Illinois Bonus Depreciation: Addback, Recovery, and IL-4562

Illinois bonus depreciation works by decoupling from the federal rule: the state requires you to add the entire federal bonus depreciation deduction back to Illinois taxable income, then gives it back gradually through an annual subtraction spread over the asset’s normal depreciable life. The total deduction is the same in the end. The timing is not. With the One Big Beautiful Bill Act restoring 100% federal bonus depreciation for property acquired after January 19, 2025, the year-one gap between your federal write-off and what Illinois lets you deduct is wider than it has been in years.¹

The Add-Back Rule

Illinois starts with federal taxable income and applies specific modifications. Under 35 ILCS 5/203, any bonus depreciation you claimed federally under IRC Section 168(k), and starting in 2026 under Section 168(n), must be added back on your Illinois return.¹ Public Act 104-0453 extended the existing add-back to cover the new Section 168(n) manufacturing deduction created by the OBBB.²

What the add-back costs depends on your entity type. C-corporations face a combined Illinois rate of 9.5%, made up of a 7% corporate income tax and a 2.5% personal property replacement tax.³ A C-corp claiming $500,000 in federal bonus depreciation adds the full $500,000 back for Illinois, which raises its state tax bill by $47,500 in year one. That money is not lost. It comes back over the asset’s recovery period. But the immediate cash flow hit is real, and it lands in the same year you likely just wrote a large check for the equipment itself.

How You Recover the Deduction

Illinois doesn’t deny the deduction permanently. It puts you on the depreciation schedule you would have followed had you elected out of bonus depreciation federally.

For property where you claimed 100% federal bonus depreciation, which covers most assets placed in service after December 31, 2020, and property acquired after January 19, 2025, the annual Illinois subtraction equals the depreciation you would have taken had you elected out of bonus depreciation under Section 168(k)(7) or Section 168(n)(6).¹ In practice, that means regular MACRS depreciation over the asset’s normal recovery period. A $500,000 piece of five-year equipment generates Illinois subtractions across roughly five to six years rather than a single-year write-off. The cumulative subtractions can never exceed the original add-back.

For assets with a federal bonus rate other than 100%, such as the old 80% or 60% phase-down years, the subtraction formula scales the annual amount to match what was added back.¹

The 40% Bonus Depreciation Gap

Property placed in service before January 1, 2025, on which you claimed 40% federal bonus depreciation, sits in a gap. The Illinois Income Tax Act did not include a subtraction formula for the 40% rate, so no annual subtraction is available for that property. The recovery waits until the asset is sold, disposed of, or reaches the final year of its regular federal depreciation schedule, whichever comes first.⁴ If you have assets stuck there, you carry the full add-back for years before you see anything back.

Disposition Before Full Recovery

Sell an asset before you’ve fully recovered the add-back and the unused balance becomes available as a subtraction in the year of disposition.⁴ For businesses that cycle through equipment quickly, that partially offsets the slower Illinois schedule.

What Changed Under the OBBB

Federal bonus depreciation was on a phase-down: 100% in 2022 dropping to 80%, 60%, and 40%, heading toward full expiration in 2027. The One Big Beautiful Bill Act reversed that. For qualified property acquired after January 19, 2025, Section 168(k) is back at 100% with no sunset.⁵ IRS Notice 2026-11 provides interim guidance on the acquisition-date rules.⁶

The OBBB also introduced a transition election that lets you deduct only 40% instead of 100%, or 60% for long-production-period property and certain aircraft, if the full deduction doesn’t fit your tax situation.⁶ From the Illinois angle, a smaller federal deduction means a smaller add-back. That alone can be a reason to consider the election, even when federal considerations wouldn’t push you toward it.

The OBBB also created a brand-new Section 168(n), providing 100% first-year expensing for nonresidential real property (normally 39-year property) used in qualified production activities like manufacturing and refining.⁷ Illinois requires the same add-back for Section 168(n) as for Section 168(k), starting with the 2026 tax year.¹ For a $10 million production facility, that means adding the full $10 million back at the state level and spreading the recovery over what would otherwise be a 39-year schedule. The cash flow gap between federal and Illinois treatment is far larger than for typical equipment.

