Does Illinois Allow Bonus Depreciation? Form IL-4562 Add-Back

Illinois does not allow bonus depreciation. Every taxpayer — individuals, C-corporations, S-corporations, partnerships, and trusts — must add back the full amount of federal bonus depreciation when calculating Illinois taxable income.¹ In exchange, the state lets you recover the asset’s cost through an annual subtraction based on standard depreciation over its normal useful life. You end up deducting the same total amount; you just do it more slowly.

How the Add-Back and Subtraction Work

Section 203 of the Illinois Income Tax Act requires you to reverse the federal bonus depreciation deduction when computing Illinois base income, then recover the cost through standard depreciation over the asset’s full recovery period.² The practical result is a timing difference: your Illinois taxable income runs higher than your federal taxable income in the year of purchase, then lower in each year that follows as the subtractions flow through.

The subtraction equals the regular federal depreciation you would have claimed had you not elected bonus depreciation. That means standard MACRS applied to the asset class — five years for computers and vehicles, seven for office furniture, fifteen for qualified improvement property, and the usual longer periods for real property.

One timing wrinkle matters for assets still in their recovery period from earlier years. For property that received a reduced federal bonus percentage under the old phase-down (such as 40 or 60 percent), Illinois required the full addition in the year you claimed the federal bonus but delays the subtraction modification until the last year of the asset’s regular depreciation schedule.³ That can create a long cash-flow gap.

What Changed for 2026

The One, Big, Beautiful Bill Act permanently restored 100 percent federal bonus depreciation for qualified property acquired after January 19, 2025, ending the scheduled phase-down.⁴ The same law added IRC Section 168(n), which allows 100 percent expensing of certain nonresidential real property used in domestic manufacturing or production — buildings that would otherwise be depreciated over 39 years.

Illinois responded with Public Act 104-0453. For tax years beginning on or after January 1, 2026, the state’s addition modification covers bonus depreciation claimed under both Section 168(k) and the new Section 168(n).¹ If you place a qualifying production facility in service and write it off entirely on your federal return, you add that full amount back on your Illinois return and recover the cost over the building’s standard recovery period.²

Filing the Adjustment on Form IL-4562

Form IL-4562 (Special Depreciation) handles both halves of the adjustment, and it attaches to whichever Illinois return you file. On Line 1, you enter the total bonus depreciation reported on federal Form 4562, Lines 14 and 25, for property acquired after September 10, 2001.³ Individuals who reported bonus depreciation on federal Form 2106 enter that amount on Line 2. Line 16 calculates the subtraction based on what your regular depreciation would have been without the bonus election.

A few categories of property stay out of the add-back. Property you sold, traded, abandoned, or otherwise disposed of during the tax year is excluded, as is property claimed under certain special federal zone provisions (such as the former Gulf Opportunity Zone or Liberty Zone).³

Where the numbers land on your primary return depends on entity type:

C-corporations report the addition on Form IL-1120, Line 5, and the subtraction on Line 18. Check box K in Step 1 and attach Form IL-4562.⁵
Individuals report the amounts through Schedule M of Form IL-1040, which feeds Lines 3 (additions) and 7 (subtractions) of the individual return.⁶
Partnerships and S-corporations compute the modifications at the entity level and pass the amounts through to partners or shareholders on Schedule K-1-P.²

Illinois cross-references state returns with federal data from the IRS. If the modifications on your Illinois return don’t reconcile with your federal depreciation, the Department of Revenue can adjust your liability or issue a notice of deficiency. Keeping the asset purchase records, your federal Form 4562, and each year’s Form IL-4562 together makes any state inquiry much easier to answer.⁷

Section 179 Is the One Acceleration Illinois Allows

Illinois generally conforms to the federal Section 179 expensing election. The Form IL-4562 instructions direct taxpayers to exclude Section 179 amounts from the bonus depreciation add-back, specifying that the form covers “only the special depreciation allowance.”³ If you elect Section 179 instead of (or alongside) bonus depreciation on qualifying property, the Section 179 portion flows through to Illinois with no addition.

For 2025, the federal Section 179 limit is $2,500,000, reduced dollar-for-dollar once total qualifying property placed in service exceeds $4,000,000.⁸ Maximizing your Section 179 election before relying on bonus depreciation can shrink the Illinois add-back and the resulting timing difference. Section 179 has its own limits, though: it cannot create or increase a net operating loss, and it applies only to tangible personal property and certain improvements, not to most buildings.

Selling an Asset With Different Federal and Illinois Basis

When you sell property that was subject to Illinois depreciation modifications, your federal and state basis won’t match. Federally, 100 percent bonus depreciation leaves your adjusted basis at or near zero, so almost all of the sale price shows up as taxable gain. For Illinois purposes, your adjusted basis reflects only the standard depreciation taken through the annual subtractions, which produces a higher basis and a smaller gain.

Federally, gain on the sale of depreciable personal property is recaptured as ordinary income to the extent of all prior depreciation deductions.⁹ Because Illinois never allowed the accelerated deduction, the state calculation produces a different number. You also stop claiming the Illinois subtraction for any asset you sold, traded, or abandoned during the year.³

Penalties and Interest for Getting It Wrong

Interest on underpayments begins the day after the payment was due and runs until the balance is paid. The rate is 7 percent annually for the period through June 30, 2026.¹⁰

Two penalties on top of interest are worth knowing. If the Department of Revenue determines you did not make a reasonable attempt to comply — including carelessly omitting the addition modification — the negligence penalty is 20 percent of the resulting deficiency. If you file with intent to defraud, the penalty rises to 50 percent of the deficiency.¹¹

Because Illinois matches state filings against federal data, an omitted bonus depreciation add-back is among the more easily spotted errors. A running schedule for each asset — the federal bonus amount claimed, the cumulative Illinois subtractions taken, and the balance still to be recovered — keeps the numbers consistent year after year and makes it straightforward to pick back up where you left off.

1
Illinois General Assembly. Public Act 104-0453
2
Illinois Department of Revenue. Informational Bulletin FY 2026-15, What’s New for Illinois Income Taxes
3
Illinois Department of Revenue. 2025 Form IL-4562 Instructions
4
Internal Revenue Service. Notice 2026-11, Interim Guidance on Additional First Year Depreciation Deduction
5
Illinois Department of Revenue. 2025 Form IL-1120, Corporation Income and Replacement Tax Return
6
Illinois Department of Revenue. 2025 IL-1040 Schedule M Instructions
7
Internal Revenue Service. About Form 4562, Depreciation and Amortization
8
Internal Revenue Service. Instructions for Form 4562
9
Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property
10
Illinois Department of Revenue. Interest Rates
11
Illinois Department of Revenue. Pub-103, Penalties and Interest for Illinois Taxes