What Is Bonus Depreciation? How It Works & Calculating It for 2023 and Beyond?
Bonus depreciation is an immediate tax deduction that speeds up tax savings and makes an asset that you placed in service more affordable. You may also see this deduction going by the name of the special allowance, the additional first-year deduction, orIRC §168 (k) depreciation.
In general, new and used furniture and equipment with a less than 20-year Modified Accelerated Cost Recovery System (MACRS) life will qualify for bonus depreciation. Congress created this deduction as an incentive for business owners to purchase qualifying assets and to engage in business activity.
Bonus depreciation should not be confused with Section 179 depreciation, which allows for an immediate deduction of the cost of an asset. There are important differences between section 179 vs bonus depreciation, including the type of property that qualifies for each deduction.
Bonus Depreciation Calculator & How To Calculate Bonus Depreciation
If you have recently purchased property and want to estimate your potential tax deduction, you can use our depreciation calculator below.
You can also calculate your bonus depreciation manually by following these three steps.
- Step 1:Subtract the original cost by any section 179 expense.
- Step 2:Reduce the basis by the applicable percentage of any credits you claimed (such as the energy credit).
- Step 3:Multiply the bonus rate (100% for 2022) by the remaining cost of the asset.
产品将产生大量的奖金depreciation you can claim for the tax year.
Business owners can claim 100% bonus depreciation on property placed in service before 2023. For property placed in service after 2022, the following bonus depreciation rate applies:
|
Year the asset was placed in service
|
Bonus depreciation rate
|
|---|---|
|
2023 |
80% |
|
2024 |
60% |
|
2025 |
40% |
|
2026 |
20% |
|
2027 |
0% |
Pros & Cons of Bonus Depreciation
| PROS | CONS |
|---|---|
| Reduces your taxable income and overall tax liability, which means more money in the bank | Cannot pick and choose which assets to claim bonus depreciation on; all assets within a class life must be treated the same |
| Deducts an asset in the year of purchase fully even if financed over multiple years | Is scheduled to phase out by 2027 |
| Is available for new and most used property and some building improvements | |
How To Claim Bonus Depreciation
If you’re ready to start your return and are looking for the best tax software to use, you can work on your return inTaxAct, which will calculate the amount of bonus depreciation you’re due onIRS Form 4562. The bonus depreciation allowance for qualified property (other than listed property) will appear on Part II, line 1. As for listed property, bonus depreciation will appear on Part V, line 25.
上市地产is an asset that’s used for both personal and business use.
Depending on how your business is structured, the amount of bonus depreciation reported on Form 4562 will be carried over to one of the following forms in TaxAct:
Which Assets Qualify for Bonus Depreciation
Bonus depreciation applies to new or used qualified property. Under IRS guidelines, qualified business property is MACRS property with a recovery period of 20 years or less, depreciable computer software, water utility property, or qualified improvement property.
The following property qualifies for bonus depreciation:
- Office furniture: Includes desks, files, safes, communications equipment, and similar items
- Information systems:Includes computers and peripheral equipment, such as card readers, printers, projectors, and disc drives, used in conducting normal business activity.
- Vehicles:Includes cars, trucks, vans, and even over-the-road semis; however, bonus depreciation on passenger automobiles that weigh 6,000 pounds or less is limited to $8,000.
For a more detailed list of MACRS properties, check outIRS Publication 946, Appendix B – Table of Class Lives and Recovery Periods. Also, note that if you use qualified property for less than 50% of business use, bonus depreciation won’t apply.
Let’s take a look at a couple of examples of how bonus depreciation could play out with MACRS property.
Example 1:In January 2022, Bob Builder purchased office furniture for their new construction firm. They paid $500 for the furniture. Office furniture is seven-year MACRS property, and they’re claiming 100% bonus depreciation. They do not have any other applicable credits or deductions, so they can claim a total of a $500 depreciation deduction when they file their 2022 tax return.
Example 2:The same facts as above, except Bob Builder purchased office furniture and placed it in service in 2023. Bonus depreciation will start to decline by 20% after December 31, 2022. Bob Builder’s 2023 bonus depreciation will be $500 x 80% = $400. The remaining $100 of the cost will be depreciated for 7 years under thenormal MACRS rules.
