My client, a farmer, died in the same year they claimed 100% federal bonus depreciation on a farm building -- can the estate take Illinois's offsetting Line 18 subtraction on Form IL-4562 to reverse that addition?

Plain-English summary

A farm tax preparer asked the Department about a client who died during the year, after the farm's federal return had claimed 100% federal bonus depreciation (under IRC Section 168(k)) on a newly built machine shed/shop. Illinois requires an ADDITION back for that bonus depreciation (IITA Section 203(a)(2)(D-15)), which had already pushed the decedent's Illinois taxable income -- and Illinois tax bill -- up substantially in the year the shed was placed in service, even though the taxpayer had no federal tax liability that year. In place of the disallowed bonus depreciation, Illinois separately allows a subtraction for the regular depreciation that would otherwise have been claimed (IITA Section 203(a)(2)(Z)).

The true reconciliation happens later: when the property is eventually sold, transferred, abandoned, or otherwise disposed of, or reaches the end of its depreciable life, IITA Section 203(a)(2)(D-16) and (AA) act as a "true-up" -- reversing the prior addition (via a Line 18 subtraction on Form IL-4562) so that, over the life of the asset, Illinois depreciation ends up matching federal depreciation. The preparer's question was whether the taxpayer's death qualified as that kind of disposition, since after death the shed passed to the estate.

The Department said no. Death of the taxpayer is not a "transfer or disposition" within the meaning of IITA Section 203(a)(2)(AA). It grounded this in IRS Publication 544, which states that "the transfer of property of a decedent to an executor or administrator of the estate, or to the heirs or beneficiaries, is not a sale or exchange or other disposition." Because Illinois's true-up subtraction is tied to the same disposition concept, the Line 18 subtraction simply isn't triggered by death -- the bonus-depreciation addition from the year the asset was placed in service is not reversed on the decedent's final return.

What this means for you

Farm operators and other businesses claiming heavy bonus depreciation

If you (or your accountant) elected large federal bonus depreciation on Illinois property, remember that Illinois adds that amount back to income up front and only reverses it later, when the specific property is actually sold, traded, abandoned, or worn out -- not simply because ownership changes hands through death. Plan for the cash-flow impact of the addition in the year the asset is placed in service, since the offsetting subtraction may not arrive for years, if ever, in the original taxpayer's hands.

Tax preparers handling a deceased taxpayer's final Illinois return

Don't claim the Line 18 "last year of regular depreciation" subtraction on a decedent's final IL-4562 solely because the property passed to an estate or heirs at death -- the Department has said in writing that death alone doesn't qualify as the "transfer or disposition" the subtraction requires.

Estates and heirs who inherit bonus-depreciated property

This letter doesn't say what happens to the pending addition once you, as the new owner, later sell or dispose of the inherited property yourself -- it only resolves the narrow question of whether death itself is a triggering event (it isn't). Get specific advice on how the true-up applies once you're the one disposing of the property.

Common questions

Q: Does a taxpayer's death count as a "transfer or disposition" that lets you take the Illinois Line 18 bonus-depreciation subtraction?
A: No. The Department relied on IRS Publication 544's rule that a transfer of property from a decedent to an executor, administrator, heir, or beneficiary is not a sale, exchange, or other disposition.

Q: Why does this matter if the estate/heirs still own the property?
A: Because Illinois's bonus-depreciation addition (IITA Section 203(a)(2)(D-15)) isn't reversed just because the original owner died -- the offsetting subtraction under Section 203(a)(2)(AA) is tied to an actual sale, trade, abandonment, other disposition, or the end of the property's depreciable life, none of which death itself satisfies.

Q: Can the Line 18 subtraction ever be claimed for this property?
A: This letter doesn't address that -- it resolves only the narrower question of whether death is a disposition event (it isn't); whether a later sale or disposal by the estate or heirs would trigger the subtraction isn't discussed.

Citations and references

Statutes and other authority:

• 35 ILCS 5/203(a)(2)(D-15) (addition modification for federal bonus depreciation)
• 35 ILCS 5/203(a)(2)(Z) (subtraction for regular depreciation in place of bonus depreciation)
• 35 ILCS 5/203(a)(2)(D-16) and (AA) (true-up addition/subtraction on disposal or end of useful life)
• IRS Publication 544 (transfer of property at death is not a sale, exchange, or other disposition)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2024.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2024/IT24-0011-GIL.pdf

Original ruling text

IT 24-0011-GIL 11/15/2024 SUBTRACTION MODIFICATIONS
Whether the transfer of property at death qualifies as a transfer or disposition
giving rise to the subtraction modification for bonus depreciation. (This is a GIL.)
November 15, 2024
NAME
BUSINESS
ADDRESS
Re:

Whether transfer of property at death constitutes the last year of
regular depreciation for purposes of the final subtraction for bonus
depreciation under 35 ILCS 5/203(a)(2)(AA)

