Indiana does not conform to federal §168(k) — 100% of your federal bonus depreciation must be added back on the Indiana state return. The federal deduction is unaffected; on the Indiana side you recover the timing difference through standard MACRS depreciation over the property's 5/15/27.5-year life. Because Indiana uses a 2.95% flat tax, the dollar hit is one of the smallest of any decoupled state. Visit the full state conformity hub to compare Indiana's treatment to every other US jurisdiction.
Modeled on a $150,000 federal §168(k) deduction.
How Indiana Treats §168(k) — The Add-Back Mechanic
Indiana defines "bonus depreciation" in IC 6-3-1-33 and requires taxpayers to add back the difference between federal depreciation (with §168(k) bonus) and Indiana depreciation (computed as if the taxpayer had elected out of §168(k)). The add-back is a permanent feature of Indiana's individual and corporate income tax systems, reported on the individual return using code 104.
Mechanically, the STR investor claims the full federal §168(k) bonus on Schedule E of the federal return, then makes an addition modification on the Indiana IT-40 in the amount of the bonus. Indiana depreciation is then taken as a subtraction over the property's normal MACRS life. Indiana Department of Revenue Information Bulletin #118 is the DOR's primary published guidance.
Because Indiana's individual income tax is a 2.95% flat rate (and phasing lower over the next several years under existing legislation), the dollar penalty of the add-back is small. On a $150,000 federal bonus, Indiana's Year-1 timing loss is roughly $4,425 — comparable to Arizona and smaller than every other decoupled state.
Worked Example — $150,000 Federal Deduction on an Indiana STR
Assume an STR investor buys a Brown County cabin, closes 2026, and identifies $150,000 in bonus-eligible 5-year and 15-year assets through a cost-segregation-quality report.
| Line | Federal | Indiana |
|---|---|---|
| Year 1 §168(k) deduction (bonus-eligible portion) | $150,000 | $0 (100% add-back) |
| Year 1 tax savings @ 37% federal / 2.95% IN flat | $55,500 | $0 |
| Year 1 Indiana MACRS recovery (approx.) | — | ~$16,900 (blended 5/15/27.5-yr MACRS) |
| Years 2 through end of asset life — IN subtraction modification | — | Remaining ~$133,100 recovered ratably |
The Year-1 Indiana miss is roughly $4,425 in state tax that would have been saved had Indiana conformed ($150,000 × 2.95% flat rate). That timing loss reverses as Indiana depreciation exceeds federal in later years. On the scale of decoupled-state penalties, Indiana is at the low end — behind only Arizona among fully decoupled states.
Pre-purchase, you can run the address on your property to see the combined federal-and-state after-tax cash flow before writing an offer.
The Statute Explained
Indiana uses a specified-date IRC conformity approach (updated periodically by the legislature) but has separately maintained a bonus depreciation add-back for years. The definition of "bonus depreciation" in IC 6-3-1-33 is what triggers the add-back, and it is written broadly enough to capture all §168(k) variants — including the OBBBA restoration of 100% bonus for property acquired and placed in service after January 19, 2025.
This structure — separate statutory add-back rather than a conformity-date exclusion — means the Indiana treatment does not change automatically with each IRC amendment. The legislature would need to affirmatively repeal or modify the add-back statute to conform.
How Indiana Compares to Federal-Conforming States
Roughly half the country conforms to federal §168(k) via rolling IRC conformity. In a full conformer like Colorado (4.4% flat), the same $150,000 federal bonus produces $6,600 in additional Year-1 state savings on top of the federal $55,500. Indiana STR investors don't get that stacking benefit.
But compared to other decoupled states, Indiana is one of the mildest. Only Arizona (~$3,750 at 2.5%) has a smaller Year-1 dollar penalty on the same $150,000 bonus. Compare against how Ohio does it (partial conformer with 5/6 add-back at 2.75% flat), or use the state conformity tool to run Indiana side-by-side with any other state at any federal deduction amount.
What This Means for Your STR Purchase Decision
For an STR investor evaluating a Brown County, Bloomington, or Michigan City property, Indiana's non-conformity is a real but small state-timing hit. Two takeaways:
First, the federal Year-1 bonus deduction remains the dominant tax number — Indiana takes nothing away from the federal $55,500 in Year-1 savings on a $150,000 bonus. Second, the Indiana add-back is small enough (~$4,425 in Year 1) that it should not swing an offer decision on its own. The federal §168(k) analysis dominates.
Before writing an offer on any Indiana STR placed in service after January 19, 2025, run the address on your property to get a line-item breakdown before committing.
Analyze a specific Indiana property
Run any Indiana STR listing through DepreciMax's $99 property report — line-item finish classification closely calibrated to a formal cost seg study, includes Indiana-specific add-back math.
Frequently Asked Questions
Does Indiana plan to conform to §168(k) in 2026?
No. Indiana defines "bonus depreciation" in IC 6-3-1-33 and permanently requires the add-back of federal §168(k) on the state return. No 2026 legislation has been introduced to conform. The add-back has been in place across multiple IRC conformity updates.
Can I still take federal bonus depreciation if I live in Indiana?
Yes. The federal §168(k) deduction is unaffected. An Indiana resident STR investor placing a property in service after January 19, 2025 can claim the full 100% federal bonus deduction under OBBBA (P.L. 119-21). Indiana only changes the state-return calculation.
How do I report the Indiana §168(k) add-back?
Indiana taxpayers report the bonus depreciation add-back on the individual return using code 104 (bonus depreciation add-back). Indiana depreciation is computed as if the taxpayer had elected out of §168(k). Indiana Department of Revenue Information Bulletin #118 explains the mechanics.
What happens on sale — does Indiana recapture the difference?
Indiana basis is higher than federal basis by the unrecovered add-back amount. On sale, Indiana gain is correspondingly smaller than federal gain, so the state timing difference reverses through subtractions across the depreciation period and, if not fully absorbed, through a lower Indiana gain at disposition.
Does Indiana's decoupling apply to §179 too?
Indiana conforms to federal §179 expensing but caps the deduction at $25,000 for state purposes — below the federal $1M+ limit. The §168(k) add-back under IC 6-3-1-33 is a separate statutory rule targeted specifically at bonus depreciation.
Every state's §168(k) position, in one place
Interactive map, sortable table, and deep-dive guide for each of the 51 jurisdictions — post-OBBBA verified.
See the 50-state map →Indiana statute: IC 6-3-1-33; Indiana Department of Revenue Information Bulletin #118 (in.gov/dor). Federal authority: IRC §168(k), as amended by the One Big Beautiful Bill Act (P.L. 119-21) restoring 100% bonus depreciation for property acquired and placed in service after January 19, 2025. Nothing in this article is tax advice. Consult a CPA who specializes in real estate before making investment decisions based on state-conformity projections.