妈ximizing Bonus Depreciation With a Cost Segregation Analysis
If you’re a business owner who owns a 27½-year or 39-year property, such as a warehouse, office building, or residential rental property, you may want to think about performing acost segregation analysis. Cost segregation studies are in-depth analyses of the cost of components and fixtures inside of buildings and typically are performed by a qualified individual such as an engineer, appraiser, or contractor.
By segregating the cost of MACRS property with shorter lives from the cost of the building, you can claim bonus depreciation on the individual components of property. So, any equipment, furniture, and fixtures, such as a heating, ventilation, and air conditioning (HVAC) system, on the property will be eligible for bonus depreciation.
During the study, the components that make up the building will be analyzed and given a recovery period of five, seven, and 15 years. This can be a great strategy to help you take advantage of the bonus depreciation deduction, create tax savings, and increase your cash flow.
Election to Claim 50 Percent Bonus Depreciation or Opting Out
While it’s beneficial for you to speed up depreciation, you have a few options for claiming bonus depreciation.
1. Do nothing and claim the 100% bonus depreciation.
By doing nothing, you’ll claim 100% bonus depreciation automatically for property that you have placed in service during the 2022 tax year.
2. Attach an election to use 50% bonus depreciation.
As part of your business strategy, you may decide to claim the 50% bonus depreciation instead of the 100% bonus depreciation deduction. You may wish to make this election if your marginal tax rate is unusually low for the tax year. To elect out of 100% bonus depreciation, you’ll simply need to attach a statement to your tax return showing that you would like to claim 50% bonus depreciation. The election must be made separately for each MACRS class life.
TaxActwill attach the required election automatically when you indicate you wish to claim 50% bonus depreciation.
Title: Election to claim a 50 percent special depreciation allowance.
First name:Bob Builder
Tax identification number:-000-00-0000
Attachment to Form 4562:Tax Year Ending Dec. 31, 2022
Electing the 50% depreciation allowance:I, Bob Builder, am electing the 50 percent depreciation allowance on all qualified seven-year property instead of the 100% special allowance.
3. Attach an election to not use any bonus depreciation.
You can also opt out of claiming bonus depreciation and instead calculate your depreciation under the normal MACRS rules. As with electing 50% bonus depreciation, the election is made separately for each asset class. For instance, you can elect out of bonus depreciation for five-year property but still claim 100% bonus depreciation for seven-year property.
If you have expiring charitable deduction carryforwards or credit carryforwards, you may decide to opt out. Since charitable deduction carryforward and other credits are limited by your taxable income, you may decide not to claim bonus depreciation to keep your current income high enough to take full advantage of any carryforwards or credits that may be expiring.
If you find yourself in any of the above scenarios, you need to attach a statement showing the class of property to a timely filed tax return, including extensions. Let’s look at what this election statement should look like.
Title:Election Out of Special Depreciation Allowance of Code Section 168(k)
First name:Bob Builder
Tax identification number:-000-00-0000
Attachment to Form 4562截至2022年12月31日:纳税年度
Electing out: I, Bob Builder, am electing out of the special 100% depreciation allowance for all seven-year property placed in service during the tax year 2022, which would otherwise qualify for the special depreciation allowance under Code Section 168 (k).
Frequently Asked Questions (FAQs)
Does only new property qualify for the bonus depreciation deduction?
No, the Tax Cuts and Jobs Act (TCJA) changed this rule, and you can now claim bonus depreciation for new and used property that meets certain requirements.
What happens to bonus depreciation after Jan. 1, 2023?
In 2023, bonus depreciation will be reduced from 100% to 80%. It’ll continue to be reduced each year until the deduction will be 0% by 2027.
Can I choose which assets to claim bonus depreciation on?
No, bonus depreciation is automatic, but you can elect to opt out of bonus depreciation for an entire asset class. However, you cannot choose individual assets to be depreciated differently. Once the election is made, it applies to all assets in the same class. Opting out bonus depreciation for one asset class does not affect bonus depreciation for other asset classes. You can opt out for all seven-year property but still claim bonus depreciation for all five-year property.
Bottom Line
Bonus depreciation is a valuable cost-saving tax incentive that you do not want to miss out on. It allows you to deduct 100% of the cost of an asset in the current tax year, 2022, as opposed to depreciating its cost over the useful life.