Dear NAME:
This is in response to your email dated September 29, 2024, in which you
requested a letter ruling. The nature of your request and the information you
have provided require that we respond with a General Information Letter, which
is designed to provide general information, is not a statement of Department
policy and is not binding on the Department. See 2 Ill. Adm. Code 1200.120(b)
and (c), which may be found on the Department's web site at
https://tax.illinois.gov/
Your email states as follows:
Would like to hear a ruling on this issue that we have seen with a client.
Our firm prepares farm tax returns in central IL and have come across
an issue with a deceased taxpayer and IL 4562. The taxpayer died DATE and
in the year of death had spent $$$$$$ on a farm machine shed/shop prior to
death. So on the 2023 federal 4562 we claimed the %% bonus figure of $$$$$.
The taxpayer showed no federal AGI or taxable income and therefore paid no
federal tax. On the IL 4562 we put on line 1 - $$$$$ which resulted in an IL
addition and line 14 - $$$ and line 15 $$$$ for the 1st year of regular
depreciation on the "bonus portion". The taxpayer therefore had a large IL net
income in mid $$$k's due to this addition and therefore paid around $$k of IL
tax.

My question is if we are able to put a subtraction on line 18 of the IL 4562
for the "Last year of regular depreciation"? Here is what the IL 4562 instructions
say:
Line 18 - Last year of regular depreciation: This line allows you
to claim the same total Illinois depreciation and federal
depreciation over the period for which you claim federal
depreciation for an asset. For assets that you claim 30, 40, 50, 60,
or 80 percent bonus depreciation, you must reverse all the
additions claimed for each asset if this is the final year for which

you can claim regular federal depreciation because the asset was
sold, traded, abandoned, or otherwise disposed of, or
• reached the end of its depreciable life.
For assets that you elected 100 percent bonus depreciation, you
must reverse all the additions claimed for each asset if this is the
final year for which you would have claimed regular federal
depreciation had you elected not to claim bonus depreciation
under IRC Section 168(k)(7) because the asset
• was sold, traded, abandoned, or otherwise disposed of, or
• reached the end of its depreciable life.
Enter the Illinois special depreciation addition you reported on any
prior year Form IL-4562, Line I plus Line 2, for this property
I think the question is, has the taxpayer "disposed of or abandoned" the
property to their estate? Or maybe it has reached the "end of its depreciable
life" because it can no longer be depreciated?
I keep going back to the first sentence of the Line 18 instructions: "This
line allows you to claim the same total Illinois depreciation and federal
depreciation over the period for which you claim federal depreciation for an
asset". If we aren't allowed to claim this line 18 subtraction the taxpayer would
never have gotten to claim the same total IL depreciation as federal.

RULING
Section 203(a)(2)(D-15) of the Illinois Income Tax Act (IITA) provides for
an addition modification in the amount of any bonus depreciation taken on the
taxpayer's federal return under subsection (k) of Section 168 of the Internal
Revenue Code. In place of bonus depreciation, IITA Section 203(a)(2)(Z)
allows a subtraction modification for the regular depreciation that would have
been taken in that year but for subsection (k). Then at the end of the property's
useful life, or when the property is sold or otherwise disposed of, IITA Section
203(a)(2)(D-16) and (AA) operate as true-up provisions to reverse all prior
addition and subtraction modifications in order to arrive at the federal
depreciation taken on the same property. Specifically, Section 203(a)(2)(AA)
provides:
(AA) If the taxpayer sells, transfers, abandons, or otherwise
disposes of property for which the taxpayer was required in any
taxable year to make an addition modification under subparagraph
(D-15), then an amount equal to that addition modification.
If the taxpayer continues to own property through the last day of
the last tax year for which a subtraction is allowed with respect to that
property under subparagraph (Z) and for which the taxpayer was
required in any taxable year to make an addition modification under
subparagraph (D-15), then an amount equal to that addition
modification.

The taxpayer is allowed to take the deduction under this
subparagraph only once with respect to any one piece of property.
The death of a taxpayer does not constitute a transfer or disposition within
the meaning of IITA Section 203(a)(2)(AA) for which a subtraction can be taken on
Line 18 of Form IL-4562. IRS Publication 544 provides: "Transfer on death. The
transfer of property of a decedent to an executor or administrator of the estate, or
to the heirs or beneficiaries, is not a sale or exchange or other disposition."
As stated above, this is a general information letter which does not constitute
a statement of policy that applies, interprets or prescribes the tax laws, and it is not
binding on the Department. If you are not under audit and you wish to obtain a
binding Private Letter Ruling regarding your factual situation, please submit all of
the information set out in items 1 through 8 of Section 1200.110(b). If you have
any further questions, you may contact me at (217) 782-2844.
Sincerely,

Brian Fliflet
Deputy General Counsel, Income Tax Policy