State Bonus Depreciation Add-Back Forms for STR Owners (2026)

Before you start — what you need on the desk

Every state add-back mechanic works the same way at a high level: the state wants you to add back your federal §168(k) deduction and instead take the depreciation you would have taken under regular MACRS. So you need two numbers:

1. Your federal §168(k) deduction — pulled from federal Form 4562, Part II, Line 14 (Special depreciation allowance) and flowed to Schedule E. If you ran a DepreciMax report, this is the "Total Year-1 bonus-eligible" number the report shows.
2. What state MACRS depreciation would have been — computed as if you had elected out of §168(k). For a $150,000 5-year property placed in service mid-year, that is usually about $30,000 in Year 1 (200% declining balance, half-year convention). For 15-year land improvements, roughly $7,500. For 27.5/39-year real property, it is unchanged (bonus never applied). Your CPA or tax software runs this; DepreciMax reports also show the state-recovery schedule for decoupled states.

The add-back is (1) minus (2). Every state form below asks for either that difference, the two numbers separately, or the recomputed net rental income.

1. California — Schedule CA (540) & FTB 3885A

California decouples fully. On $150K federal bonus, you lose $19,950 in state savings. Status: 100% add-back. Top rate 13.3%. Statute: R&TC §17024.5, §17250.

California has always disallowed federal §168(k) for both personal income tax and corporation tax. SB 711 (enacted October 1, 2025) advanced California's IRC conformity date from 1/1/2015 to 1/1/2025 — but explicitly excluded OBBBA, so §168(k) remains disallowed. On a $150,000 federal bonus deduction, California STR investors miss roughly $19,950 in Year-1 state savings (the largest miss in the country).

• Main return: Form 540 (resident) or Form 540NR (nonresident / part-year).
• Adjustment schedule: Schedule CA (540) — California Adjustments.
• Depreciation worksheet: FTB Form 3885A — Depreciation and Amortization Adjustments (Individuals). Compute California MACRS depreciation without §168(k).
• What goes where: Report the federal-to-California depreciation difference in Schedule CA (540), Part I — Income Adjustment Schedule, in the section that mirrors your federal Schedule E rental income. Federal amount goes in Column A, California amount in Column B, the difference is picked up as an addition in Column C.
• Basis tracking: Keep a separate California depreciation schedule for every §168(k)-eligible asset. State basis will be higher than federal until MACRS catches up. On sale, gain is recomputed with California basis on Schedule CA.

2. Arizona — Form 140, Schedule A + ITP 16-2

Arizona decouples via a two-step add/subtract. The 2.5% flat rate keeps the pain small. Status: 100% add-back. Flat 2.5%. Statute: A.R.S. §43-1021, §43-1022.

Arizona requires taxpayers to add back federal depreciation under §167(a) and subtract depreciation computed as if the taxpayer had elected out of §168(k) under §168(k)(2)(D)(iii). ITP 16-2 (Individual Income Tax Procedure) documents the mechanic. On a $150,000 federal bonus deduction, an Arizona STR investor loses only ~$3,750 in state savings — the smallest hit of any decoupled state, thanks to the 2.5% flat rate.

• Main return: Form 140 (resident individual).
• Adjustment schedule: Form 140, Schedule A — Adjustments to Federal AGI.
• Add-back line: "Depreciation adjustment" (addition) — the total federal depreciation on §168(k)-eligible property. Reported per A.R.S. §43-1021.
• Subtract line: "Depreciation computed without §168(k)" (subtraction) — regular MACRS depreciation. Reported per A.R.S. §43-1022.
• Net effect: The two lines together produce the same net timing hit as a single add-back would in other states. Arizona uses this two-step approach because it maintains a separate state depreciation schedule for every §168(k)-eligible asset.

3. North Carolina — D-400 Schedule S (85% add-back, 5-year recovery)

North Carolina is a partial conformer. 15% comes through in Year 1, 85% is added back and recovered ratably over 5 years. Status: 85% add-back. Flat 3.99%. Statute: N.C. Gen. Stat. §105-153.6.

North Carolina allows 15% of federal §168(k) bonus in Year 1 and requires the other 85% to be added back on the current-year return. The add-back is then subtracted at 20% per year over the next 5 taxable years — full recovery in 5 years, much faster than the state-MACRS-life catch-up that other decoupled states use. On a $150,000 federal bonus deduction, a NC STR investor gets a $22,500 state deduction in Year 1 (worth about $898 at 3.99%) and recovers the remaining $127,500 add-back at $25,500 per year over the next five years.

