What is a Bonus Depreciation?

Bonus depreciation is an additional amount of depreciation that may be claimed on an asset during the first year of ownership. Claiming this additional depreciation requires that the asset qualify under the regulations current set by applicable tax agencies. In many cases, this type of accelerated depreciation is used as a means to stimulate the economy by increasing the incentives for businesses to replace older equipment or purchase additional equipment.

Many national revenue agencies provide guidelines for claiming bonus depreciation on assets acquired during the most recently completed tax year. In some countries, the ability of a large business to claim this type of depreciation is somewhat limited, while smaller businesses are allowed to claim larger percentages of depreciation on qualified purchases. Since the regulations governing the calculation of this extra depreciation are subject to change from one tax year to the next, it is important to make sure that the most recent guidelines are used, as well as the most recent versions of any tax forms required to claim the deduction.

Business owners may claim bonus depreciation on many different types of assets that are purchased and placed into active service during that first year of use. For example, a business that owns an apartment building may be eligible for extra depreciation on air conditioning equipment purchased and installed in that building. Purchases of this type would qualify as property improvements and could possibly be eligible for bonus depreciation during that first year, based on how applicable regulations are structured.

When made available to taxpayers, this type of bonus depreciation can serve as an incentive to stimulate a sluggish economy. The ability to claim this extra depreciation helps the business owner lower the amount of taxes owed for the period under consideration. The end result is that the owner retains a larger share of his or her business revenue and can presumably utilize that retained revenue to make additional purchases and increase the flow of money through that economy.

Since some types of business assets may already be classed in a manner that calls for a different type of depreciation schedule to apply, it is important to determine exactly how the tax agency classifies the asset. This prevents situations in which the business owner would miss the opportunity to receive the bonus depreciation allowed by current tax laws. At the same time, properly classifying recently acquired assets means that tax returns are not rejected and sent back to the business for resubmission, a situation that sometimes leads to the assessment of late fees and penalties.