Bonus Depreciation and How It Affects Business Taxes
Bonus depreciation is a valuable tax-saving tool for businesses. It allows your business to take an immediate first-year deduction on the purchase of an eligible business property, in addition to other depreciation.
Current Features of Bonus Depreciation
In December 2017, Congress passed some changes to bonus depreciation, among other changes to business taxes. The new provisions are:
- Bonus depreciation doesn't have to be used for new purchases but must be "first use" by the business that buys it.
- Bonus depreciation is increased to 100% for qualified purchases made after September 17, 2017, and remains at 100% until January 1, 2023.
- The plan is then phased out over several years: 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. Unless the plan is changed before then, bonus depreciation would not be available beginning in 2027.
What is Depreciation?
Depreciation allows (or requires) businesses to spread out the cost of long-term assets over the life of the asset. The alternative would be to take the cost of the asset in the first year after the asset is acquired by the business, but this isn't realistic. Hence, depreciation.
The most common way to depreciate a business asset is by spreading out the cost evenly over the asset life - called straight-line depreciation.
But, Congress has frequently given additional incentives to businesses over the past few years, to encourage them to purchase capital assets for their businesses.
One such encouragement is bonus depreciation.
What is Bonus Depreciation?
Bonus depreciation is a method of accelerated depreciation which allows a business to make an additional deduction of 50% of the cost of qualifying property in the year in which it is put into service. This extra depreciation allowance is only for new equipment.
The IRS says:
This special bonus depreciation allowance is available to all businesses and applies to most types of tangible personal property and computer software acquired and placed in service [a particular year]. It allows taxpayers to deduct 50 percent of the cost of qualifying property in addition to the regular depreciation allowance that is normally available.
How Bonus Depreciation Works
First, you make the purchase of a qualified business property. The property can be just about any kind except for land and buildings. Then you put the property in service, by setting it up and using it. Let's say the property is worth $1,000,000. First, you may be able to take a Section 179 deduction, to reduce the purchase price. Then you may be able to take the additional bonus depreciation of 50% of the remaining basis. The balance of the purchase is then depreciated in the usual way. You can read more about how to calculate depreciation.
Qualifications and Restrictions on Using Bonus Depreciation
To be qualified to use bonus depreciation, it must be first used in the year you are claiming the first depreciation deduction. Only certain types of property may be eligible for bonus depreciation.
Computer software is now included.
Certain kinds of property, called listed property, must be used 50% or more for business use, to qualify for bonus depreciation. Listed property includes computers, autos, and other property that can be used for both business and personal purposes.
A new category of "qualified improvement property" has been added. As defined by the IRS, it is any improvement to a building interior of "nonresidential real property" (a building) that is placed in service after the date the building was first placed in service.
Recording Bonus Depreciation on Your Business Tax Return
Getting Help with Bonus Depreciation
Depreciation is a complicated business process, and the laws regarding depreciation, particularly bonus depreciation and Section 179 deductions, are always changing.
Before you make a business decision to buy new property and claim a bonus depreciation expense, talk to your tax professional.
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