Section 179 as the Workaround

Section 179 lets you immediately expense qualifying assets rather than depreciating them. Federally, it looks a lot like bonus depreciation. Illinois treats the two very differently. The add-back in 35 ILCS 5/203 targets Section 168(k) and Section 168(n) specifically, and it does not reference Section 179.¹ Section 179 deductions flow straight through to Illinois taxable income with no modification.

That makes Section 179 the more efficient choice for Illinois taxpayers when it’s available. The catch is that Section 179 has an annual dollar cap (adjusted for inflation) and a phase-out based on total qualifying property placed in service. Bonus depreciation has no dollar cap. For large capital investments, Section 179 won’t cover the whole cost, and the balance falls back into bonus depreciation territory with its Illinois add-back.

A common approach is to layer them: take Section 179 up to the annual limit, then apply bonus depreciation to whatever remains. You accept the Illinois add-back on the bonus portion, but you’ve kept the Section 179 portion off the add-back schedule entirely.

Pass-Through Entities and Individual Owners

Partnerships, S-corporations, trusts, and estates don’t compute the add-back and subtraction at the entity level in the way C-corporations do. The modifications flow through to owners on Schedule K-1-P or Schedule K-1-T.⁸ Individual partners, shareholders, and beneficiaries who receive these amounts follow the K-1 reporting instructions instead of completing their own IL-4562.

The Illinois individual income tax rate is 4.95%.⁹ For an S-corp owner whose share of a $200,000 bonus depreciation deduction flows through, that’s an extra $9,900 of Illinois tax in year one, recovered gradually over the asset’s life.

Filing on Form IL-4562

Anyone who reports bonus depreciation on federal Form 4562 must file Illinois Form IL-4562, Special Depreciation, with the state return. Step 2 handles the addition; Step 3 handles the subtraction.¹⁰ The form attaches to your IL-1120, IL-1120-ST, IL-1065, IL-1041, or IL-1040 depending on entity type.

For 100% bonus depreciation property acquired after January 19, 2025, Line 16 is where the subtraction is claimed. You enter the depreciation you would have taken had you elected out of bonus depreciation, which for most assets is the regular MACRS amount for that year.⁴ For property covered by Section 168(n), the same line applies, using the depreciation you’d have claimed without the Section 168(n)(6) election.

Recordkeeping is where this goes wrong. Every asset needs a running record of its bonus depreciation percentage, the federal deduction year, the cumulative Illinois subtractions taken, and the remaining balance. When your fixed asset ledger contains property from years with different bonus rates (100%, 80%, 60%, 40%), each asset follows its own subtraction formula. Lose track and you either overstate or understate your Illinois deductions, and neither reads well in an audit.

Planning Points Worth Checking

Two interactions are worth running through the numbers before a large capital purchase.

First, Section 163(j). For tax years beginning after December 31, 2024, the OBBB adds depreciation, amortization, and depletion back when calculating adjusted taxable income for the 30% business interest limitation. Large federal bonus depreciation raises federal ATI and expands the interest deduction ceiling. Because Illinois requires the bonus add-back, Illinois taxable income is already higher, so the interplay between interest limits and depreciation plays out differently on the state return than on the federal one.

Second, state credits and incentives. The temporary bump in Illinois taxable income from the add-back can affect eligibility for programs that use state taxable income as a threshold or a formula input. If you rely on any Illinois credit or incentive tied to income levels, check where the add-back puts you before you commit to the purchase.

1
Illinois General Assembly. Illinois Code 35 ILCS 5/203 – Base Income Defined
2
Illinois Department of Revenue. FY 2026-15, What’s New for Illinois Income Taxes
3
Illinois Department of Revenue. What Is the Tax Rate for Businesses, Trusts, and Estates?
4
Illinois Department of Revenue. 2025 Form IL-4562 Instructions
5
Internal Revenue Service. One, Big, Beautiful Bill Provisions
6
Internal Revenue Service. IRS Notice 2026-11 – Interim Guidance on Additional First Year Depreciation Deduction Under Section 168(k)
7
Internal Revenue Service. IRS Notice 2026-16 – Interim Guidance on Special Depreciation Allowance for Qualified Production Property Under Section 168(n)
8
Illinois Department of Revenue. 2025 Form IL-4562 Instructions
9
Illinois Department of Revenue. Income Tax Rates
10
Illinois Department of Revenue. 2025 IL-4562 Special Depreciation