Tennessee Bonus Depreciation: No Personal Income Tax, No State Add-Back.
Tennessee does not impose a personal income tax. For an individual Tennessee real estate investor, a federal cost segregation study generally does not create a Tennessee personal-income-tax depreciation add-back, decoupling adjustment, or state bonus-depreciation clawback. The deduction is still a federal tax item, and actual current-year usability depends on federal limitations such as passive activity, at-risk, basis, and taxpayer-specific rules.
Reviewed by Cost Seg Smart Editorial Team · Last reviewed: · Cites Tennessee Dept. of Revenue, Hall income tax repeal (2021)
The 30-second answer: Tennessee has no personal income tax (the Hall income tax on interest and dividends was fully phased out and repealed effective January 1, 2021), so an individual investor claiming federal §168(k) bonus depreciation on 5, 7, and 15-year cost-segregated components generally has no Tennessee personal-income-tax return on which to add it back.
On a $750K Tennessee rental with $600K depreciable basis and 18.3% reclassified to shorter-life property, the reclassified components generate about $109,800 of federal Year-1 depreciation. At a 37% federal bracket, that is about $40,600 of federal savings from the reclassified components alone; including regular depreciation on the remaining building basis, total illustrative Year-1 federal savings are about $43,900.
Tennessee's franchise and excise tax may apply to some entities, but it is a separate entity-level tax, not a personal income tax, and current-year use of the federal deduction still depends on passive-loss, at-risk, and basis limits.
Federal vs Tennessee, Side by Side
For an individual investor's cost-segregation-reclassified components:
| Tax provision | Federal (IRC) | Tennessee |
|---|---|---|
| Bonus depreciation under §168(k) | 100% may apply to qualified property acquired and placed in service after January 19, 2025, subject to §168(k) eligibility, related-party/prior-use, binding-contract, and election rules | No state bonus rules to conform to. Tennessee has no personal income tax |
| Personal income tax on rental income | Ordinary rates, up to 37% | None. No personal income tax; the Hall tax on interest and dividends was repealed effective January 1, 2021 |
| State depreciation add-back or decoupling | Not applicable | None. No personal-income-tax return adds back the federal bonus deduction |
| Federal usability of the deduction | Subject to passive activity, at-risk, basis, and business-interest limits | Same federal limits apply; Tennessee adds no state-level reduction |
| MACRS asset class lives | 5 / 7 / 15 / 27.5 / 39 yr per Rev. Proc. 87-56 | No individual income tax uses them; the federal schedule stands alone |
| Franchise and excise tax | Not applicable | Applies to entities (LLCs, corporations), not to individuals; computed under Tennessee franchise and excise rules rather than by starting from federal taxable income and adding back bonus depreciation; confirm entity treatment separately with your advisor |
| Depreciation form the individual files with the state | Form 4562 → Schedule E (rental) | None. No personal income tax return to file |
Sources: Tennessee Dept. of Revenue (Hall income tax repealed effective January 1, 2021), IRC §168(k). Bonus figures reflect current law under the One Big Beautiful Bill Act (OBBBA, 2025); eligibility depends on acquisition and placed-in-service dates and elections.
How Tennessee's no-income-tax status affects your cost segregation study
The study itself does not change. The same engineering-based reclassification, using nationally-recognized 2026 construction cost data, MACRS classification per Rev. Proc. 87-56, and IRS Pub 5653 ATG-aligned documentation, produces the same component schedule whether the property sits in Tennessee, California, or Nevada. What changes is what happens after the federal deduction: in a non-conforming state, your CPA maintains a parallel state depreciation book and reconciles a Year-1 add-back. In Tennessee, there is no individual state depreciation book to maintain for personal-income-tax purposes.
Your CPA receives the same Cost Seg Smart engineered report, the same Form 4562-ready schedule, and the same Form 3115 §481(a) section if this is a lookback study. On the federal return the components run through one calculation:
- Federal book: bonus depreciation on eligible 5/7/15-year components in Year 1, plus half-year-convention MACRS on the 27.5-year residential (or 39-year commercial) remainder, subject to the federal passive-loss, at-risk, basis, and business-interest limits.
- Tennessee: no individual state depreciation book, because there is no personal income tax return. Nothing to add back at the state level, nothing to defer for personal-income-tax purposes.
