Introduction

Bonus depreciation is a tax incentive that allows businesses to deduct a significant portion of the cost of eligible assets in the year they are placed in service. It was established by the Internal Revenue Service (IRS) to encourage investment in new assets and boost economic growth. This article will provide detailed guidance on how to calculate bonus depreciation, including determining eligibility, calculating the deduction, and understanding the impact on taxes.

1. Determine Eligibility for Bonus Depreciation

The first step is to determine if your business is eligible for bonus depreciation. Assets that may qualify for this tax incentive include:

– Tangible property with a recovery period of 20 years or less, such as machinery, equipment, and vehicles

– Computer software

– Water utility property

– Certain qualified improvement property

The asset must also be new or previously unused (first-time use) in your business. Additionally, your business must have acquired and placed the asset in service after September 27, 2017.

2. Calculate Asset Basis

To calculate bonus depreciation, you must first determine the asset’s basis – the cost of acquiring the asset. The basis includes all expenses associated with acquiring, producing, or improving the asset (excluding sales tax). For example:

– Purchase price

– Shipping fees

– Installation costs

– Professional fees related to purchasing the asset (e.g., legal or accounting fees)

3. Determine Depreciable Basis

Next, you need to determine the depreciable basis of your eligible asset. To do this, subtract any down payments or grants received from the original basis calculated above. If you have taken any other deductions or credits related to the asset, subtract those amounts from its depreciable basis as well.

4. Calculate Bonus Depreciation Rate

Since 2018, bonus depreciation rates have been temporarily increased by the Tax Cuts and Jobs Act (TCJA). The current bonus depreciation rate is 100% for eligible assets acquired and placed in service from September 27, 2017, through December 31, 2022. It’s important to note that the rate will begin to phase out starting January 1, 2023, through December 31, 2026.

5. Calculate Bonus Depreciation Deduction

To calculate the bonus depreciation amount, simply multiply the depreciable basis of your asset by the current bonus depreciation rate.

For example:

Depreciable Basis: $100,000

Bonus Depreciation Rate: 100%

Bonus Depreciation Deduction: $100,000 x 100% = $100,000

6. Update Tax Records

Finally, report your bonus depreciation deduction on your business’s income tax return using Form 4562: Depreciation and Amortization.

This will reduce your overall tax liability for the year.

Conclusion

Calculating bonus depreciation can be a powerful way to lower your business’s taxable income and potentially save thousands of dollars in taxes. Understanding eligibility requirements, calculating the depreciable basis of your assets, and applying the appropriate bonus depreciation rate is crucial for accurately claiming this valuable tax incentive. Be sure to consult with a qualified tax professional to ensure you are correctly taking advantage of bonus depreciation provisions available to your business.