Bonus Depreciation and its effect on business taxes

For business owners looking for valuable tax saving options, bonus depreciation serves to be the best tool. With bonus depreciation businesses can deduct a certain percentage of the purchase price on eligible assets instead of writing them off over the useful life of the assets.

The concept of bonus depreciation

You must be familiar with the term “depreciation”. Speaking about depreciation, when a business acquires an asset such as a piece of machinery, the cost of the asset for accounting purposes will be spread out over the useful life of the asset and this might sometimes result in favor of the business. When not applied, the financial statement of the business might be affected severely.

This is where bonus depreciation came into play. The TCJA brought in a lot of changes in the rules. The bonus depreciation deductions were doubled and the depreciation became applicable to used properties under specific conditions and not just for new properties. The new rules now apply for properties acquired and placed into service after September 27, 2017, and before January 1, 2023.

The difference between depreciation and bonus depreciation

The most common way in which a business asset is depreciated is by just spreading out the cost of the asset evenly over the life of the asset. This method is commonly referred to as straight-line depreciation.

Coming to bonus depreciation, it is referred to as accelerated depreciation. It allows businesses to make an extra deduction of 50% of the cost of the asset in the year it was put into service.

How does it work?

Say, you have acquired a business property, a property of any kind other than land or building, and put it into service. Say, for example, the property is worth $1,000,000. The section 179 deduction can help you reduce the purchase price. You can then take the bonus depreciation for the remaining basis. The balance is then depreciated in the same way over a number of years. 

Benefits of bonus depreciation

  • It helps businesses deduct a huge percentage of the cost of purchase the year the asset was acquired rather than depreciating it over a while
  • It encourages investment by small businesses

The bonus depreciation rules keep changing over the years, the one now is likely to expire in 2023

Depreciation is a complicated process and the rules keep changing, so before you take a decision talk to the experts and get professional help.


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