The practical advantage of a no-income-tax state is that there is no Tennessee personal-income-tax add-back reducing or deferring the federal deduction, and the after-study bookkeeping is lighter because there is no second set of state depreciation schedules to track through disposition. How much of the federal deduction you actually use in the current year still depends on your passive-loss, at-risk, basis, and business-interest situation.
Illustrative numbers: $750K Tennessee rental
An illustrative example using the Cost Seg Smart residential benchmark (SFR reclass 18.3%) and 100% federal bonus depreciation for eligible components under current law:
| Line item | Federal | Tennessee |
|---|---|---|
| Purchase price | $750,000 | $750,000 |
| Land allocation (20%) | $150,000 | $150,000 |
| Depreciable basis | $600,000 | $600,000 |
| Reclassified to 5/7/15-yr (18.3% SFR benchmark) | $109,800 | $109,800 |
| Year-1 deduction on reclassified components | $109,800 (100% bonus, if eligible) | No state income tax |
| Year-1 depreciation on remaining 27.5-yr basis | ~$8,909 | No state income tax |
| Total Year-1 depreciation | $118,709 | No state income tax |
| Marginal tax rate | 37% | 0% (no personal income tax) |
| Illustrative Year-1 federal tax savings | ~$43,900 (37% × $118,709) | $0 state (nothing to add back) |
| Cost Seg Smart study cost | $995 (residential under $1M basis) | |
| ROI on $995 study fee (illustrative) | ~44× | |
In a non-conforming state, part of that Year-1 benefit would be deferred by a state add-back and recovered over 5 to 15 years. Tennessee imposes no personal-income-tax add-back, so there is no state-side deferral to track. Whether the full federal deduction is usable in the current year depends on your passive-loss, at-risk, basis, and business-interest situation. Figures are illustrative; your result depends on basis, land allocation, bracket, and eligibility.
See a sample cost segregation report
Look at exactly what your Tennessee study delivers: the component-by-component 5/7/15-year schedule, the Form 4562-ready numbers, and the documentation your CPA files. Real reports are our best answer to "is this legit?"
Forms your CPA files for a Tennessee property
Because Tennessee has no personal income tax, the reporting workflow for an individual investor is federal-only. There is no state depreciation form and no state add-back schedule:
- Federal Form 4562: depreciation and amortization, including the §168(k) bonus deduction on eligible reclassified components. Flows to Schedule E (rental) or Schedule C (active business).
- Schedule E (or Schedule C): the accelerated deduction reduces federal taxable income in Year 1, subject to the federal passive-loss, at-risk, and basis limits. No Tennessee equivalent exists, because Tennessee does not tax individual income.
- Form 3115 §481(a) section: included only if this is a lookback method change on a property placed in service in a prior year (see below).
- Entity franchise and excise return (if applicable): an LLC or corporation may file a Tennessee franchise and excise tax return. That tax is computed under Tennessee franchise and excise rules rather than by starting from federal taxable income and adding back bonus depreciation, so its treatment should be confirmed separately with your advisor.
For an individual Tennessee investor, the single set of federal depreciation schedules is all you track through disposition. There is no parallel state basis to reconcile at sale.
Form 3115 lookback on a Tennessee property
If the property was placed in service in a prior tax year and depreciation has already been reported using a non-segregated method, a federal Form 3115 (Application for Change in Accounting Method) may allow a current-year §481(a) catch-up adjustment for the accelerated depreciation you missed, generally without amending prior returns. This is often the single biggest acceleration mechanism in cost segregation. The cumulative catch-up on a $750K property held several years is commonly in a five-figure range, but the actual amount depends on placed-in-service date, prior depreciation claimed, bonus eligibility, land allocation, and component mix. Figures are illustrative.
In Tennessee, the lookback is cleaner than in a non-conforming state. There is no state personal income tax, so there is no parallel state §481(a) equivalent to compute and no state schedule to restate. The catch-up is a federal-only calculation, still subject to the federal passive-loss, at-risk, and basis limits.
See our full Form 3115 cost segregation guide for federal mechanics, partnership and LLC pass-through treatment, and timing rules.
Should you skip cost segregation in Tennessee? No.
Tennessee is one of the more favorable states in the country for a cost-segregation-driven acceleration strategy, for three reasons:
- No Tennessee personal-income-tax add-back. Unlike non-conforming states, Tennessee does not add back or defer the federal deduction at the state level. How much of the federal deduction you use in the current year still depends on your passive-loss, at-risk, basis, and business-interest situation.
