Bonus depreciation is a tax incentive that allows small- to mid-sized businesses to take a first year-deduction on purchases of qualified business property in addition to other depreciation.
How bonus depreciation works
Generally, the point of depreciation is to spread out the cost of an asset over the life of the asset, rather than take the full cost of the asset in the first year. Bonus depreciation is a kind of accelerated depreciation. In the year qualified property is purchased and put into use, a business is allowed to deduct 100% of the cost of the property in addition to other depreciation that is always available.
Qualified property (or assets) includes:
- Property depreciated under the Modified Accelerated Cost Recovery System (MACRS) that has a recovery period of 20 years or less
- Computer software
- Specified plants
- Qualified improvement property
- Some listed property
More specifically, property depreciated under the MACRS that has a recovery period of 20 years or less is generally tangible, personal property such as vehicles, office equipment, heavy equipment, machinery, etc. Land does not count as qualified property.
Qualified improvement property is defined by the IRS as “any improvement to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date such building was first placed in service.”
Listed property, or property that can be used for both business and personal use, must be used 50% of more for business to qualify for bonus depreciation.
Keep in mind, to be depreciable, property must have a “determinable useful life,” meaning that it wears out, loses value, etc. It also must last more than one year. It’s not considered depreciable if it is put into use and disposed of in the same year.
IRS Form 4562 should be used to claim bonus depreciation and Section 179. Keep in mind, for each business or activity on a tax return that requires Form 4562, a separate Form 4562 must be submitted.
What is bonus depreciation for 2019?
Under the Tax Cuts and Jobs Act, bonus depreciation has been increased to 100% (up from 50%) for purchases of qualified property made between September 27, 2017 and January 1, 2023.
Additionally, now used, qualified property acquired and put into use after September 27, 2017 can be depreciable if it meets certain requirements. Previously, only new purchases were eligible for depreciation. The requirements as stated by the IRS for used, qualified property are:
- The taxpayer or its predecessor didn’t use the property at any time before acquiring it.
- The taxpayer didn’t acquire the property from a related party.
- The taxpayer didn’t acquire the property from a component member of a controlled group of corporations.
- The taxpayer’s basis of the used property is not figured in whole or in part by reference to the adjusted basis of the property in the hands of the seller or transferor.
- The taxpayer’s basis of the used property is not figured under the provision for deciding basis of property acquired from a decedent.
- Also, the cost of the used property eligible for bonus depreciation doesn’t include the basis of property determined by reference to the basis of other property held at any time by the taxpayer (for example, in a like-kind exchange or involuntary conversion).
If you have any question regarding bonus depreciation feel free to call Tax Management & Financial Horizons to speak to a tax professional.