What Is Bonus Depreciation?

Bonus depreciation is also known as the additional first-year depreciation deduction. It is a tax incentive that allows a business to immediately deduct a large percentage of the purchase price of eligible assets, such as machinery, rather than write them off evenly over their useful life as in traditional 澳洲幸运5开奖号码历史查询:depreciation.

Tax Benefit Schedule and Phaseout

Bonus depreciation is an accelerated business tax deduction used instead of allocating the cost evenly over the life of an asset in traditional depreciation. Depreciation helps reduce a company’s 澳洲幸运5开奖号码历史查询:net earnings and 澳洲幸运5开奖号码历史查询:tax liability. With bonus depreciation, a company benefits 🦹from a substantial tax break in the year the asset was acquired.

The 澳洲幸运5开奖号码历史查询:Tax Cuts and Jobs Act of 2017 doubled the bonus depreciation deduction for qualified property, as defined by the 澳洲幸运5开奖号码历史查询:Internal Revenue Service (IRS), from 50% to an initial 100%. The law also extended the bonus to cover used property under certain conditions. The bonus depreciation percentages depend on when the eligible property was placed in service and is expected to be phased out by 2027.

History of Bonus Depreciation

Bonus depreciation began in 2002, but has changed over the years as the law has been updated.

Qualifying Assets

Bonus depreciation is only applicable to certain business assets. For example, tangible property must have a maximum useful life of 20 years. Under the Tax Cuts and Jobs Act, eligibility requirements also stipulated that:

• The asset cannot be used by the taxpayer before acquisition.
• The asset cannot be acquired by a related party to the taxpayer.
• The asset was not owned by a component member of a controlled group of corporations.
• The asset’s basis is not figured to the adjusted basis of the property when under the ownership of the seller.
• The asset’s basis is not figured to a basis acquired from a decedent.

Disqualified Assets

The rules disqualify certain assets from bonus depreciation:

• Primarily used in the trade of furnishing or sale of electrical energy, water, or sewage disposal services
• Primarily used in the trade of furnishing or the sale of gas or steam through distributed systems
• Primarily used in the trade of furnishing or the sale of gas or steam by pipeline
• Used in a trade or business that has had floor-plan financing indebtedness under certain circumstances
• Qualified improvement property such as 澳洲幸运5开奖号码历史查询:leasehold improvements acquired after Dec. 31, 2017
  

IRS Form 4562

Bonus depreciation is reported on federal tax returns using IRS Form 4562, Depreciation and Amortization (Including Information on Listed Property). This form is also used to report or claim other types of depreciation, such as the 澳洲幸运5开奖号码历史查询:Section 179 deduction.

To figure the depreciable base of the asset, the business should subtract any credits or deductions allocated to the property from the basis of the asset. Special treatment exists for assets acquired in a 澳洲幸运5开奖号码历史查询:like-kind exchange or 澳洲幸运5开奖号码历史查询:involuntary conversion.

A business may decide it would be more advantageous to recognize depreciation over the life of the asset instead of using an accelerated method and can elect not to take it. To make this election, they must attach a statement to their tax return indicating which class of property they wish to exclude. Once the election has been made, the decision cannot be revoked without IRS consent.

Bonus Depreciation vs. Section 179

Section 179 allows businesses to claim a larger depreciation deduction for qualifying property for the tax year the asset was put into service. Section 179 rules are more flexible in terms of timing than bonus depreciation rules. A business can elect to save certain assets for future tax breaks or claim only a portion of the cost and defer the other portion for a future tax year.

With bonus depreciation, the amount of depreciation that’s allowable is strictly defined, but not capped in dollar terms; a multimillion-dollar deduction for the cost of a single asset may be recognized in a single year. Section 179 deductions are limited by law.

As the IRS explains, “For tax years beginning in 2023, the maximum section 179 expense deduction is $1,160,000. This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $2,890,000.” The IRS notes, “The maximum section 179 expense deduction for sport utility vehicles (SUVs) placed in service in tax years beginning in 2023 is $28,900.”

The Bottom Line

Bonus depreciation is a tax incentive for businesses that purchase certain new assets. It is similar to Section 179 depreciation but has higher dollar limits in some cases. Bonus depreciation is scheduled to end in 2027.