Bonus depreciation is an additional depreciation deduction for tax purposes that allows a taxpayer to deduct an additional amount equal to a specified percentage of the adjusted basis of property that is placed in service during the tax year. In recent years, the percentage amount has been set at 50%.
The 2015 PATH Act extended the tax provision for bonus depreciation through 2019, but the percentage will phase-out and bonus depreciation will not be available to assets placed in service after 2019.
Generally, an asset will qualify for the bonus depreciation allowance if it is in one of the eligible classes of assets and is a new, not used, asset. The eligible classes are those with a class life of 20 year or less, qualified leasehold improvement property, certain qualified improvement property, certain utility property and some software assets.
Under the PATH Act, the allowable bonus depreciation percentage will remain at 50% for assets places in service in 2016 and 2017. However, the percentage will drop to 40% for 2018, 30% for 2019, and will be eliminated for the years after 2019. Certain longer-lived transportation property will be eligible for bonus depreciation through 2020.
Hints for Tax Planning.
It is important to note the new percentages for tax planning purposes. Accelerating asset purchases might make sense if you want to take advantage of the higher bonus depreciation percentages. Understanding the tax implications of the changes to bonus depreciation might make a difference when planning the timing or amount of those asset purchases. The PATH act also made permanent the Section 179 expensing deduction amount of $500,000 and it should be considered together with bonus depreciation for tax-planning purposes.