1. What a cost segregation study does
A building normally depreciates over 27.5 years (residential) or 39 years (commercial). A cost segregation study breaks the purchase price apart and reclassifies components like flooring, cabinetry, dedicated electrical, and land improvements into 5, 7, and 15-year property, so a large slice of the basis depreciates on much shorter schedules.
On the federal return, that reclassified property also qualifies for bonus depreciation, which restores a 100% first-year write-off for qualifying property acquired and placed in service after January 19, 2025. States set their own rules, which is where Indiana comes in.
2. Indiana and federal bonus depreciation
Indiana has decoupled from IRC 168(k) bonus depreciation since 2002 and that did not change after OBBBA. SEA 243 (2026 session) updated Indiana's IRC conformity date to January 1, 2026, generally adopting OBBBA retroactively to pre-2026 tax years, but it expressly keeps the 168(k) decoupling and adds a new decoupling from IRC 168(n) qualified production property expensing effective July 4, 2025 (QPP must be depreciated for Indiana as 39-year straight-line nonresidential real property). The rule applies identically to individual (AGI tax) and corporate taxpayers via IC 6-3-1-3.5 and IC 6-3-1-33. Narrow exception: for property acquired in a post-TCJA personal-property like-kind exchange, bonus depreciation is allowed up to the 'Section 1031 Income' recognized on the exchange.
Year 1: add back the difference between federal depreciation claimed and what depreciation would have been had the taxpayer elected out of bonus (reported with Code 104; Code 120/157 for 168(n) QPP). Subsequent years: negative adjustments (deductions) equal to the regular MACRS depreciation Indiana allows, until the full federal deduction is recovered over the asset's MACRS life. On sale or disposition, any remaining federal-vs-state depreciation difference is taken as a one-time negative adjustment, so the benefit is timing-only, never lost.
Worked example
A $1,000,000 building, with and without a study
Illustrative only. A residential rental purchased for $1,000,000 of building basis (land excluded), acquired and placed in service after January 19, 2025.
Building basis
$1,000,000
Reclassified to 5, 7, and 15-year property (25%)
$250,000
Federal first-year deduction at 100% bonus
$250,000
Year 1 on that $250,000 without a study (27.5-year straight line)
about $9,100
On the Indiana return, the $250,000 federal bonus deduction is not allowed. Year 1: add back the difference between federal depreciation claimed and what depreciation would have been had the taxpayer elected out of bonus (reported with Code 104; Code 120/157 for 168(n) QPP). Subsequent years: negative adjustments (deductions) equal to the regular MACRS depreciation Indiana allows, until the full federal deduction is recovered over the asset's MACRS life. On sale or disposition, any remaining federal-vs-state depreciation difference is taken as a one-time negative adjustment, so the benefit is timing-only, never lost.
Model your own numbers with the tax strategy projector.
3. Section 179 in Indiana
Indiana Section 179 cap: $25,000 (Indiana first-year 179 allowance cap; federal excess added back via Code 105).
Indiana caps the state Section 179 allowance at $25,000 per year; any federal 179 claimed above that is added back in year 1 and recovered through regular MACRS depreciation deductions in later years (and trued up at disposition). Indiana does follow the federal investment phase-out threshold under IRC 179(b)(2) as indexed, not the old pre-2003 $200,000 threshold. Like-kind-exchange exception: 179 expensing up to the Section 1031 Income on exchanged personal property is fully allowed. SB 357 (2025 session) proposed raising the cap to $100,000 but did not become law; the May 2026 revision of Information Bulletin #118 still states the $25,000 cap.
4. Does it still help in Indiana?
Yes. Indiana's addback is computed as if the taxpayer had elected out of bonus, which means the state fully follows federal MACRS recovery periods and conventions (5/7/15/27.5/39-year). A cost seg study that reclassifies components into 5-, 7-, and 15-year property still front-loads Indiana depreciation substantially versus 27.5/39-year straight-line; only the 100% first-year bonus slice is deferred, and it comes back as deductions over those short MACRS lives.
- •Decoupled from 168(k) bonus since 2002, one of the oldest decoupling states; OBBBA's permanent 100% bonus changed nothing for Indiana
- •SEA 243 (2026) moved the IRC conformity date to January 1, 2026 and generally adopted OBBBA retroactively, but added a decoupling from new IRC 168(n) qualified production property expensing effective July 4, 2025; for Indiana, QPP is depreciated as 39-year straight-line nonresidential real property
- •Section 179 capped at $25,000 since 2003, but Indiana follows the current federal 179 investment phase-out threshold, not the old $200,000 one; SB 357 (2025) proposed a $100,000 cap and failed
- •Unique like-kind-exchange carve-out: bonus and 179 are allowed up to the 'Section 1031 Income' recognized on post-TCJA personal-property trades (retroactive to 2018)
- •Specific reporting codes: Code 104 (bonus addback/recovery), Code 105 (Section 179), Code 120 (2025 QPP) / Code 157 (2026+ QPP), Code 151 (excess-business-loss interaction)
- •Depreciation addbacks interact with Indiana's excess business loss modification: addbacks attributable to loss-year property can shift into the following year (IB 118 Examples 6-8)
- •Residency moves matter: depreciation accrued while out of state is effectively lost to zero apportionment and cannot be made up after returning (IB 118 special rule)
- •Indiana is otherwise taxpayer-favorable on OBBBA items: it does not impose the 163(j) interest limitation and allows current-year expensing of both domestic and foreign R&E
- •Flat individual rate of 3.0% (2025) plus county income tax softens the cash cost of the bonus addback relative to high-rate states
5. The exit: recapture and timing
The accelerated deductions come back into view when you sell. Gain attributable to the 5, 7, and 15-year property is Section 1245 recapture, taxed at ordinary rates, and the straight-line depreciation on the building itself is unrecaptured Section 1250 gain, taxed at up to 25%. A study does not create that bill, it moves deductions forward, but the timing of the sale decides how much of the benefit you keep.
Two levers manage the exit. A 1031 exchange defers both flavors of recapture along with the rest of the gain, and simply holding the property lets the time value of the early deductions do its work; most owners want a 3 to 5 year horizon before a taxable sale for the math to stay comfortably positive. Model the exit before you commission the study, not after.