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Bonus Depreciation

Bonus Depreciation

What is Bonus Depreciation?

Bonus depreciation is a tax incentive that permits a business to quickly deduct a large percentage of the purchase price of eligible assets, like machinery, as opposed to discount them over the "valuable life" of that asset. Bonus depreciation is otherwise called the extra first year depreciation deduction.

How Bonus Depreciation Works

At the point when a business makes an acquisition, like machinery, the cost, for tax accounting purposes, has customarily been spread out over the valuable life of that asset. This cycle is known as depreciation and can once in a while help an organization out. On the off chance that depreciation isn't applied, an organization's financial statement could endure an extreme shot, showing smaller profits or larger losses for the year it made the acquisition.

The Tax Cuts and Jobs Act of 2017 multiplied the bonus depreciation deduction from half to 100%.

The Tax Cuts and Jobs Act, passed in 2017, rolled out major improvements to the rules on bonus depreciation. Most essentially, it multiplied the bonus depreciation deduction for qualified property, as defined by the IRS, from half to 100%. The 2017 law likewise extended the bonus to cover utilized property under certain conditions. Formerly it applied exclusively to property bought new.

The new bonus depreciation rules apply to property acquired and put in service after September 27, 2017, and before January 1, 2023, when the provision lapses except if Congress reestablishes it. In 2023, the rate for bonus depreciation will be 80%. In 2024, it will be 60%, and in 2025, it will be 40%. In 2026, it will be 20% (expecting Congress doesn't change the law before then, at that point). Property acquired before September 27, 2017, stays subject to the prior rules. Bonus depreciation is calculated by increasing the bonus depreciation rate (as of now 100%) by the cost basis of the acquired asset. For a business that claims bonus depreciation on a thing that costs $100,000, for instance, the subsequent deduction would be worth $21,000, expecting the organization's tax rate is 21%.

Bonus depreciation must be required in the first year that the depreciable thing is set in service. Nonetheless, businesses can choose not to utilize bonus depreciation and on second thought devalue the property over a more drawn out period assuming that they view that as invaluable.

History of Bonus Depreciation

Congress presented bonus depreciation in 2002 through the Job Creation and Worker Assistance Act. Its purpose was to permit businesses to recover the cost of capital acquisitions all the more rapidly to invigorate the economy. The bonus depreciation allows companies to deduct 30% of the cost of eligible assets before the standard depreciation method was applied. To be eligible for bonus depreciation, assets must be purchased between September 10, 2001, and September 11, 2004.

The 2003 Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) increased the bonus depreciation rate to half for property initially utilized after May 3, 2003, and set in service before January 1, 2005. Putting an asset in service means that it is actively utilized in the operations of a business. The half depreciation incentive was presented again through the 2008 Economic Stimulus Act for property acquired after December 31, 2007.

The 2015 Protecting Americans from Tax Hikes (PATH) Act extended this program through 2019 for business owners however incorporated a stage out of the bonus depreciation rate after 2017. Under PATH, businesses were permitted to deduct their capital expenses by half for 2015, 2016, and 2017. The rate was then scheduled to drop to 40% in 2018 and 30% in 2019.

In 2017 the Tax Cuts and Jobs Act raised the rate to 100% and rolled out different improvements to the law, as portrayed previously.


  • Bonus depreciation permits businesses to deduct a large percentage of the cost of eligible purchases the year they secure them, instead of deteriorating them over a period of years.
  • Businesses ought to involve IRS Form 4562 to record bonus depreciation as well as different types of depreciation and amortization.
  • It was made as a method for empowering investment by small businesses and invigorate the economy.
  • The rules and limits for bonus depreciation have changed throughout the long term, and the most recent ones are scheduled to lapse in 2023.