What is Bonus Depreciation?
Bonus depreciation also known as additional first year depreciation deduction is an incentive that is taken by the government to help the newly formed businesses by giving them a larger deduction on their capital expenditure for the business in the first year, however, there are many conditions that an organization is bound to follow to get themselves eligible for same.
- It is a kind of first-year depreciation given to a qualified asset. The subsequent year depreciation is also provided after the first year of inception of the business, including the bonus depreciation.
- The assets are required to fulfill the conditions to qualify the depreciation at the beginning of the year. In this type of technique, the businessmen get encouragement to start a new business and give his contribution 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, if anyone wants to opt for the additional first-year depreciation deduction, then the asset of the business has to pass all the checklist of the qualified asset to claim the bonus depreciation. Since it is a special type of depreciation 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 then after purchasing, he is required to place the property in service. Then he will be eligible to claim the bonus depreciation of their tax return.
Example of Bonus Depreciation
A company buys a camera from the market. The proprietor of that business is a You Tuber. The price of the camera was $ 10000/- it was a professional camera, and also they have customized it according to their preferences. Now, this camera will come under the category of qualified assets since it will be used in the business of the company.
The asset should be used in the business to qualify as an eligible asset to obtain the bonus depreciation is one of the criteria. The tax rate on that product says 20% now the deductible value is $2000. It should be taken in the very first year when the asset is put to use. In this case, the asset should be put to use also to claim the bonus depreciation of the qualifying asset.
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How it Affects Business Taxes?
- It positively affects business taxes in the country. With its help, businessmen pay less tax during the inception of their business. It is a kind of tax-saving initiative which is adopted by the government to help and encourage the new businessmen to try the business without any heavy burden of taxes on them.
- There are several criteria in which an asset must qualify to obtain the deduction easily. The asset should be put to use in the business. The businessmen can’t claim deduction on the items that are not on the business. Therefore the item should be used in the business.
- The asset which is to be used in the business has to be owned and not 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 tax saving. It is always very popular in the new businessmen since they try to opt for the bonus depreciation.
Differences Between Bonus Depreciation and Section 179
- These two are a helping tool for the businessmen who have just started their businesses. Both the deduction method serves 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, and that is 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 who are willing to get the claim through bonus depreciation.
- Therefore, it is seen that bonus depreciation is much easier to obtain then 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 their cost of an asset over and above any amount exceeding the taxable income in 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, and no other rates are being prescribed. The deduction under section 179 is dependent on the taxable income of the business. In contrast, the bonus depreciation can be claimed by the beginners in case they have occurred losses at the inception of their businesses. Therefore it is popular among businessmen who are new in their businesses.
Each person should carefully understand the methods of claiming the deduction and the rates which are prevailing in the market. The businessmen should also take some extra care before buying the asset for their business to make their future smooth regarding the criteria for qualifying an asset to obtain that deduction. Also, if they are opting out from bonus depreciation, then also they 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 –