Bonus Depreciation

What Is Bonus Depreciation?

Bonus depreciation is a tax incentive that allows businesses to immediately deduct a large percentage of the purchase price of eligible business assets in the year they are placed in service, rather than depreciating them over the useful life of the asset. This can significantly reduce a company’s tax liability in the year of purchase.

Key Features of Bonus Depreciation

  • Immediate Expense Deduction: Allows for the immediate deduction of a substantial portion of asset costs.
  • Encourages Investment: Designed to encourage businesses to buy new equipment and invest in development.
  • Tax Relief: Provides significant tax relief and helps improve cash flow for businesses.
  • Eligibility Criteria: Applies to new and sometimes used assets with a recovery period of 20 years or less.

How Does Bonus Depreciation Work?

  1. Asset Acquisition: Businesses purchase eligible assets such as machinery, equipment, or software.
  2. Deduction Claim: In the first year the asset is placed in service, businesses can deduct a significant portion of the cost.
  3. Tax Filing: The deduction is claimed on the business’s tax return for the year the asset was placed in service.
  4. Remaining Value Depreciation: Any remaining cost not covered by bonus depreciation is depreciated over the asset’s useful life according to regular depreciation schedules.

Best Practices for Bonus Depreciation

  • Consult Tax Professionals: Always consult with a tax professional to ensure compliance and optimal tax strategy.
  • Record-Keeping: Maintain detailed records of asset purchases and depreciation schedules.
  • Strategic Purchasing: Plan asset purchases to maximize tax benefits, especially in years when making large investments.

FAQs

It depends on the tax laws at the time; historically, bonus depreciation has been limited to new assets, but recent laws have expanded it to include used assets under certain conditions.

Generally, there is no dollar limit on the amount of bonus depreciation that can be claimed in a given year, but specific rules and limits may apply depending on the asset type and tax year.

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