With bonus depreciation, businesses can deduct 100% of the cost of certain assets in the year they are placed in service.
Commonly referred to as 168(k), Section 168(k) bonus, first year bonus depreciation and additional first year bonus depreciation.
Do I Qualify for the Bonus Depreciation?
Bonus depreciation allows businesses to deduct a larger percentage of the cost of purchasing eligible assets immediately, rather than spreading the deduction across several years.
2022 Bonus Depreciation Details
Depreciation means the decrease in an asset’s value over time as a result of use, decay or obsolescence. With the bonus depreciation tax deduction, businesses can deduct the full amount of the purchase cost of eligible assets rather than having to spread the deduction out over several years (i.e., the “useful life” of the asset). This allows the business to lower their tax bill for the year more substantially.
100% Bonus Depreciation under the TCJA
The Tax Cuts and Job Act included a provision that allows business owners to take 100% bonus depreciation, which means they can deduct the full price of the asset in the first year. No other depreciation would be available for that asset in subsequent years. This is the case through 2022, after which time the percentage will incrementally decrease each year, unless Congress extends the current bonus depreciation rate.
Electing out of Bonus Depreciation
You may wish to elect out of bonus depreciation if you have a current year loss, or just a small amount of income, and expect to have greater income in the next few years. In that situation, the depreciation deduction may be more beneficial at the expected future higher marginal tax rates.
Bonus Depreciation with vehicles
Vehicles weighing less than 6,000 pounds are subject to the luxury automobile limits under Section 280F, so the amount of bonus depreciation will be limited. No such limit exists for bonus depreciation taken for vehicles weighing 6,000 pounds or more (the SUV limit). The amount of bonus depreciation allowed is prorated by the percentage of time the vehicle is used for business purposes (must be over 50%).
Note: The SUV limitation does exist for Section 179, so businesses that wish to expense a heavier vehicle may be better off choosing bonus depreciation rather than Section 179 expensing.
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• Reduces taxable income.
• Reduces self-employment tax.
• When maximizing depreciation in the current year, you will reduce depreciation for subsequent years.
• May be subject to recapture (i.e., you may need to pay tax on an expensed asset if you sell the asset in a future year).
Assumptions When Taking the Bonus Depreciation
• The assets are considered tangible and purchased in the current year.
• Assets are being used 100% for business purposes.
• The business has more than enough income to cover the depreciation expenses (i.e., the business won't be operating at a loss due to the depreciation expenses).
• The asset isn't a building that would benefit from cost segregation studies.
• Section 179 Expensing
Requirements to Claim the Bonus Depreciation
• The property must be new to the taxpayer.
• The asset must be depreciated using MACRS and have a class life less than 20 years.
• The asset can't be real property.
Business Entities That Can Claim the Bonus Depreciation
• Schedule C
• Schedule E
• Schedule F
• Farm Rental
• C Corporation
• S Corporation
The material discussed on this page is meant for general illustration and/or informational purposes only and is not to be construed as investment, tax, or legal advice. You must exercise your own independent professional judgment, recognizing that advice should not be based on unreasonable factual or legal assumptions or unreasonably rely upon representations of the client or others. Further, any advice you provide in connection with tax return preparation must comply in full with the requirements of IRS Circular 230.