Bonus Depreciation

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Meaning and definition of Bonus Depreciation

Bonus depreciation refers to an additional amount of deductible depreciation which is awarded in addition to what is usually available. Bonus depreciation is always taken right away, in the first year that the depreciable item is put to use. This incentive type is proffered either as an extra incentive or as a measure of relief for small sized businesses which are seeking to purchase any additional equipment.

As explained by Investopedia, the actual amount of bonus depreciation vitiates year to year, but it is proffered on top of the utmost allowable Section 179 expensing limits and standard depreciation for first year. Moreover, bonus depreciation cannot be taken on property that is needed to use the Alternative Depreciation Schedule, but it is, however, not liable to alternative minimum tax (AMT) adjustments.

Benefits of Bonus Depreciation

Bonus depreciation just keeps getting better for the cost of tenant improvements. Introduced initially was the federal economic stimulus package in 2002 that contained a temporary provision for owners and tenants to subtract 30% of eligible non-residential leasehold improvement costs in the first year, in addition to the other 70% depreciated over the standard 39-year schedule. Subsequently, the US Jobs and Growth Tax Relief Reconciliation Act of 2003 upped the ante to a 50% first year depreciation deduction for new improvements positioned in service by Jan.1, 2005.

The working of Bonus Depreciation

As per the rules, the 50% first year bonus depreciation allowance proffers significant tax savings on two categories of property that hold building owners’ and tenants’ interest. The first category includes new property with a depreciation period of 20 years or less, including various kinds of equipment, interior decoration, carpeting and landscaping. The second category includes leasehold improvements to non-residential real estate, like interior construction in leased office and retail space.

Contrasting regular depreciation deductions, which need to be essentially pro-rated to reflect that property has been in use only for a portion of a tax year, the 50% bonus deduction is allowed in full the year the property is put to use, even if the date is the last day of the year. The bonus depreciation is intended to promote new investments. 

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