Bonus Depreciation

Definition

Bonus Depreciation refers to a tax incentive that allows businesses to immediately deduct a large percentage of the purchase price of eligible assets in the first year of service. It’s in addition to Section 179 expensing and the regular depreciation.

Bonus depreciation, as introduced and amended by various tax legislations including the Tax Cuts and Jobs Act (TCJA), is designed to encourage the acquisition of certain types of business assets. Unlike typical depreciation schedules that spread the deduction out over the useful life of an asset, bonus depreciation allows the upfront expense to provide businesses with immediate tax benefits.

Examples

Example 1: Purchase of New Equipment
- A business purchases a new piece of manufacturing equipment for $100,000 in 2023. Under the current rules, if the equipment qualifies for 100% bonus depreciation, the company can immediately write off the full $100,000 on its tax return for 2023.
Example 2: Acquisition of Computers
- An IT company spends $50,000 on new computer systems. With bonus depreciation, the company can deduct 100% (if it qualifies) of the cost in the first year, leading to significant immediate tax savings.

Frequently Asked Questions (FAQs)

Q: What types of property qualify for bonus depreciation?

A: Qualified property generally includes tangible property with a depreciable life of 20 years or less, such as equipment, machinery, computers, appliances, and certain software.

Q: Can used property qualify for bonus depreciation?

A: Yes, under the TCJA, both new and used equipment can qualify for bonus depreciation, as long as it is the taxpayer’s first use.

Q: Is there a cap on the amount of bonus depreciation that can be claimed?

A: Unlike Section 179, there is no annual dollar limit for bonus depreciation. However, the applicable percentage (which was temporarily set to 100%) may decrease over time with changes in legislation.

Q: How does bonus depreciation interact with Section 179 expensing?

A: Businesses can use both Section 179 expensing and bonus depreciation, typically deducting the most by utilizing Section 179 first and then applying bonus depreciation to further reduce the tax burden.

Q: Does bonus depreciation affect my state return?

A: State tax laws may differ from federal rules regarding bonus depreciation. Business owners should check with state tax regulations to understand the impact on their state tax returns.

Section 179 Deduction: A tax deduction that allows businesses to expense up to a certain amount of the cost of qualified property in the year it’s placed in service.
Depreciation: The systematic allocation of the cost of an asset over its useful life.
Qualified Property: Specific types of property that meet IRS criteria for bonus depreciation.
Tax Cuts and Jobs Act (TCJA): The tax reform legislation passed in 2017 that included significant changes to individual, business, and international tax laws, including enhancement of bonus depreciation.

Online Resources

References

Internal Revenue Code (IRC) Section 168(k)
Tax Cuts and Jobs Act (TCJA), Public Law 115-97
IRS Publication 946 - How to Depreciate Property
Congressional Research Service Report - “The Section 179 and Bonus Depreciation Expensing Allowances”, Jane G. Gravelle, Donald J. Marples (2019)

Suggested Books for Further Studies

“Tax Savvy for Small Business: A Complete Tax Strategy Guide” by Frederick W. Daily
“U.S. Master Depreciation Guide (2021)”, CCH Tax Law Editors
“Principles of Accounting Volume 2: Managerial Accounting” by Mitchell Franklin, Patty Graybeal, and Dixon Cooper

Real Estate Basics: Bonus Depreciation Fundamentals Quiz

### Can both new and used equipment qualify for bonus depreciation under the TCJA? - [x] Yes, both new and used equipment can qualify. - [ ] No, only new equipment can qualify. - [ ] Used equipment can qualify only if purchased during a specific time. - [ ] None of the above. > **Explanation:** Under the TCJA, both new and used equipment can qualify for bonus depreciation, as long as it is the first use by the taxpayer. ### What is the main benefit of applying bonus depreciation? - [ ] It extends the depreciation period. - [ ] It increases the overall cost of the property. - [x] It allows a large portion of the expense to be deducted in the first year. - [ ] It makes property tax deductible. > **Explanation:** The main benefit of bonus depreciation is that it allows businesses to deduct a significant portion of the asset cost in the first year, providing immediate tax savings. ### Does Bonus Depreciation have an annual limit similar to Section 179? - [x] No, there is no annual limit. - [ ] Yes, the limit changes annually. - [ ] It depends on the type of property. - [ ] It is based on the business revenue. > **Explanation:** Unlike Section 179 which has an annual dollar limit on deductions, bonus depreciation does not have an annual limit. ### Can land qualify for bonus depreciation? - [ ] Yes, both land and buildings qualify. - [ ] Land qualifies if used for commercial purposes. - [x] No, land does not qualify for depreciation. - [ ] Land only qualifies in certain states. > **Explanation:** Land does not qualify for any kind of depreciation, including bonus depreciation, because land does not wear out or become obsolete. ### What tax publication outlines the rules for bonus depreciation? - [ ] IRS Publication 934 - [x] IRS Publication 946 - [ ] IRS Publication 938 - [ ] None of the above. > **Explanation:** IRS Publication 946 outlines the rules and guidelines for depreciation including bonus depreciation. ### Who benefits most from bonus depreciation? - [ ] Homeowners with personal property. - [ ] Businesses with long-term asset depreciation goals. - [x] Businesses looking for immediate tax relief. - [ ] Non-profit organizations. > **Explanation:** Businesses seeking immediate tax relief benefit most from bonus depreciation as it offers significant upfront deductions. ### What major tax reform significantly affected bonus depreciation? - [x] Tax Cuts and Jobs Act (TCJA) - [ ] Affordable Care Act (ACA) - [ ] Sarbanes-Oxley Act (SOX) - [ ] Dodd-Frank Act > **Explanation:** The Tax Cuts and Jobs Act of 2017 significantly affected bonus depreciation by allowing for 100% first-year deductions. ### Can bonus depreciation be applied to intangible assets? - [ ] Yes, if the asset has a determinable useful life. - [ ] Yes, for all intangible assets. - [x] No, it typically applies to tangible property. - [ ] Intangible assets must be expensed entirely in the first year. > **Explanation:** Bonus depreciation typically applies to tangible property with a useful life of 20 years or less and does not generally apply to intangible assets. ### Is bonus depreciation mandatory or optional? - [ ] Mandatory for all qualifying assets. - [x] Optional, businesses can elect not to use it. - [ ] Businesses can only opt-out if they use Section 179 instead. - [ ] It depends on the type of asset purchased. > **Explanation:** Bonus depreciation is optional, and businesses can choose whether or not to apply it to their qualifying assets. ### Can businesses apply both Section 179 and bonus depreciation? - [x] Yes, they can use both. - [ ] No, they must choose one or the other. - [ ] They must alternate between years. - [ ] Only for assets over a certain cost. > **Explanation:** Businesses can apply Section 179 expensing first, and then use bonus depreciation for any remaining qualifying cost.