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

Illinois does not allow bonus depreciation. Every taxpayer who claims federal bonus depreciation under IRC Section 168(k) — and, starting in 2026, the new qualified production property deduction under Section 168(n) — must add the full amount back when calculating Illinois taxable income, then recover the cost through an annual subtraction over the asset’s regular useful life.¹ The rule applies to individuals, C-corporations, S-corporations, partnerships, and trusts.²

How the Add-Back and Subtraction Work

Section 203 of the Illinois Income Tax Act reverses the federal acceleration. You do eventually deduct the full cost of the asset for Illinois purposes; you just cannot do it all in year one. A piece of equipment written off entirely on your 2026 federal return might generate Illinois deductions spread over five, seven, or fifteen years depending on the asset class.

The result is a timing difference. Your Illinois taxable income runs higher than your federal taxable income in the year you place the asset in service, and lower in each of the following years as the subtraction modifications flow through. The state uses standard MACRS recovery periods and methods to determine the annual subtraction — five years for computers and vehicles, seven years for office furniture, fifteen years for qualified improvement property, and so on.²

A quick example: you buy $100,000 of five-year MACRS equipment and elect 100 percent bonus depreciation federally. Your Illinois addition is $100,000. Your Illinois subtraction in year one is roughly $20,000 under the 200 percent declining balance method, with the rest recovered across the following four years.

Reporting the Adjustment on Form IL-4562

Form IL-4562, Special Depreciation, is the starting point for every Illinois bonus depreciation adjustment. 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 with bonus depreciation reported on federal Form 2106 enter that amount on Line 2. On Line 16, you calculate what your regular federal depreciation would have been for the year if you had not elected bonus — that becomes your Illinois subtraction.

Two categories drop out of the addition. Property you sold, traded, abandoned, or otherwise disposed of during the tax year is excluded, as is property claimed under certain expired federal zone provisions.³

The computed amounts then travel to your main Illinois return:

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-4562.⁴
Individuals report the amounts on Schedule M of Form IL-1040, which feeds Lines 3 and 7 of the individual return.⁵
Partnerships and S-corporations compute the modifications at the entity level and pass the addition and subtraction through to partners or shareholders on Schedule K-1-P.²

Illinois cross-references your return against IRS data. If the addition or subtraction does not reconcile with your federal filing, the Department of Revenue may issue a notice of deficiency. Keeping the original purchase records, the federal Form 4562, and each year’s Form IL-4562 makes any inquiry easier to answer.⁶

Section 179 Is Not Added Back

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

For 2025, the federal Section 179 limit is $2,500,000, reduced dollar-for-dollar once total qualifying property placed in service exceeds $4,000,000.⁷ Maximizing Section 179 before turning to bonus depreciation can shrink the Illinois add-back and the timing difference that comes with it. Section 179 has its own limits — it cannot create or increase a net operating loss, and it applies to tangible personal property and certain improvements, not most buildings.

What Changes in 2026: Section 168(n) Property

The One, Big, Beautiful Bill Act permanently restored 100 percent federal bonus depreciation for qualified property acquired after January 19, 2025, and created a new deduction under IRC Section 168(n) allowing 100 percent expensing of certain nonresidential real property used in domestic manufacturing or production activities — buildings that would otherwise be depreciated over 39 years.⁸

Illinois responded with Public Act 104-0453. For tax years beginning on or after January 1, 2026, the addition modification covers bonus depreciation claimed under both Section 168(k) and Section 168(n).¹ Placing a qualifying production facility in service and writing it off entirely on your federal return means adding back that full deduction on your Illinois return and recovering the cost over the building’s standard recovery period.

Qualified Improvement Property

Interior improvements to nonresidential buildings — qualified improvement property — have a 15-year federal MACRS recovery period, making them eligible for 100 percent bonus depreciation.⁹ The improvement must be to the interior of a building already in service, and it cannot enlarge the building, install an elevator or escalator, or modify the internal structural framework.

Because Illinois decouples, the full federal write-off is added back on Form IL-4562, and the Illinois subtraction spreads across 15 years. A $150,000 office renovation expensed federally in one year generates Illinois subtractions of roughly $10,000 per year under straight-line depreciation.

Phase-Down Property From Prior Years

Property that received a reduced federal bonus percentage under the old phase-down (such as 40 or 60 percent) follows a special Illinois timing rule. You take the full addition in the year you claimed the federal bonus, but the subtraction modification is delayed until the last year of the asset’s regular depreciation schedule.³ For assets still working through recovery periods from prior years, this can create a real cash-flow gap.

Selling an Asset With an Illinois Modification History

When you sell business property that has been running on separate federal and Illinois depreciation schedules, the two returns will show different gains. Federally, if you claimed 100 percent bonus depreciation, your adjusted basis is close to zero and nearly all of the sale price is taxable gain, largely recaptured as ordinary income to the extent of prior depreciation.¹⁰ For Illinois, your basis reflects only the subtractions actually taken through the year of sale, so the Illinois gain is smaller.

Stop claiming the Illinois subtraction on any asset you disposed of during the year. The Form IL-4562 instructions exclude disposed-of property from the add-back calculation for that year as well.³

Penalties and Interest if You Miss the Add-Back

Omitting the addition modification underpays your Illinois tax. Interest accrues the day after the payment was due and continues until paid, at the federal underpayment rate — 7 percent annually through June 30, 2026.¹¹

Two penalties can layer on top:

A negligence penalty of 20 percent of the deficiency, applied when the Department of Revenue finds you did not make a reasonable attempt to comply.¹²
A fraud penalty of 50 percent of the deficiency, applied when the return was filed with intent to defraud.¹²

Because Illinois matches state filings against federal data, a missing bonus depreciation add-back is one of the easier errors for the Department to catch. Keeping a running schedule for each asset — the federal bonus taken, the cumulative Illinois subtractions claimed, and the balance still to recover — is the practical way to keep filings straight year over year.

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
Illinois Department of Revenue. 2025 Form IL-1120, Corporation Income and Replacement Tax Return
5
Illinois Department of Revenue. 2025 IL-1040 Schedule M Instructions
6
Internal Revenue Service. About Form 4562, Depreciation and Amortization
7
Internal Revenue Service. Instructions for Form 4562
8
Internal Revenue Service. Notice 2026-11, Interim Guidance on Additional First Year Depreciation Deduction
9
Internal Revenue Service. Publication 946, How To Depreciate Property
10
Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property
11
Illinois Department of Revenue. Interest Rates
12
Illinois Department of Revenue. Pub-103, Penalties and Interest for Illinois Taxes