1) First of all, what is bonus depreciation?
Designed to stimulate investment in business property (not land or buildings), the Internal Revenue Code, under the Tax Cuts and Jobs Act of 2017 (TCJA), now permits “bonus depreciation” of up to 100% of the cost of eligible business property. Prior to the TCJA, the Code permitted up to a 50% deduction.
Bonus depreciation is a method of accelerated depreciation. The IRS often calls bonus depreciation a “special depreciation allowance.” The code provision permitting this deduction is § 168(k).
So now, in year 2021, businesses may potentially receive a 100% deduction of the cost of “qualified business property”—after first applying any applicable §179 deductions. This “immediate” depreciation deduction is available for eligible property placed in service between September 27, 2017 and January 1, 2023.
After January 1, 2023, the 100% deduction will be phased down per the following schedule:
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
2) Which assets are subject to bonus depreciation?
Qualified business property that has a useful life of 20 years or less. Examples include equipment, furniture, fixtures, machinery, computer software, and costs of qualified film or television productions, and live theatrical productions.
Qualified business property also includes “qualified improvement property,” which are improvements made to the interior of commercial buildings. It will also apply to some “listed property,” which is property used for both personal and business (i.e. vehicles and cameras).
The property must be used in your business or in an income-producing activity. The property must have a determinable useful life and be expected to last more than one year.
3) Must the property be new, or can bonus depreciation apply to used property?
The property may be used but new to the taxpayer. For example, bonus depreciation would not apply if you were to buy property after leasing it. Nor will this deduction apply in transactions between related parties (including from a component member of a controlled group of corporations), or in the context of a like-kind exchange (a tax-free exchange).
4) Must I claim bonus depreciation, or may I use a different depreciation method?
Bonus depreciation is not mandatory. You’d consider timing when deciding whether to apply this deduction. When would this large tax deduction benefit your business. For example, a growing company with a low net income may prefer to spread out those deductions over the asset’s useful life to better use the deduction against income.
5) When may I claim the bonus depreciation deduction?
You claim it during the taxable year in which the asset is “placed in service” (i.e. when you put the asset to use). For example, if you purchase a copy machine in year one but start using it in year two, you claim bonus depreciation in year two.
6) Is bonus depreciation under §168(k) the same as a §179 expense deduction?
No. These code sections are slightly different in function and therefore produce different results. First, you apply your § 179 deduction, which has a $1 million-dollar limitation that’s proportionately reduced to the extent that the § 179 property cost exceeds $2.5 million.
Secondly, § 179 cannot create a net loss for your business income. For example, if you have $10,000 in business income and you want to expense $20,000 of § 179 property, you may only deduct 10,000. Contrarily, there is no business income limitation for bonus depreciation. So, using the preceding example, you’d be able to use a $10,000 loss.
7) How may I claim bonus depreciation?
You claim your bonus depreciation on line 14 of Form 4562. Here are the instructions to that form.
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-- Jesse Langel