Short answer
Cost segregation is a federal exercise, but the return it lands on is usually two returns. States start from federal income and then adjust it, and many do not follow, or "conform to," the federal bonus depreciation rules. In a decoupled state, the 100 percent first-year deduction that a study produces on the federal return is added back on the state return and recovered over years on the state's own schedule. The result is a second depreciation schedule, a different state tax in the study year and in later years, and a different state gain at sale. This article explains how conformity and decoupling work, gives three examples from state tax authorities' own published guidance, and lists what an owner has to track. It covers federal rules and quotes state authorities; the state that matters is yours, and your adviser applies it. It is general education, not tax advice.
How state conformity works
| Approach | What the state does with federal bonus depreciation | Effect on a study |
|---|---|---|
| Full conformity | Accepts the federal deduction as computed | One schedule; the study's federal result carries to the state |
| Decoupling with addback and recovery | Adds the bonus depreciation back to state income, then allows the state's own depreciation over the recovery period | Two schedules; larger state income in the study year, smaller in later years |
| Partial decoupling | Adds back a percentage, with subtractions over a fixed number of later years | Two schedules with a defined recovery pattern |
| Static conformity to an older Code | Follows the Internal Revenue Code as of a fixed date, so later federal changes such as the 2025 law do not apply until the state updates | The federal permanent 100 percent rule may not apply for state purposes |
States also differ on section 179, on the treatment of the section 481(a) adjustment from a look-back study, and on how the state basis affects gain at sale.
Three examples from official sources
California. The Franchise Tax Board's instructions list IRC Section 168(k), the federal bonus depreciation provision, among the federal rules to which California law does not conform, and describe California's own, much smaller, additional first-year depreciation. A study's 100 percent federal deduction on 15-year and 5-year property is not the California deduction; California depreciation runs on California's rules and produces a different state basis.
Minnesota. The Department of Revenue requires an addition of 80 percent of the allowable bonus depreciation in the year it is claimed, with one-fifth of that addition subtracted in each of the following five years. For tax year 2025, Minnesota did not conform to the federal H.R. 1 changes, so bonus depreciation on property acquired after January 19, 2025 must first be recalculated under prior law on a nonconformity schedule, without the one-fifth subtraction for that part of the adjustment, and then the standard 80 percent addition applies. Partners and shareholders make the addition on their own returns for bonus depreciation passed through to them.
New York. New York requires a separate New York State depreciation computation for IRC section 168(k) property on Form IT-398, with the modifications reported on Form IT-225, and its 2025 notice states that New York does not conform to the federal accelerated depreciation for qualified production property under section 168(n). A New York owner's study produces a federal schedule and a New York schedule from the first year.
Other states have their own rules; these three are examples, not a list. Check your state's tax authority or ask your adviser.
What decoupling does to a study's economics
- The first-year benefit is federal-only in a decoupled state. A projection that applies the federal deduction to the combined federal-and-state rate overstates the benefit by the state share.
- State tax may rise in the study year relative to the federal picture, because the addback increases state income while federal income falls.
- Later years reverse. The state allows its own depreciation over time, so state income is lower than federal in later years.
- Basis differs at sale. Federal basis reflects the accelerated depreciation; state basis reflects the state's schedule; the gain, and any recapture treatment the state applies, differ.
- Look-backs differ too. Some states do not follow the federal section 481(a) adjustment, or spread it differently.
None of this makes a study wrong. It makes the state line in the projection necessary.
What the owner must track
- A separate state depreciation schedule for every asset the study reclassified, in every decoupled state where the property is taxed.
- The addback and recovery amounts by year, including the five-year subtractions in a state like Minnesota.
- State basis, for the sale computation.
- Pass-through reporting: partnerships and S corporations report the modification information to owners, who make the state adjustments on their own returns.
- Changes in state law. States respond to federal changes on their own timelines; a state that conformed last year may decouple this year.
The IRS guide expects a study's asset list to tie to the fixed-asset ledger; in a decoupled state the ledger has two depreciation columns, and the study's list is the source for both.
Questions to ask before commissioning a study
- Does my state conform to federal bonus depreciation, fully, partly or not at all, for the year of acquisition?
- How does the projection treat the state? Is the state line shown separately?
- Does the practitioner or the adviser maintain the state schedule?
- If the property is in a different state from my residence, which state's rules apply to the rental and to me?
- How does my state treat a look-back's section 481(a) adjustment?
What people ask on Reddit and other forums
State surprises fill the "cost segregation reddit" threads on r/tax after the first state return arrives. The searches that lead people to these threads are usually phrased "state bonus depreciation conformity", "states that do not allow bonus depreciation" and "state addback bonus depreciation".
"My federal return shows a huge loss and my state return shows income. Why?" Your state decoupled from bonus depreciation and added it back. The state allows its own depreciation over the recovery period instead.
"Is there a list of states that allow bonus depreciation?" State tax authorities publish their own rules, and they change. This article gives three official examples; your state's department of revenue or your adviser has the current answer.
"I live in a conforming state but the property is in California." The property's state taxes the rental income under its rules; your resident state taxes you under its rules with a credit mechanism. Which schedule applies where is a question for your adviser.
"Does the study need to be redone for the state?" No. The asset list is the same; the state schedule applies the state's depreciation rules to it.
Questions people also ask
Do all states allow bonus depreciation?
No. Many states decouple from federal bonus depreciation in whole or in part; California, Minnesota and New York are examples from their own published guidance. Check your state.
What happens to cost segregation in a state that does not conform?
The federal deduction is added back on the state return and the state allows its own depreciation over time, producing a second schedule and a different state basis.
Does decoupling make a study not worth it?
It reduces the state share of the first-year benefit. Whether the study is still worth it depends on the federal benefit, your rates and the other checks.
How does Minnesota treat bonus depreciation?
An 80 percent addition in the year claimed with one-fifth subtractions over the next five years, and for 2025 a nonconformity recalculation for property acquired after January 19, 2025, per the Department of Revenue.
Who keeps the state depreciation schedule?
Your adviser, from the study's asset list. Ask who is responsible before the first return is filed.
Sources
- https://www.irs.gov/newsroom/treasury-irs-issue-guidance-on-the-additional-first-year-depreciation-deduction-amended-as-part-of-the-one-big-beautiful-bill — IR-2026-06 (January 14, 2026), federal bonus depreciation guidance.
- https://www.ftb.ca.gov/forms/2025/2025-3885-instructions.html — California Franchise Tax Board, 2025 Instructions for Form FTB 3885: non-conformity to IRC Section 168(k).
- https://www.revenue.state.mn.us/bonus-depreciation — Minnesota Department of Revenue, Bonus Depreciation.
- https://www.tax.ny.gov/forms/n-notices/n-26-1.htm — New York State Department of Taxation and Finance, Notice N-26-1.
- https://www.tax.ny.gov/pdf/current_forms/it/it398_fill_in.pdf — New York State Form IT-398, Depreciation Schedule for IRC Section 168(k) Property.
- https://www.irs.gov/publications/p544 — IRS Publication 544 (2025), Sales and Other Dispositions of Assets: Chapter 3.
- https://www.irs.gov/pub/irs-pdf/p5653.pdf — IRS Publication 5653, Cost Segregation Audit Techniques Guide (Rev. 2-2025): Chapter 4.
Related reading
- Bonus depreciation and cost segregation after the 2025 law
- Why a deduction is not a refund
- Is cost segregation worth it? A decision checklist
- How to read a depreciation schedule
- When to involve a tax adviser in cost segregation
- What Reddit asks about cost segregation, answered with sources
- Find a practitioner in the NBCSS directory