- No state reconciliation to track. Non-conforming states force a parallel depreciation book, a Year-1 income addition, and years of subtraction adjustments. Tennessee has none of that for personal-income-tax purposes, so the after-study bookkeeping is lighter for your CPA.
- The Form 3115 lookback is clean. If the property was placed in service in a prior year and depreciated without cost segregation, the federal §481(a) catch-up may be available, with no state-side adjustment to layer on top of it.
The nuance to flag with your CPA is entity structure: an LLC or corporation may have its own Tennessee franchise and excise computation under state rules, which should be confirmed separately. For an individual Tennessee investor, there is no personal-income-tax add-back, though federal usability still depends on the taxpayer's passive-loss, at-risk, and basis situation.
Frequently asked
Does Tennessee have bonus depreciation?
Tennessee has no personal income tax, so for an individual investor there is no separate Tennessee bonus-depreciation question. Federal §168(k) bonus depreciation (100% may apply to qualified property acquired and placed in service after January 19, 2025, subject to eligibility, related-party/prior-use, binding-contract, and election rules) applies on your federal return, and Tennessee imposes no personal income tax that could add it back or defer it. Whether you can use the full federal deduction in the current year still depends on federal limitations such as passive activity, at-risk, basis, and business-interest rules.
Does Tennessee tax my rental income?
No. Tennessee levies no personal income tax on wages, salaries, or rental income. The Hall income tax, which taxed only certain interest and dividend income, was fully phased out and repealed effective January 1, 2021. Rental income you earn as an individual is not taxed by the State of Tennessee, so there is no state return on which a bonus-depreciation deduction would be reduced or added back.
Wasn't there a Tennessee income tax (the Hall tax)?
There was, but it is gone. The Hall income tax applied only to certain interest and dividend income, never to wages, salaries, or rental income. It was phased out over several years and fully repealed effective January 1, 2021, per the Tennessee Department of Revenue. Because it never reached rental income and no longer exists, it has no bearing on cost segregation or on the federal bonus depreciation an individual investor claims on a Tennessee rental.
Can I use Form 3115 on a Tennessee property I bought years ago?
Often, yes. If the property was placed in service in a prior tax year and depreciation has already been reported using a non-segregated method, a federal Form 3115 (Application for Change in Accounting Method) may allow a current-year §481(a) catch-up adjustment for the accelerated depreciation you missed, generally without amending prior returns. Because Tennessee has no personal income tax, there is no parallel state adjustment to reconcile; the lookback is a federal-only calculation.
How much does cost seg save on a Tennessee rental?
On a $750,000 Tennessee rental with a $600,000 depreciable basis and 18.3% reclassified into shorter-life property (the Cost Seg Smart residential benchmark), roughly $109,800 moves into Year-1 bonus depreciation. At a 37% federal bracket, that is about $40,600 of federal savings from the reclassified components alone; including regular first-year depreciation on the remaining building basis, total illustrative Year-1 federal savings are about $43,900. Because Tennessee imposes no personal income tax, there is no state add-back reducing the benefit, though current-year usability still depends on federal passive-loss, at-risk, and basis limitations. Actual results depend on your basis, land allocation, bracket, and eligibility.
Is Tennessee simpler than a non-conforming state?
In one clear respect, yes. Non-conforming states such as California require a parallel state depreciation book and a Year-1 add-back that defers part of the benefit over the asset lives. Tennessee has no personal income tax, so for personal-income-tax purposes there is no state book, no add-back, and no clawback to track. The federal deduction and its limitations are the same everywhere; Tennessee simply removes the state-side income-tax complexity, which makes the after-study bookkeeping lighter for your CPA.
What does a Tennessee cost seg study rely on for its numbers?
The study reclassifies building components into IRS-recognized MACRS class lives (5, 7, and 15-year) per Rev. Proc. 87-56, using an engineering-based methodology that follows the IRS Cost Segregation Audit Techniques Guide (Publication 5653). The reclassified components may then qualify for federal §168(k) bonus depreciation (100% for qualified property acquired and placed in service after January 19, 2025, subject to eligibility and election rules). The engine ships our own calibrated, nationally-recognized construction cost data.
Related guides
- Bonus depreciation by state: overview
- All 50 states: conformity reference table
- California bonus depreciation (non-conforming)
- Texas bonus depreciation (no personal income tax)
- Pennsylvania bonus depreciation
- Form 3115 cost segregation lookback: §481(a) mechanics
- What is cost segregation: the full primer
- Cost segregation in Tennessee: market and property examples
- Sample cost segregation reports