Cost Segregation Study in Indiana
Indiana decouples from federal bonus depreciation, which sounds like bad news until you look at the rate. Indiana's flat individual income tax is 2.95% for 2026, on a statutory path down to 2.90% in 2027. When the state rate is under three percent, the cost of a bonus depreciation addback is small in absolute terms, and the decoupling that would be painful in California or Oregon is close to a rounding error here.
That does not make the addback free, and it does not make the compliance disappear. Indiana still requires a separate state depreciation schedule for the life of the asset. It just means the Indiana analysis rarely changes the decision to run a study.
How Indiana Income Tax Interacts With Federal Strategy
Indiana's individual income tax has been stepping down under House Enrolled Act 1001 of 2023. The rate was 3.05% for 2024, 3.00% for 2025, 2.95% for 2026, and 2.90% for 2027 and after.
On top of that, all ninety-two Indiana counties levy a local income tax, generally between roughly 0.5% and 3.0%. The county tax is imposed on Indiana adjusted gross income, so any Indiana deduction reduces county tax as well. A taxpayer in a high-rate county faces a combined rate near 6%, which roughly doubles the state-level value of a cost segregation deduction compared with the headline flat rate.
Indiana taxes capital gains as ordinary income at the same flat rate with no preference. That flat treatment means the study does not create rate arbitrage against you on exit. Converting Section 1250 gain into Section 1245 ordinary recapture has no Indiana rate consequence because both are taxed at 2.95%.
Indiana conforms to the federal passive activity loss rules. If the loss is suspended federally under IRC Sec. 469, it is suspended for Indiana.
Indiana Pass-Through Entity Tax
Indiana enacted its elective pass-through entity tax through Senate Enrolled Act 2 in February 2023, retroactive to tax years beginning on or after January 1, 2022. The rate equals the individual income tax rate in effect for the year, so 2.95% for 2026.
The election is made on the entity's Indiana return and is annual rather than multi-year. Owners receive a refundable Indiana credit for their share of the tax paid, and the credit covers the state tax but not the county local income tax, which remains an individual-level obligation.
Because the Indiana rate is low, the federal benefit of the election is correspondingly modest in absolute dollars. It is still worth making for a profitable entity, since the entity-level deduction converts a capped individual state and local tax deduction into an uncapped business expense, but it will not move the needle the way a 9.85% Minnesota election or a 9.3% California election does.
Indiana Depreciation Conformity
Indiana decouples from bonus depreciation. Indiana Code 6-3-1-3.5 requires an addback of the amount of bonus depreciation allowed under IRC Sec. 168(k), and Indiana depreciation is then computed as if bonus had never been elected.
Indiana also decouples from expanded Section 179, limiting the deduction to $25,000 for Indiana purposes with the addback of any excess. Like Maryland, Indiana froze at the pre-2003 federal figure.
What Indiana does allow is the reclassification. Property identified by a cost segregation study as five, seven, or fifteen-year property receives those recovery periods for Indiana. The state benefit is the acceleration relative to a 27.5 or 39-year straight-line schedule, taken on MACRS without bonus.
The addback and the subsequent recovery both flow through to the county local income tax, since the county tax rides on Indiana adjusted gross income. That means the addback costs you at the combined rate in year one and returns to you at the combined rate over the recovery period.
Cost Segregation Considerations Specific to Indiana
Three things drive the Indiana analysis.
First, the low rate makes the decision easy but does not make the compliance optional. At 2.95%, a $500,000 bonus depreciation addback costs roughly $14,750 of state tax in year one before county tax, and that money comes back over the recovery period. Compare that with a federal deduction worth up to $185,000 in the same year and the answer is obvious. But you still have to maintain the Indiana schedule, because the basis divergence persists to the sale and Indiana will not reconstruct it for you.
Second, model the actual county rate. The spread between Indiana's lowest and highest county rates is wide enough to roughly double the state-level benefit. Use the owner's county of residence as of January 1, which is the date Indiana uses to determine county tax liability for the year.
