follows:

For Tax Year 2024

Sam received their share of ordinary income from ACME, Inc., which includes their share of bonus depreciation for the tax year. Sam reports the ordinary income on their federal Schedule E when filing the federal return.

When ACME, Inc. files its Minnesota Form M8, it will report Sam’s share of bonus depreciation on Schedule KS. Assume Sam’s 100% share of federal bonus depreciation is $50,000. Additionally, Sam determined the $10,000 suspended bonus depreciation from 2023 may be deducted on their 2024 federal return.

Sam will complete and file Schedule M1MB with their 2024 Minnesota income tax return. Since Sam deducts the $50,000 bonus depreciation from the 2024 tax year and the $10,000 suspended bonus depreciation from the 2023 tax year on their 2024 federal return, they are required to addback 80% of $60,000 (the amount deducted federally). 

The $50,000 from 2024 will be included on step 2 of the Worksheet for Line 1 of Schedule M1MB. 

The suspended bonus depreciation from 2023 will be added back using the Worksheet for Line 4 of Schedule M1MB. 

Note: Sam is allowed a bonus depreciation subtraction on their 2024 Minnesota income tax return in the amount of $3,200 (20% of the 2023 addition for $16,000).

C corporations – Additions: Minnesota Statute 290.0133 subdivision 11

C corporations – Subtractions: M.S. 290.0134, subd. 13

Individuals, Estates, and Trusts – Additions: M.S. 290.0131, subd. 9

Individuals, Estates, and Trusts – Subtractions: M.S. 290.0132, subd. 9

Minnesota Income Tax Treatment of Federal Bonus Depreciation from the Minnesota Legislature