Mike is a sole proprietor and resident of the fictional state of East Columbia. He receives business income from a business operated entirely within East Columbia. This year, Mike placed a new machine (seven-year asset) into service for his business. On his federal return, he claimed the 100% special depreciation allowance. East Columbia begins its state tax calculation with federal adjusted gross income and generally conforms to the Internal Revenue Code. However, East Columbia does not allow special depreciation deductions. Which of the following is TRUE about Mike's East Columbia tax return?

1-Mike will lose out on the opportunity to claim any depreciation deduction on his state return over the asset's recovery period.

2-Mike will claim a smaller deduction on his East Columbia return compared to the federal return in Year 1, but a larger deduction each year beginning in Year 2 through the end of the asset's recovery period.

3-Mike will need to make a modification on his state return to account for the difference in the state treatment of depreciation in Year 1. However, for the remainder of the asset's recovery period, the state and federal depreciation amounts will match.

4-Mike will be required to opt out of special depreciation on his federal return.