What is Bonus Depreciation and How Does it Work? Imagine being able to frontload years of tax savings into your first year of ownership, that is the immense power of Bonus Depreciation! This crucial tax provision allows you to deduct a large percentage of the cost of certain property assets immediately, rather than spreading the deductions out over many decades.
Here is how it works: first, you use a Cost Segregation Study to identify assets eligible for shorter recovery periods (20 years or less). You then apply the current Bonus Depreciation percentage to the value of those assets, claiming that portion as an immediate deduction in the first year. For example, if you have $500,000 worth of eligible assets, you can deduct $400,000 (or 80%) in 2023, or $300,000 (or 60%) in 2024. The remaining value of those assets is then spread over their regular depreciation schedule. This immediate deduction significantly lowers your taxable income, offering an enormous first-year benefit!
Bonus Depreciation: Key Facts & Mechanism
- Definition: Allows you to deduct a large percentage of certain property costs upfront rather than spreading them out.
- Eligibility: Applied to assets eligible for shorter recovery periods (20 years or less), typically identified via Cost Segregation.
- Mechanism: You apply the current bonus percentage (e.g., 80% in 2023, 60% in 2024) as an immediate deduction.
- Example Calculation: A $500,000 asset at 80% bonus means $400,000 is deducted in Year 1.
- Future Outlook: We hope to see 100% bonus depreciation reinstated, making the full reclassified amount deductible in Year 1.