• Main return: Form D-400 — Individual Income Tax Return.
• Adjustment schedule: D-400 Schedule S — N.C. Adjustments for Individuals.
• Year 1 add-back line: D-400 Schedule S, Part A — Additions to Federal AGI, "Bonus depreciation" line. Add 85% of your federal §168(k) deduction.
• Years 2-6 subtract line: D-400 Schedule S, Part B — Deductions from Federal AGI, "Bonus depreciation" line. Subtract 20% of the Year-1 add-back each year for 5 years.
• Basis tracking: N.C. basis of the asset is the same as federal — no separate basis to track. Only the deduction timing differs.

4. Pennsylvania — PA-40 & PA Schedule E (recompute from scratch)

Pennsylvania has no line-item add-back — you rebuild rental income without §168(k) on PA Schedule E. Status: 100% add-back. Flat 3.07%. Statute: 72 P.S. §7303.

Pennsylvania Personal Income Tax (PIT) is the tax individual STR investors pay. Unlike states with a discrete add-back line, PA PIT computes net income from rental activities entirely without §168(k) bonus depreciation — you rebuild Schedule E from the ground up for state purposes. Depreciation is recalculated under IRC §§167 and 168 without bonus. Act 72 of 2018 fixed corporate net income tax depreciation timing, but PIT treatment is unchanged. On a $150,000 federal bonus deduction, a PA STR investor loses ~$4,605 in Year-1 state savings.

• Main return: PA-40 — Pennsylvania Personal Income Tax Return.
• Rental income schedule: PA Schedule E — Rents and Royalty Income (Loss). Report gross rents and all expenses. For depreciation, use regular MACRS without §168(k).
• Where the delta shows up: The delta between federal Schedule E net income and PA Schedule E net income never appears as a discrete number on any form. It surfaces as a higher PA net rental income on PA-40 Line 6 (Net Income or Loss from Rents, Royalties, Patents, and Copyrights).
• Basis tracking: Track separate PA basis for every §168(k)-eligible asset. On sale, gain/loss is recomputed with PA basis on PA Schedule D.

5. New Jersey — NJ-1040 & Form GIT-DEP

New Jersey uses a dedicated worksheet (GIT-DEP) to compute the depreciation adjustment for every §168(k) asset. Status: 100% add-back. Top rate 10.75%. Statute: N.J.S.A. §54A:5-1.2; P.L. 2002 c.40.

New Jersey has decoupled from §168(k) since P.L. 2002 c.40. For Gross Income Tax (GIT) — the tax individual STR investors pay — federal bonus depreciation is disallowed and depreciation is recomputed under the Internal Revenue Code as of the applicable statutory date. On a $150,000 federal bonus deduction, a NJ STR investor at the 10.75% top rate loses ~$16,125 in Year-1 state savings — one of the largest state timing hits nationally.

• Main return: NJ-1040 — Resident Income Tax Return (or NJ-1040NR for nonresident).
• Depreciation worksheet: Form GIT-DEP — Gross Income Tax Depreciation Adjustment Worksheet. Compute NJ-allowable depreciation (no §168(k)) for every §168(k)-eligible asset.
• Rental income schedule: Schedule NJ-BUS-1 (for pass-through) or the rental income line on NJ-1040 directly. Report the recomputed net rental income (using GIT-DEP depreciation, not federal).
• Where the number lands: NJ-1040 Line 22 — Net gains or income from rents, royalties, patents, and copyrights. This is the NJ-recomputed number, higher than federal by the bonus add-back.
• Basis tracking: GIT-DEP maintains the separate NJ basis over the life of the asset. On sale, GIT-DEP feeds into the Schedule NJ-DOP disposition calculation.

6. Indiana — IT-40 Schedule 1, Code 104

Indiana requires 100% add-back via a code-tagged line on Schedule 1. Small dollar impact at 2.95%. Status: 100% add-back. Flat 2.95%. Statute: IC 6-3-1-33; Info Bulletin #118.

Indiana defines "bonus depreciation" in IC 6-3-1-33 and requires taxpayers to add back the difference between federal depreciation (with bonus) and depreciation computed without §168(k). The add-back is reported using code 104 on the individual return. On a $150,000 federal bonus deduction, an Indiana STR investor at the 2.95% flat rate loses ~$4,425 in Year-1 state savings — one of the smallest dollar hits among decoupled states.

• Main return: Form IT-40 — Full-Year Resident Individual Income Tax Return.
• Adjustment schedule: Schedule 1 — Add-Backs.
• Add-back line: The bonus depreciation add-back is entered on Schedule 1 with three-digit code 104. Amount = federal depreciation minus depreciation computed without §168(k). Indiana Information Bulletin #118 details the calculation.
• Recovery mechanic: The added-back amount is recovered as a subtraction (Schedule 2, code 505) in future years as the state depreciation catches up under regular MACRS.

