What is Bonus Depreciation?
Bonus depreciation is also known as an additional first-year depreciation deduction, which is an incentive provided by the government to help the newly formed businesses. It allows firms a larger deduction on their capital expenditure in the first year of their acquisition.
However, bonus depreciation comes with many rules that an organization is bound to follow to get themselves eligible for this incentive.
- It is a kind of first-year depreciation given to a qualified asset. The subsequent year depreciation is also provided after the first year.
- The assets are required to fulfil certain conditions to qualify for depreciation at the beginning of the year. In this type of technique, the businessmen get encouragement to start a new business and contribute to society. Although this method of claiming is optional, there is no hard and fast rule that all the businessmen will have to opt for the same.
- On the contrary, another rule for availing bonus depreciation is that if anyone wants to opt for the additional first-year depreciation deduction, the business’s asset has to pass all the checklist. Since it is a special type of depreciation, it is not the same as the subsequent year’s depreciation.
How Does it Work?
- It is calculated by using the bonus rate, which is prevailing in the market. The calculation involves multiplying the rate with the cost of the asset. The tax on the property is then deducted from the cost of the asset. On that deducted value, the additional first-year depreciation is calculated.
- The individual must first purchase the qualified asset, and after purchasing, he/she is required to place the property in service. Only then they will be able to claim the bonus depreciation on their tax return.
Example of Bonus Depreciation
In this example of bonus depreciation, a company buys a camera from the market. The proprietor of this business is a YouTuber. The price of the camera was $ 10000. It was a professional camera, and also the company has customized it according to its preferences. Now, this camera will come under the category of qualified assets since it will be used in the company’s business.
The asset should be used in the business to obtain the bonus depreciation which is given only on used assets. The tax rate on camera says 20%. Now the deductible value is $2000. It should be taken in the very first year when the asset is put to use.
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How it Affects the Business Tax?
- It positively affects the business tax of a country. With its help, businessmen pay less tax during the inception of their business. It is a kind of tax-saving initiative adopted by the government to encourage the new businessmen without any heavy tax burden.
- There are several criteria by which an asset must qualify to obtain the deduction quickly. The asset should be put to use in the business. The businessmen can claim the depreciation only on the used assets. Therefore the item should be used first.
- The asset has to be owned and should not be on the lease. The person will not be allowed to claim for the deduction if the asset is not owned. We can claim a 100% deduction of the asset value along with our business tax return.
- It is a simple phenomenon that if the businessmen get a 100% reduction in their first year of inception, then they are required to pay very less tax. Thus, it results in saving the tax. It is quite popular amongst new business people since they try to opt for a deduction like this.
Difference between Bonus Depreciation and Section 179
- Bonus Depreciation and Section 179 are a helping tool for businessmen who have just started their business. Both the deduction method serve similar results, but both are not the same. Any business can claim it; the only criterion is that the asset should be a qualifying asset.
- In case of deduction under section 179, the businessmen will be able to get the deduction but on one condition. The condition states that the business should have a taxable profit in the year in which this deduction is claimed. On the contrary, there are no such criteria for the businessmen willing to get the claim through bonus depreciation.
- Therefore, it is seen that bonus depreciation is much easier to obtain than Section 179 deductions. The second thing is that the businessmen can only claim deduction up to the amount of taxable profit. Under Section 179, the business owners can’t claim deduction on an asset’s cost over and above any amount exceeding the taxable income of their business.
- Say, for example, the cost of the asset is $10,000, and the taxable profit or income is $500. In this case, the business owners are qualified to get a deduction of $500 only. The deduction under section 179 is dependent on the taxable income of the business.
- In contrast, bonus depreciation can be claimed by the beginners in case they have incurred losses in the first year of operations. Therefore it is popular among new businessmen.
Each person should carefully understand the methods of claiming the deduction and the prevailing rates in the market. The businessmen should also take some extra care before buying the asset for their business to make their future smooth. Also, if they are opting out from bonus depreciation, they will have to understand the conditions of claiming the deduction on the capital investment made in the business.
This article has been a guide to What is a Bonus Depreciation & its Definition. Here we discuss how bonus depreciation works and also how it can affect business taxes along with an example. You can learn more about from the following articles –