Vermont Bonus Depreciation: Excluded From the Definition of Income Itself.
Vermont computes both individual and corporate taxable income "without regard to 26 U.S.C. §168(k)." The bonus deduction never enters the Vermont starting figure — it isn't an add-back layered on top of a federal number, it's built into how "taxable income" is defined.
Reviewed by Cost Seg Smart Editorial Team · Last verified against 32 V.S.A. §5811 — definitions of taxable income and Vermont net income
The 30-second answer: Vermont has decoupled from federal §168(k) bonus depreciation, and unusually directly: both the individual (32 V.S.A. §5811(21)) and corporate (§5811(18)(A)) definitions of taxable income compute income "without regard to 26 U.S.C. §168(k)." The bonus never enters the Vermont starting figure at all.
We corrected this verdict on 2026-09-07 from a prior "conforms" label. Vermont's general base IS rolling (§5811(7)), which is likely how that earlier label arose — but §168(k) carries an explicit, permanent carve-out from that rolling base in the same section.
What we could not confirm: the exact mechanic that recovers the disallowed amount later. It presumably recovers through ordinary depreciation over the asset's remaining life, but no specific schedule or year count was located, and this page does not assert one.
On a representative Vermont single-family rental (the single-family rental band we publish, 9–32% of depreciable basis reclassified, 16% representative), the reclassified components alone generate an estimated $18K–$165K of federal Year-1 depreciation — roughly $6,660–$61,570 of federal Year-1 tax savings at the 37% top bracket, fully intact regardless of the Vermont answer.
Federal vs Vermont, Side by Side
For an individual investor's or Vermont business's cost-segregation-reclassified components:
| Tax provision | Federal (IRC) | Vermont |
|---|---|---|
| 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 | Excluded from the definition of taxable income itself (32 V.S.A. §5811(21) individual, §5811(18)(A) corporate) |
| Mechanism | Not applicable | Built into the definition, not a later add-back line — the bonus never enters the Vermont starting figure |
| General conformity vs this carve-out | Not applicable | General base is rolling (§5811(7)); §168(k) is an explicit, permanent exception within it |
| Recovery of the excluded amount | Not applicable | Not confirmed. Presumably ordinary depreciation over the asset's remaining life; no specific schedule is asserted here |
| Federal usability of the deduction | Subject to passive activity, at-risk, basis, and business-interest limits | Same federal limits govern the federal deduction; Vermont's exclusion applies independently |
Source: 32 V.S.A. §5811; IRC §168(k). Federal bonus figures reflect current law; eligibility depends on acquisition and placed-in-service dates and elections.
A correction, and what we could — and could not — confirm
We are correcting this page's verdict from an earlier "conforms" label, and we think it is worth explaining exactly how that happened. Vermont's general tax base is rolling: 32 V.S.A. §5811(7) tracks the federal Internal Revenue Code as it changes, which on its own reads like straightforward conformity. But that same definitions section carries an explicit, permanent carve-out at §5811(21) (individual) and §5811(18)(A) (corporate): taxable income is computed "without regard to 26 U.S.C. §168(k)." Reading only the rolling-base provision and missing the carve-out is exactly how a state can look like it conforms when a specific, important provision does not flow through.
What makes Vermont's decoupling unusually clean, statutorily speaking, is that it isn't a separate add-back line computed after starting from federal taxable income — it is built directly into how "taxable income" and "Vermont net income" are defined in the first place. The bonus simply never enters the calculation.
What we could not confirm, and want to state directly rather than paper over: the exact mechanic that later recovers the disallowed amount. It presumably recovers through ordinary depreciation deductions over the asset's remaining MACRS life — the natural consequence of simply excluding the bonus from the starting depreciation figure — but no specific recovery schedule, add-back-and-subtract cycle, or year count was located in the sections reviewed. This page does not assert one. Confirm the precise mechanic with a Vermont CPA or the Vermont Department of Taxes before modeling multi-year cash flow.
Illustrative numbers: a Vermont single-family rental
Using the single-family residential (SFR) band we publish — 9–32% of depreciable basis reclassified into 5/7/15-year property, 16% representative — on a property priced between $250,000 and $650,000, with a 20% residential land allocation, and 100% federal bonus depreciation for eligible components under current law. The Vermont column is qualitative because the exact recovery mechanic was not confirmed:
| Line item | Federal | Vermont |
|---|---|---|
| Purchase price band | $250,000–$650,000 | Same property |
| Depreciable basis (20% land allocation) | $200,000–$520,000 | Same basis |
| Reclassified to 5/7/15-yr (9–32% of basis) | $18K–$165K | Excluded from the Vermont taxable income definition |
| Year-1 treatment | $18K–$165K deducted (100% bonus, if eligible) | Ordinary MACRS Year-1 depreciation only (no §168(k) allowance) |
| Later-year treatment | Not applicable (already deducted) | Presumably recovers via ordinary depreciation over the remaining life — exact mechanic not confirmed |
| Marginal tax rate | Up to 37% | Vermont individual income tax rate (verify current year with the Vermont Department of Taxes) |
| Illustrative Year-1 federal tax savings on reclassified components | ~$6,660–$61,570 (37% × $18K–$165K) | Fully intact — Vermont's exclusion has no federal effect |
Figures are illustrative and use the site's published SFR reclassification band; your result depends on your basis, land allocation, bracket, component mix, and eligibility. Whether the full federal deduction is usable in the current year still depends on your passive-loss, at-risk, basis, and business-interest situation. Confirm Vermont's exact later-year recovery mechanic with your CPA before relying on a specific schedule.
