Bonus Depreciation
Bonus depreciation is a method of accelerated depreciation, which allows a business to make an additional first-year deduction of the cost of qualifying property in the year it is placed in service. Qualified property must either:
- Have a regular depreciation life of 20 years or less
- Be computer software
- Be water utility property
- Be qualified improvement property
Bonus depreciation is not available for any asset that is required to use Alternative Depreciation System (“ADS”).
Pre-TCJA:
Taxpayers were allowed to deduct 50 percent of the cost of most new tangible property (other than buildings and some building improvements) and most new computer software in the year that it was placed in service. This additional depreciation was available only for new property (the first use has to start with the taxpayer).
TCJA:
IRC Section 168(k) was amended to provide for 100-percent bonus depreciation for property acquired and placed in service after Sept. 27, 2017. This is effective until tax year ending Dec. 31, 2022. It further relaxed the rules that the property must be new. Used and new qualified properties are now eligible for the new 100-percent bonus depreciation. Furthermore, the 100-percent deduction will be available for a “qualified film or television production” as well as a “qualified live theatrical production.”
|
Tax Year |
Bonus Percentage |
Section 1245 Property |
15-year Land Improvements |
Qualified Leasehold Improvements |
Qualified Improvement Property |
|
2015 |
50% |
Yes 1 |
Yes 1 |
Yes 1 |
N/A |
|
2016 |
50% |
Yes 1 |
Yes 1 |
— |
Yes 1 |
|
1/1/17-09/27/17 |
50% |
Yes 1 |
Yes 1 |
— |
Yes 1 |
|
09/28/17 -12/31/17 |
100% |
Yes 2 |
Yes 2 |
— |
Yes 1 |
|
1/1/18 -12/31/2022 |
100% |
Yes 2 |
Yes 2 |
— |
N/A |
1 Applies only to new property 2 Applies to new and used property
Rules:
Assets qualifying under the bonus rules must meet both the acquisition and placed-in-service rules. With the change in the bonus depreciation percentage in 2017, it is imperative that both of these rules are reviewed carefully to determine the bonus eligibility under the TCJA.
Acquisition Rules:
- Acquired Property:
A written contract must be entered into during the specified dates when the bonus depreciation is effective and must meet two conditions:
- The contract is legally binding under the state law
- The contract does not limit damages to a specified amount
In case of acquired property, the binding contract date trumps the placed-in-service date.
- Self-Constructed Property:
The taxpayer must begin the construction, production or manufacturing of the asset during the specified dates when the bonus depreciation is effective.
- Physical work of a significant nature (preliminary activities such as planning, designing, securing finance, researching etc. do not count)
- 10-percent safe harbor – paid or incurred more than 10 percent of the total cost of the property (not including land or preliminary activities)
- Placed in service rules:
An asset is considered placed in service on the date that it is in a condition or state of readiness for a specifically assigned function. If the asset is not yet put to use, it is still considered placed in service if the taxpayer has done everything needed to put the asset to use. For example, a building that is intended to house machinery and equipment is placed in service when the building’s construction is complete, whether or not the machinery and equipment have been placed in the building. Furthermore, trade or business must have commenced before depreciation can begin.
|
Type of Acquisition |
Date Binding contract signed |
Work of Significant nature > 10% |
Placed in Service Date |
Bonus |
|
Acquired used asset |
Prior to 9/28/17 |
N/A |
Prior to 9/28/17 |
N/A |
| Acquired used asset |
Prior to 9/28/17 |
N/A |
After 9/27/17 |
N/A |
| Acquired used asset |
After 9/27/17 |
N/A |
After 9/27/17 |
100% |
|
|
|
|
|
|
|
Acquired new asset |
Prior to 9/28/17 |
N/A |
Prior to 9/28/17 |
50% |
|
Acquired new asset |
Prior to 9/28/17 |
N/A |
After 9/27/17 |
50% |
|
|
|
|
|
|
|
Self-constructed asset |
Prior to 9/28/17 |
Prior to 9/28/17 |
Prior to 9/28/17 |
50% |
|
Self-constructed asset |
Prior to 9/28/17 |
Prior to 9/28/17 |
9/28/17 – 12/31/2017 |
50% |
|
Self-constructed asset |
Prior to 9/28/17 |
Prior to 9/28/17 |
1/1/18 – 12/31/18 |
40% |
|
Self-constructed asset |
Prior to 9/28/17 |
Prior to 9/28/17 |
1/1/19 -12/31/19 |
30% |
|
Self-constructed asset |
Prior to 9/28/17 |
After 9/27/17 |
9/28/17 -12/31/22 |
100% |
|
Self-constructed asset |
After 9/27/17 |
After 9/27/17 |
9/28/17 – 12/31/22 |
100% |
Please contact your GHJ tax advisor (310.873.1600) if you have any questions or wish to discuss the changes in more details.
