What is bonus depreciation?
Bonus depreciation is a way to perform accelerated depreciation (when a company reduces a fixed asset’s value.) In bonus depreciation, the government encourages businesses to take a 50% deduction from equipment or other assets purchased within the same year as the deduction. This is an alternative to depreciating the value of an object over a few years. The government does this to encourage investment and promote economic health.
According to Investopedia, Congress created theJob Creation and Worker Assistance Act in 2002 to help small businesses. This act included the term “ Bonus Depreciation ” as one of its offerings and has offered it ever since. Then in 2017, Congress passed the Tax Cuts and Jobs Act, which increased the bonus depreciation percentage from 50% to 100%.
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How does bonus depreciation work?
According to the accounting website Bench, here is how the concept of business depreciation works:
1. Purchase an asset
There are a few types of assets that qualify for bonus depreciation. These include:
- Commercial real estate
- Improvements to commercial property
- Any asset with a lifespan of 20 years or less like machinery, office equipment and furniture
- Software programs
- Costs to put on film or theater productions
2. Start using the asset
Once you’ve purchased a qualified asset, be sure to begin using it immediately. This ensures that you can claim bonus depreciation on your next tax return, rather than having to wait a year, in which an asset may have already depreciated in value.
3. Record bonus depreciation on your tax return
Fill out form 4562 in addition to your actual tax return to claim bonus depreciation for one or more assets.
How do you calculate bonus depreciation?
According to Investopedia, here is how to calculate bonus depreciation using the 2017 percentage and formula:
- Identify the purchasing price of an asset
- Identify the current bonus depreciation rate
- Multiply the bonus depreciation rate by the purchase price
For example, a piece of factory equipment costs $15,000. With the current bonus depreciation rate at 100%, this means that the bonus depreciation equivocates for the original purchasing price of the asset. Further, this reduces income tax by $15,000.
Who qualifies for bonus depreciation?
According to the IRS, any business can qualify for bonus depreciation. Although it was originally designed to help small businesses, now it’s based on the type of asset purchased, and when it was purchased to determine the percentage of bonus depreciation that businesses qualify for.
What qualifies for bonus depreciation?
Any property a company purchased and began using after September 27, 2017, and prior to January 1, 2023, will qualify for a 100% deduction if recorded as bonus depreciation. After January 1, 2023, the 100% deduction rate will begin to decrease. For example:
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
In 2027, 10 years after Congress passed the Job Creation and Worker Assistance Act, they will decide whether to renew it, and if so, whether the percentage will still be 100%.
Benefits of bonus depreciation
Bonus depreciation offers several benefits to individual businesses and the economy as a whole. First, there is a financial gain to business owners. Instead of having to report less profit due to depreciating assets over the years, business owners get the maximum value of their assets by depreciating them within the first year of use. This allows them to maximize investments, expand their business and offer jobs. With more job opportunities available, more professionals can be employed and have money to spend.
