If I claimed federal bonus depreciation, do I have to add part of it back on my Nebraska individual income tax return?

Plain-English summary

Nebraska did not fully follow the extra federal "bonus depreciation" Congress created in the Job Creation and Worker Assistance Act of 2002 (Internal Revenue Code sections 168(k) and 1400L). Because of Nebraska legislation, for returns filed after September 10, 2001, an individual who deducted that bonus depreciation on a federal return must add back 85% of it in figuring Nebraska income — for assets placed in service after September 10, 2001 and before September 11, 2004.

Where it goes on the return. Enter 85% of the bonus depreciation deducted on a 2000 or 2001 federal return on:

• line 43, Nebraska Schedule I, Form 1040N (for 2001 returns), or
• line 41, Nebraska Schedule I, Form 1040N (for 2000 returns).

If you already filed the original Form 1040N, report the increase on an amended Nebraska return.

Pass-through entities. Bonus depreciation received by a partnership, limited liability company, cooperative (including a section 521 cooperative), S corporation, or joint venture is distributed to the partners, members, shareholders, patrons, or beneficiaries the same way income is, and each reports it on their own Form 1040N. The amount is reduced to exclude any bonus depreciation from an S corporation or LLC that is not derived from or connected with Nebraska sources under Neb. Rev. Stat. §77-2734.01.

Getting it back later. The amount added back is subtracted in equal pieces of 20% per year over five years, beginning with the first tax year that begins on or after January 1, 2005.

What this means for you

An individual who claimed federal bonus depreciation

You can't keep the full federal deduction for Nebraska. Add back 85% now on Nebraska Schedule I, then recover it as a 20%-per-year subtraction over five years starting in 2005.

An owner of a partnership, S corporation, or LLC

Your share of the entity's bonus-depreciation add-back flows through to your individual return like your share of income — minus any part tied to non-Nebraska sources.

Common questions

Q: How much do I add back?
A: 85% of the federal bonus depreciation for qualifying assets placed in service after September 10, 2001 and before September 11, 2004.

Q: Which line do I use?
A: Line 43 of Nebraska Schedule I, Form 1040N for 2001 returns (line 41 for 2000 returns).

Q: Do I ever get the deduction back?
A: Yes — subtract 20% of the added-back amount each year for five years, starting with the first tax year beginning on or after January 1, 2005.

Citations and references

• Job Creation and Worker Assistance Act of 2002 — Internal Revenue Code sections 168(k) and 1400L — the federal bonus depreciation that triggers the Nebraska add-back.
• Neb. Rev. Stat. §77-2734.01 — determines the portion of pass-through bonus depreciation derived from or connected with Nebraska sources.
• Form 1040N, Nebraska Schedule I (lines 43 and 41) — where the 85% add-back is reported.

Source

• Landing page: https://revenue.nebraska.gov/about/legal-information/revenue-rulings-issued-tax-commissioner
• Original PDF: https://revenue.nebraska.gov/sites/revenue.nebraska.gov/files/doc/legal/rulings/rr220201.pdf

Original ruling text

REVENUE RULING 22-02-1
May 3, 2002
Individual Income Tax -- Bonus Depreciation. INDIVIDUALS RECEIVING BONUS
DEPRECIATION UNDER THE FEDERAL JOB CREATION AND WORKER ASSISTANCE
ACT OF 2002 (SECTIONS 168(k) OR 1400L OF THE INTERNAL REVENUE CODE) MUST
ADJUST THEIR NEBRASKA INCOME TAX RETURNS TO ADD BACK A PORTION OF
SUCH BONUS DEPRECIATION.
Advice has been requested as to whether individuals who received bonus depreciation under certain
federal law provisions must adjust their Nebraska income tax returns to add back a portion of such
bonus depreciation.
Due to recent legislation enacted by the Nebraska Legislature, for Nebraska income tax returns
filed after September 10, 2001, individual taxpayers must increase federal adjusted gross income
by eighty-five percent of any amount of bonus depreciation received under the Job Creation and
Worker Assistance Act of 2002 (sections 168(k) or 1400L of the Internal Revenue Code of 1986, as
amended) for assets placed in service after September 10, 2001, and before September 11, 2004.
Specifically, eighty-five percent of bonus depreciation deducted on a tax year 2000 or 2001 federal
income tax return should be entered on line 43, Nebraska Schedule I, Form 1040N (for 2001
returns), or line 41, Nebraska Schedule I, Form 1040N (for 2000 returns). If an original Nebraska
Form 1040N has already been filed, report the increase on the appropriate amended Nebraska
return.
For any bonus depreciation received by partnerships, limited liability companies, cooperatives
(including any cooperative exempt from income taxes under section 521 of the Internal Revenue
Code of 1986, as amended), S corporations, or joint ventures, the increase shall be distributed to
the partners, members, shareholders, patrons, or beneficiaries in the same manner as income is
distributed for purposes of calculating their tax liabilities on their Nebraska Individual Income Tax
Returns, Forms 1040N. The increase shall be modified to exclude the portion of bonus depreciation
received from an S corporation or a limited liability company that is not derived from or connected
with Nebraska sources as determined in Neb. Rev. Stat. §77-2734.01.
The amount of bonus depreciation added to federal adjusted gross income for Nebraska purposes
shall be subtracted in later taxable years as follows:
Twenty percent of the total amount of bonus depreciation added back may be subtracted in
the individual’s first taxable year beginning or deemed to begin on or after January 1, 2005, as
determined under the Internal Revenue Code of 1986, as amended; and
Twenty percent in each of the next four following taxable years.
APPROVED:

Mary Jane Egr
State Tax Commissioner
May 3, 2002

Nebraska Department of Revenue, P.O. Box 94818, Lincoln, Nebraska 68509-4818