Although most of the expenses and deductions used to figure your federal taxes are allowed on your Indiana tax return, some need to be “added back” to calculate the correct income used to figure Indiana income tax due.
For example, interest earned from a direct obligation of a state or political subdivision other than Indiana is taxable to Indiana if the obligation was acquired after Dec. 31, 2011. An individual who received $421 in interest from bonds issued by another state and purchased after Dec. 31, 2011, will have to “add back” $421 to the amount of income used to calculate the tax obligation for Indiana.
You must complete your federal tax return, Form 1040/1040-SR, through the federal adjusted gross income (AGI) line before beginning to figure your Indiana individual income tax return.
- Bonus depreciation add-back
You must make an exception for any bonus depreciation deduction used for property placed in service after Sept. 11, 2001. Bonus depreciation is the additional first-year special depreciation deduction allowed under Section 168(k) of the Internal Revenue Code (IRC).
Figure the net income (or loss) which would have been included in federal adjusted gross income had the bonus depreciation method not been used. The difference, which may be a positive or negative amount, must be added back.
Example: Mack used the bonus depreciation method for federal income tax purposes. After refiguring the depreciation without using the bonus method, he has to add back $1,500 on his Indiana tax return.
For additional information, see Income Tax Information Bulletin 118.
- Domestic production activities add-back
If you claimed a domestic production activities deduction on your federal Form 1040, line 35, enter that amount on line 4 of Form IT-40.
- Net operating loss add-back
Any net operating loss deduction taken on line 21 of your federal Form 1040 must be added back. Write the amount of the net operating loss as a positive figure. (You will claim an Indiana net operating loss deduction on Indiana’s Schedule 2, under line 11. Get Schedule IT-40NOL to figure your Indiana loss.)
- OOS municipal obligation interest add-back
Any interest earned from a direct obligation of the State of Indiana or a political subdivision of the State of Indiana is not taxable for Indiana income tax purposes.
Interest earned from a direct obligation of a state or political subdivision other than Indiana is taxable to Indiana if the obligation was acquired after Dec. 31, 2011. Interest earned from obligations held or acquired prior to Dec. 31, 2011, is not subject to Indiana income tax.
Example: Martha, an Indiana resident, purchased bonds issued by the city of Washington, Indiana. The $247 interest income received from these bonds is exempt from tax by Indiana. She also purchased bonds issued by the city of San Antonio, Texas. She received $421 interest from these bonds, which were purchased after Dec. 31, 2011. She will have to add back the $421 interest received from the OOS municipal bonds.
For additional information, see Information Bulletin #19.
- Qualified preferred stock
If an individual:
- Had losses from the sale or exchange of preferred stock in either Federal National Mortgage Association or Federal Home Loan Mortgage Corporation;
- Treated the loss from the sale or exchange as ordinary income for federal income tax purposes in the year the loss had been incurred; and
- Had any amount previously added back that not been allowed as a deduction, the individual is permitted to continue deducting the loss not previously allowed as a capital loss.
However, the amount allowable as a capital loss must be computed in accordance with federal limitations on allowable capital losses. See IRC sections 1211 and 121 for further details on federal limitations.
- Section 179 expense add-back
You may have figured an IRC Section 179 expense using a ceiling of more than $25,000 for federal tax purposes. Indiana allows you to figure IRC Section 179 expense using a ceiling of no more than $25,000.
If you figured IRC Section 179 expense using a ceiling amount of more than $25,000, you’ll need to add back the difference between it and $25,000.
*Plus Forms 1040NR/1040NR-EZ, filed by U.S. Nonresident Aliens
- Tax add-back
If you did not complete Federal Schedules C, C-EZ, E, or F, which include sole proprietorship income, farm income, rental, partnership, S corporation, and trust and estate income (or loss), then do not complete this line.
On those schedules you are allowed to claim a deduction for taxes paid which are:
- Based on, or
- Measured by income, and
- Levied at a state level by any state in the United States.
If you claimed this kind of deduction on any of these schedules, then you must add it back to your Indiana income.
Do not add back property taxes on this line.
Note: Income, losses and/or expenses from other schedules and forms may flow through to federal Schedules C, E and F. For example, partnership income from federal Schedule K-1 (Form 1065) may be included on federal Schedule E, while expenses from federal Form 8829 may be included on federal Schedule C. Make sure to check these schedules and forms for any deduction that needs to be added back.
A complete list of add-backs can be found in the current year IT-40 instruction booklet.
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