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 eligible business property, in addition to other depreciation.
2017 Tax Act Changes
In December 2017, Congress passed the Tax Cuts and Jobs Act (the Trump Tax Cuts), that included some changes to bonus depreciation, among other changes to business taxes. Here are the details of the new provisions:
- Bonus depreciation doesn't have to be used for new purchases but must be "first use" by the business that buys it.
- Bonus depreciation increased to 100% for qualified purchases made after September 17, 2017, and remains at 100% until January 1, 2023.
There are some restrictions on the type of property that can be depreciated using bonus depreciation. These restrictions are meant to make sure that the property was bought from an external unrelated source.
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.
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  percent of the cost of qualifying property in addition to the regular depreciation allowance that is normally available.
How It Works
First, you make the purchase of 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 100% of the remaining basis. The balance of the purchase is then depreciated in the usual way over a number of years. You can read more about how to calculate depreciation.
Qualifications and Restrictions
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 an 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 on Your Business Tax Return
Use IRS Form 4562 to record bonus depreciation and other types of depreciation and amortization. You might want to review the Instructions for Form 4562 before you begin this calculation.
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 a new property and claim a bonus depreciation expense, talk to your tax professional.