See a sample cost segregation report
Look at exactly what your Vermont 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 Vermont property
For a Vermont investor or business, the depreciation workflow runs on both the federal return and the Vermont return:
- 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 federal deduction reduces federal taxable income in Year 1, subject to the federal passive-loss, at-risk, basis, and business-interest limits.
- Vermont income tax return: taxable income is computed without regard to §168(k) from the start, per 32 V.S.A. §5811(21) (individual) or §5811(18)(A) (corporate) — there is no separate add-back line because the bonus was never part of the Vermont figure.
- Form 3115 §481(a) section: included only if this is a federal lookback method change on a property placed in service in a prior year (see below).
The reclassified schedule is the same engineered output for both books; the difference is that federal claims the Year-1 bonus while Vermont's own income definition never counted it in the first place.
Form 3115 lookback on a Vermont property
If the property was placed in service in a prior tax year and depreciation was 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. Any catch-up dollars are illustrative and depend on placed-in-service date, prior depreciation claimed, bonus eligibility, land allocation, and component mix.
The federal §481(a) catch-up is the primary lever, and it remains subject to the federal passive-loss, at-risk, and basis limits. For Vermont, the catch-up year's bonus-eligible amount would be excluded from the Vermont taxable income definition the same way an ordinary Year-1 bonus is — confirm the state-level recovery mechanic with your CPA since it was not confirmed in this review.
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 Vermont? No.
Vermont's exclusion has zero effect on the federal return, which is where the dominant benefit sits. The math still favors doing the study, for three reasons:
- The full federal Year-1 bonus is intact. Vermont's exclusion of §168(k) is baked into the state's own income definition; the full §168(k) bonus is still claimed on the federal return. How much you use in the current year still depends on your passive-loss, at-risk, basis, and business-interest situation.
- The reclassification itself has value regardless of the state-level timing. Even setting the unconfirmed Vermont recovery mechanic aside, the accelerated federal deduction and the shorter MACRS class lives are unaffected by Vermont's exclusion.
- The Form 3115 lookback still captures missed federal years. 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, generally without amending prior returns.
The nuance to flag with your CPA is the one honest gap in this page: we know Vermont excludes §168(k) from its taxable income definition, but the exact schedule by which any disallowed amount is later recovered was not located, and should be confirmed directly with the Vermont Department of Taxes before modeling multi-year Vermont cash flow.
Frequently asked
Does Vermont allow bonus depreciation?
No. Vermont is decoupled from federal §168(k) bonus depreciation, and the exclusion is written directly into how the state defines taxable income. Both the individual definition (32 V.S.A. §5811(21)) and the corporate definition (§5811(18)(A)) compute income "without regard to 26 U.S.C. §168(k)." An individual or business still claims the full federal Year-1 bonus on the federal return (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), but that bonus never enters the Vermont starting figure at all.
How is Vermont's decoupling different from a state that does an 'add-back'?
In most decoupled states, the state starts from federal taxable income (which includes the bonus) and then adds a specific line item back. Vermont's mechanism is more direct: the definition of "taxable income" itself — the starting figure for the Vermont calculation — is computed without regard to §168(k) in the first place. There is no separate add-back line because the bonus was never part of the Vermont number to begin with.
Wasn't Vermont previously listed as a conforming state?
Yes, and that was a correction we made and want to be transparent about. Vermont's general tax base IS rolling — §5811(7) tracks the federal Internal Revenue Code as it changes, which is presumably how an earlier "conforms" label arose. But §168(k) itself is carved out explicitly and permanently from that rolling base, in the same definitions section. The rolling base and the §168(k) carve-out are two different things, and only reading both together gives the correct answer: Vermont is decoupled specifically for bonus depreciation, even though its general conformity is rolling.
Do I recover the disallowed Vermont depreciation later, and on what schedule?
This is the one detail we could not confirm, and we are being direct about it rather than guessing. The disallowed amount presumably recovers through ordinary depreciation over the asset's remaining MACRS life — that is how most bonus-depreciation carve-outs work in practice — but the exact recovery mechanic was not located in the sections reviewed. We are not asserting a specific add-back-and-subtract cycle, a fixed number of years, or a fixed percentage, because that was not confirmed. Have your CPA verify the precise mechanic with the Vermont Department of Taxes before modeling multi-year cash flow.
Does this apply the same way to individuals and corporations?
Yes. The individual definition at §5811(21) and the corporate definition at §5811(18)(A) use nearly identical language — both compute their respective taxable income figures without regard to §168(k).
Is cost segregation still worth it in Vermont?
Yes, for the federal benefit. Vermont's exclusion of §168(k) is baked into the state's own income definition and has zero effect on the federal return — the full federal §168(k) bonus is still claimed there. Whether the full federal deduction is usable in the current year still depends on federal passive-activity, at-risk, basis, and business-interest limits. The Vermont-side timing of the reclassified deduction should be confirmed with your CPA given the recovery mechanic was not confirmed here.
Can I use Form 3115 on a Vermont property I bought years ago?
Often, yes, at the federal level. If the property was placed in service in a prior tax year and depreciation was 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 for the accelerated depreciation you missed, generally without amending prior returns. Any catch-up dollars are illustrative and depend on placed-in-service date, prior depreciation, bonus eligibility, land allocation, and component mix. For Vermont, the catch-up year's bonus-eligible amount would be excluded from the Vermont taxable income definition the same way an ordinary Year-1 bonus is — confirm the state-level recovery mechanic with your CPA since it was not confirmed in this review.
Related guides
- Bonus depreciation by state: overview
- All 50 states: conformity reference table
- Rhode Island bonus depreciation (decoupled, permanent disallowance)
- Maine bonus depreciation (decoupled, full add-back with capped recovery)
- Form 3115 cost segregation lookback: §481(a) mechanics
- What is cost segregation: the full primer
- Sample cost segregation reports