What is Bonus Depreciation?
Bonus depreciation, sometimes referred to as the additional first-year depreciation deduction, is a Federal tax incentive for businesses that purchase eligible assets, such as machinery. It allows the purchaser to deduct a large percentage of the purchase price of the eligible asset immediately, then write the remaining cost off over the useful life of that asset. Although some states follow the Federal bonus depreciation rules, California does not conform.
How Does Bonus Depreciation Work?
When discussing bonus depreciation, it’s important to note that the 2017 Tax Cuts and Jobs Act (TCJA) made some major changes to bonus depreciation. As such, there is some regulatory variance between assets placed in service before and after September 27, 2017.
Bonus Depreciation Under Section 179
For tax years 2015 through 2017, bonus depreciation is regulated by Section 179. Section 179 set first-year bonus depreciation at 50%, then scheduled it to decrease starting in 2018 and phase out entirely in 2020 and beyond. Under Section 179, in order for an asset to qualify for bonus depreciation, it must both:
- Have a useful life of 20 years or less (this includes all types of tangible personal business property and software purchased, but not real property)
- Be purchased from someone unrelated to the buyer (e.g., it can’t be a gift or inheritance)
Additionally, Section 179 only allows for bonus depreciation of new property.
Bonus Depreciation Under the Tax Cuts and Jobs Act
The TCJA made major changes to bonus depreciation regulations. The tax code update changed the allowable first-year bonus depreciation deduction for qualified property. Formerly 50%, the deduction was increased to 100% through 2022; after that, the amount of allowable bonus depreciation phases out over four years, as follows:
In order for an asset to qualify for bonus depreciation under the TCJA, it must meet the following requirements:
- Assets must be of a specified type (generally, this includes machinery, equipment, computers, appliances, and furniture).
- Assets must either be new or be used and meet the acquisition requirements of Section 168(k)(2)(E)(ii).
- Assets must have a recovery period that is less than or equal to 20 years.
- Assets must have been acquired and placed in service after September 27, 2017.
How to Claim Bonus Depreciation
Whether or not you will benefit from claiming bonus depreciation depends upon the specifics of your business and tax situation. Here’s a quick look at the methods for claiming (or not claiming) bonus depreciation.
To claim the deduction, business taxpayers should file Form 4562 Depreciation and Amortization with their business tax return. It is important that taxpayers retain copies of their filed 4562s in order to keep track of prior deductions and ensure that they claim the appropriate deduction on future tax returns.
Conversely, to opt out of the depreciation deductions for a class of property, taxpayers should do so on their tax return. Taxpayers who have already filed a return without making the election to opt out have six months from the original filing deadline to submit an amended return.
WNDE Bonus Depreciation Services
WNDE’s team of tax professionals are thoroughly versed on bonus depreciation regulations, both under Section 179 and under the Tax Cuts and Jobs Act. We are prepared to guide your organization in taking the most advantage of this tax deduction.