7. Massachusetts — Form 1, Schedule E (rental) & Schedule E-1

Massachusetts has disallowed §168(k) since 2002. High effective rate for millionaires (9%). Status: 100% add-back. Top 9.0% (incl. surtax). Statute: MGL ch. 62 §2(d)(1)(N); TIR 03-25.

Massachusetts requires a 100% add-back of §168(k) bonus depreciation for both PIT and corporate excise purposes. Massachusetts DOES allow the §179 expense election (unlike bonus depreciation). The 4% millionaires' surtax on income over $1M means high-income STR investors face an effective 9% top rate. On a $150,000 federal bonus deduction, a Massachusetts STR investor at 9% loses ~$13,500 in Year-1 state savings.

• Main return: Form 1 — Massachusetts Resident Income Tax Return.
• Rental income schedule: Massachusetts Schedule E, Part I — Real Estate and Royalty Income. Report gross rents and expenses. Depreciation is computed WITHOUT §168(k).
• Depreciation reconciliation: Schedule E-1 — Real Estate and Royalty Income and (Loss) Detail. Use this to reconcile the Massachusetts-only depreciation figure to the federal Schedule E depreciation.
• Basis tracking: Separate Massachusetts basis is maintained for each §168(k)-eligible asset. Disposition gain/loss is recalculated with MA basis on Schedule B or Schedule D depending on holding period.

8. New Hampshire — BPT Return NH-1120-BT & Form DP-160

NH has no wage tax, but the Business Profits Tax (BPT) hits STR investors above the $103K gross receipts threshold. Status: 100% add-back (BPT). BPT 7.5%. Statute: RSA 77-A:3-b, I; RSA 77-A:1.

New Hampshire has no individual income tax on wages or salaries, but the Business Profits Tax (BPT) applies to any "business organization" — including sole proprietorships, LLCs, and pass-throughs — with gross business income over $103,000 (the 2025 threshold). The BPT rate is 7.5% (2026). BPT decouples from §168(k), so STR investors above the threshold must add back federal bonus. On a $150,000 federal bonus deduction, an above-threshold NH STR investor loses ~$11,250 in BPT savings. Small STR operations below $103K in gross rental income are unaffected.

• Main return: Form NH-1040 — Proprietorship Business Profits Tax Return (for individual sole prop STRs) OR Form NH-1065-BT / NH-1120-BT depending on entity structure.
• Depreciation adjustment: Form DP-160 — BPT Section 179 and §168(k) Adjustment. Compute NH-allowable depreciation without §168(k). §179 is also limited on this form.
• Where the add-back lands: The recomputed depreciation figure flows into Line 1 of NH-1040 (Net Income) as an adjustment. DP-160 attaches to the return.
• Below-threshold escape: If gross rental receipts are under $103,000, no BPT return required — no add-back exposure.

Cross-state summary — where does the number go?

^*Modeled on a $150,000 federal §168(k) deduction. Actual state savings depend on your marginal rate.
^†North Carolina is the 5-year recovery timing hit, not a permanent loss — you recover the 85% add-back at 20% per year over the next 5 years.

Three things filers get wrong

Confusing the state basis with the federal basis on sale

In every decoupled state, the state basis of the asset is higher than the federal basis while the depreciation catches up. If you sell in year 3 of a hold, your federal gain is calculated with a lower federal basis (bonus already fully depreciated), and your state gain is calculated with a higher state basis (state depreciation still catching up). California, New Jersey, and Massachusetts require you to recalculate the gain on sale — this is the single largest source of unnecessary tax paid on STR dispositions. Track state basis every year. Do not wait until sale.

Missing the North Carolina 5-year recovery

NC's 85% add-back is not a permanent loss — 20% is subtracted each year for 5 years starting the year after the add-back. If you forget to take that subtraction in years 2-6, you pay tax you don't owe. This is common because the subtraction is on Schedule S Part B, not the same schedule as the original add-back, and it's easy to overlook.

Forgetting the New Hampshire BPT threshold

New Hampshire has no wage tax, but the BPT catches STR investors with more than $103K in gross rental income. Many NH STR owners assume they owe zero state tax and never file — then discover the BPT and its 7.5% rate later, with penalties. If you own an STR in NH and your gross rental receipts are anywhere near $100K, run the numbers with your CPA before Oct 15.

How to brief your CPA

If you're handing this off to a CPA before October 15, give them three files:

1. Your federal Form 4562 (Depreciation and Amortization) showing the §168(k) special allowance for the STR.
2. The DepreciMax property report — line-item finish classification with 5-year, 15-year, and 39-year components broken out. This is what supports the §168(k) number.
3. A state depreciation worksheet for each decoupled state where you have an STR (or where you're a resident). If you don't have one, the DepreciMax report includes the state-recovery schedule for all 51 jurisdictions.

The CPA's job is to put those numbers on the right lines — the numbers themselves should already be defensible.

Frequently asked questions