When Can You Take Bonus Depreciation?

Understanding Bonus Depreciation

Bonus depreciation is a tax incentive that allows businesses to deduct a larger portion of the cost of certain assets in the year they are placed in service, rather than depreciating them over their useful life. This strategy can significantly reduce a company’s tax liability, leading to increased cash flow and potential investment opportunities.

Eligibility for Bonus Depreciation

To qualify for bonus depreciation, an asset must meet specific criteria:

  • Property Type: Bonus depreciation generally applies to tangible personal property with a recovery period of 20 years or less under the Modified Accelerated Cost Recovery System (MACRS). This includes assets such as machinery, equipment, computers, and office furniture.
  • Placed in Service: The asset must be placed in service during the tax year for which the bonus depreciation deduction is claimed.
  • New or Used: Bonus depreciation is available for both new and used assets. However, the deduction for used assets is limited to the portion of the cost that exceeds the adjusted basis of the asset when acquired.

Calculating Bonus Depreciation

The amount of bonus depreciation that can be claimed depends on the type of asset and the year it was placed in service. The following table outlines the bonus depreciation rates for different asset classes:

Year Placed in Service Bonus Depreciation Rate
2023 80%
2024 60%
2025 40%
2026 20%
2027 and after 0%

Timing of Bonus Depreciation

Bonus depreciation is claimed on the tax return for the year in which the qualifying asset is placed in service. The deduction is reported on Form 4562, Depreciation and Amortization.

Additional Considerations

  • Phase-Out: Bonus depreciation is scheduled to phase out gradually over the next several years. The deduction will be 0% for assets placed in service after December 31, 2026.
  • Recapture: If an asset for which bonus depreciation was claimed is sold or disposed of before the end of its recovery period, the depreciation deduction may be recaptured as ordinary income.
  • Interaction with Section 179 Deduction: Bonus depreciation and the Section 179 deduction are both first-year expensing deductions. However, there are some key differences between the two. Section 179 has an annual deduction limit, while bonus depreciation does not. Additionally, Section 179 is not subject to recapture, unlike bonus depreciation.

Bonus depreciation is a valuable tax incentive that can provide significant financial benefits to businesses. By understanding the eligibility requirements, calculation methods, and timing of bonus depreciation, businesses can optimize their tax strategies and maximize their cash flow.

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When should you not take bonus depreciation?

The IRS explicitly disqualifies certain types of assets from being able to claim bonus depreciation. Under new bonus depreciation rules, assets are not eligible if they are: Primarily used in the trade of furnishing or sale of electrical energy, water, or sewage disposal services.

When can you take bonus depreciation on vehicles?

Bonus depreciation must be taken in the year the vehicle is originally placed in service by the taxpayer.

What assets are eligible for 100% bonus depreciation?

Qualified property eligible for bonus depreciation includes depreciable assets with a recovery period of 20 years or less, such as vehicles, furniture, manufacturing equipment, and heavy machinery.

When can a business take 100% bonus depreciation?

Businesses may take 100% bonus depreciation on qualified property both acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. The acquisition date for property acquired pursuant to a written binding contract is the date of such contract and may have extended bonus periods.

How do I qualify for bonus depreciation?

To qualify for bonus depreciation, the asset has to be used for business at least 50% of the time. Costs of qualified film or television productions and qualified live theatrical productions. Placing property in service means you have to start using the asset in your business.

When does bonus depreciation start?

However, that 100% limit begins to phase down after 2022. Starting in 2023, the rate for bonus depreciation will be: To take advantage of bonus depreciation: Step 1: Purchase qualified business property. Qualified business property includes: Property that has a useful life of 20 years or less.

Can I depreciate a bonus asset in the first year?

Assets acquired during the bonus period (September 27, 2017, to January 1, 2023) can receive 100% depreciation deductions in the first year. This deduction is taken the first year that the asset enters service with the company. These rules only apply to specific assets and types of property.

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