Third, watch the rate step-down when timing a Form 3115 lookback study. Because the Indiana rate declines each year through 2027, an Indiana deduction is worth marginally more taken sooner than later. This is the opposite of the usual advice to defer deductions into higher-rate years, and it is a small effect, but it points the same direction as the federal time-value argument rather than against it.
Fourth, on disposition, remember that Indiana basis exceeds federal basis because Indiana never allowed the bonus writedown. Indiana gain on sale is smaller than federal gain. At 2.95% plus county tax the dollars are smaller than they would be in a high-rate state, but the error is just as easy to make.
Working With AE Tax Advisors in Indiana
AE Tax Advisors works with real estate investors, business owners, and high-income professionals across Indiana and all fifty states. We are a licensed CPA and IRS Enrolled Agent practice based in Billings, Montana, and we handle the engineering-based cost segregation study, the Indiana addback and recovery schedule, the county tax modeling, the entity structuring, and the return preparation as one engagement.
Indiana is a state where the federal answer almost always dominates, so the value of good advice is less about whether to run the study and more about executing the passive activity qualification correctly and keeping the state schedule clean through to the sale.
Related reading: the complete guide to cost segregation, our cost segregation study service, short-term versus long-term rental tax treatment, lookback studies and Form 3115, and multi-state tax planning.
Indiana Cost Segregation and Tax Questions
Does Indiana allow bonus depreciation on a cost segregation study?
No. Indiana Code 6-3-1-3.5 requires an addback of federal bonus depreciation claimed under IRC Sec. 168(k), and Indiana depreciation is recomputed as if bonus had never been elected. Indiana also caps Section 179 at $25,000. The shorter recovery periods identified by the study do apply for Indiana purposes, recovered on MACRS without bonus.
Is a cost segregation study still worth it in Indiana if the state adds back bonus depreciation?
In nearly every case yes, because the Indiana rate is low. At the 2026 flat rate of 2.95%, a $500,000 addback costs roughly $14,750 of state tax before county tax, and that amount returns to you over the recovery period. The same $500,000 deduction is worth up to $185,000 federally in year one. Indiana is one of the states where the decoupling rarely changes the decision.
How does Indiana county income tax affect the calculation?
All ninety-two Indiana counties levy a local income tax, generally between roughly 0.5% and 3.0%, imposed on Indiana adjusted gross income. That means the bonus depreciation addback costs you at the combined state and county rate and the later depreciation returns at the combined rate. In a high-rate county the combined marginal rate approaches 6%, roughly double the headline state rate.
What is the Indiana pass-through entity tax rate for 2026?
The Indiana PTET rate equals the individual income tax rate for the year, which is 2.95% for 2026 and drops to 2.90% for 2027. The election was created by Senate Enrolled Act 2 in 2023, retroactive to 2022. It is made annually on the entity return and gives owners a refundable Indiana credit. The credit covers state tax but not county local income tax.
Does Indiana tax depreciation recapture differently than capital gain?
No. Indiana taxes all income at the same flat rate with no capital gains preference, so Section 1245 ordinary recapture and unrecaptured Section 1250 gain are both taxed at 2.95% plus county tax. A cost segregation study therefore creates no Indiana rate disadvantage on exit. Keep in mind that Indiana basis exceeds federal basis because of the addback, so Indiana gain is smaller than federal gain.
Book a Indiana Tax Strategy Call
Pick a time below. We will walk through your Indiana property or business, model the state and county addback together, and tell you plainly whether a study is worth running.
Indiana tax rates, pass-through entity tax rules, and depreciation conformity provisions described on this page reflect law in effect as of August 2026 and are provided for general information only. State conformity changes frequently and often retroactively. Nothing here is tax advice for your situation, and no client relationship is created by reading it. Talk to us about your facts before acting.