By Tom Ochsenschlager, JD, CPA
The bonus depreciation rules were passed as part of the Tax Cuts and Jobs Act (TCJA). These rules generally permit a 100% deduction on Form 4562 for most depreciable assets the year they are placed in service beginning after Sept. 27, 2017 and before Jan. 1, 2023. After 2022, the rate for bonus depreciation phases out. It will drop to 80% in 2023, 60% in 2024, 40% in 2025 and 20% in 2026.
To be eligible for the write-off, the property must have a useful life of 20 years or less. That includes vehicles, equipment, furniture and fixtures, machinery, computer software and qualified improvement property such as improvements to the interior of nonresidential property. Special rules are provided for self-constructed property.
If the property is used for both personal and business purposes, such as a vehicle, it is eligible for the bonus depreciation write-off only if it is used in the business more than 50% of its total use.
The deduction can be claimed in the year the applicable asset is placed in service, which in some instances may be later than the year the property is acquired.
Special rules apply to limit the availability of the bonus depreciation for passenger vehicles such as automobiles, SUVs, pickups and vans with a vehicle weight of 6,000 pounds or less. For these vehicles, if “bonus” depreciation is elected, the depreciation deduction is limited to $18,100 in the year placed in service ($10,000 “normal” depreciation plus $8,100 bonus depreciation). In years after the vehicle is placed in service, the depreciation deduction is the same as depreciation would be without the bonus election, which is $16,100 in the second year, $9,700 in the third year, and $5,760 in the later years. See the tables in Rev. Proc. 2020-37.
Differences from Section 179 Depreciation
The 179 deduction is limited to the business’ taxable income before considering the deduction. The remainder can be subject to “regular” depreciation rules or can be carried forward. The TCJA bonus depreciation, however, is not limited to taxable income and accordingly can generate a loss to be carried back for a refund of prior taxes.
The TCJA also increased the limit for the 179 deduction to $500,000 in 2017 and $1 million in the following years. However, the benefit of the 179 deduction is phased out if purchases that would otherwise qualify exceed $2.5 million.
Unlike the 179 deduction, the TCJA bonus depreciation is applicable to used property if the taxpayer acquired the used property from an unrelated party and it was not acquired in a tax-free transaction.
Details for the application of the TCJA bonus depreciation are available in the 137 pages of regulations https://www.irs.gov.gov/pub/irs-drop/td-9916.pdf.