What is Bonus Depreciation and How Can You Claim It?
Small business owners can enjoy valuable tax breaks. However, it can be difficult to navigate the complex world of small business taxes. Bonus depreciation is a tax deduction that can cause confusion. In this guide, we’ll cover the ins and outs of bonus depreciation to help you understand this deduction better and ultimately make more informed decisions for your business.
At a glance:
- Bonus depreciation lets businesses deduct a fixed percentage of an asset’s cost upfront, reducing taxable income.
- Only certain types of qualified property are eligible for bonus depreciation.
- There are important differences between bonus depreciation and Section 179. Sometimes, you can take both deductions in the same year.
What is bonus depreciation for a business?
Bonus depreciation is an accelerated form of depreciation — it allows you to deduct a fixed percentage (60% for 2024) of an asset’s cost upfront instead of spreading the deduction out over its useful life. This tax strategy lowers taxable income and can help reduce tax liability.
For example, if you bought a qualified asset worth $100,000 in 2024, you could deduct $60,000 (60%) in bonus depreciation the first year instead of spreading the cost over multiple tax years.
Is bonus depreciation the same as Section 179?
Many first-time small business owners confuse two common forms of depreciation: bonus depreciation and the Section 179 deduction. While they may seem similar on the surface, these two depreciation methods are quite different, and each has its own restrictions.
Section 179 allows you to deduct a set dollar amount instead of a fixed percentage when using bonus depreciation. Section 179 allows you to write off the full cost of an asset, up to $1,220,000 by 2024, as an immediate business expense. This deduction will phase out if your expenditures exceed $3,050,000 by 2024. This is different from Section 179 which does not allow for a deduction of more than the amount you paid. In certain cases,
you can claim both Section 179 and bonus depreciation in the same tax year. However, you must first take Section 179 deductions before you can take bonus depreciation. Tax Cuts and Jobs ActBefore Congress enacted the Tax Cuts and Jobs Act of 2017, bonus-depreciation rules were very different. After TCJA was passed, businesses could immediately write off 100% of the cost of “qualified business property” if purchased and placed in service after Sept. 27, 2017, and before Jan. 1, 2023.
However, beginning in tax year 2023, bonus depreciation was reduced to 80%. In 2024 it will be 60%. Unless changes are made, the allowable percentage is set to decrease in 20% increments every year through 2027, meaning bonus depreciation is set at 40% for 2025 and 20% for 2026 until the current provision expires and drops to 0% in 2027.Eligibility rulesTo qualify for bonus depreciation, you must meet specific criteria set by the IRS. Bonus depreciation is only available for purchases of eligible assets. Here are some rules to keep in mind and examples of qualifying property:
Useful life:
To qualify for bonus depreciation, the asset must have a useful life of 20 years or less. This type of asset is suitable for both business and personal use. For instance, if you’re a professional photographer using your camera for personal use, you must use the item for business purposes at least 50% of the time to qualify for bonus depreciation.
Qualified improvement property:
This includes improvements made to the interior of a commercial (nonresidential) building, as long as the improvements were made after the building opened for business.
Short-term rentals:
This includes vacation rental properties where the average stay is seven days or less.
- Other costs: The cost of computer software and certain film, TV, and live theatrical productions can also qualify for bonus depreciation.
- You can only claim bonus depreciation for the year you placed the asset in service (started using it). If you’re unsure whether a business asset qualifies for bonus depreciation, the IRS has a detailed FAQ page that can help.Should I take bonus depreciation, or is it better to take Section 179?
- Whether you should take the bonus depreciation or Section 179 deduction depends entirely on your tax situation.Now that bonus depreciation is no longer 100%, Section 179 may be a better option if your business is profitable and you are below the annual limit. Section 179 is more flexible, allowing you the freedom to choose what percentage of an asset you wish to deduct, and when. Bonus depreciation, on the other hand, is limited to a fixed percentage (60 % in 2024, and 40 % in 2025). However, Section 179 cannot create a net loss like bonus depreciation can. Both options can be valuable tax deductions in the right circumstances. If you’re unsure which deduction is best for you, it may be wise to consult a tax professional.
- How do I report bonus depreciation on my tax return?To claim bonus depreciation on your income tax return, you’ll need to fill out IRS Form 4562, Depreciation and Amortization. TaxAct(r), can help you claim bonus depreciation when you file your taxes with us. Understanding their differences and the unique benefits each offers is key to making it work for you. Tax laws and regulations are subject to change. Staying informed is essential for making the best financial decisions and maximizing tax-saving opportunities. When you file your small business taxes with us at TaxAct, our software will walk you through a broad range of business expenses and situations to help identify the deductions that apply to your situation.
- This article is for informational purposes only and not legal or financial advice.All TaxAct offers, products and services are subject to applicable terms and conditions.
