Bonus Depreciation Calculation

For taxpayers, figuring out how to calculate bonus depreciation is a bit of a superpower. Let’s get this straight: Depreciation in the accounting world is just a fancy way of spreading out the cost of a tangible asset over its useful life. Think of it as admitting that your shiny new toy is slowly losing its value.

Every so often, Congress decides to “encourage” businesses to buy more stuff by offering juicy incentives like bonus depreciation. Because who needs genuine market demand when you’ve got a tax write-off, right?

This is where it gets interesting for anyone looking to shrink their short-term tax bill. This special deduction is a game-changer, letting you write off a huge chunk of an asset’s cost in the very first year you own it. The 2024 bonus depreciation rules continue this trend, although with some changes.

While this offers a sweet immediate tax break, it’s not a free-for-all. A common mistake is forgetting about the depreciation recapture tax when you sell the asset. For example, if you claim 100% bonus depreciation on a $100,000 piece of equipment and later sell it for $60,000, that entire $60,000 becomes taxable income. The initial tax savings can vanish if you’re not playing the long game.

Plus, the bonus depreciation phase-out is in full swing – dropping from 100% in 2022 to 80% in 2023, and it keeps on shrinking. The window to max out this benefit is closing. The rest of the asset’s cost gets deducted the old-fashioned way, through regular depreciation over several years.

So, let’s dive into the nuts and bolts of calculating it.

What is Bonus Depreciation?

So, what is bonus depreciation? Think of it as a tax deduction on steroids. It lets you deduct a massive chunk of the purchase price for an eligible asset in the first year you own it, instead of patiently writing it off over its so-called “useful life.”

Normally, when your business buys an asset, you spread its cost over several years. This is your standard depreciation expense, which dutifully reduces your net income bit by bit. It’s sensible. It’s logical. It’s also slow.

Bonus depreciation, on the other hand, is the government’s way of saying, “Hey, go buy some stuff, and we’ll make it worth your while.” It’s an accelerated deduction that drastically lowers your taxable income now, not later, shrinking your immediate tax liability. You might hear it called the additional first-year depreciation deduction or IRC §168 (k) depreciation, but it all means the same thing: bigger, faster tax savings.

This little tax incentive first popped up with the Job Creation and Worker Assistance Act of 2002. But the game really changed in 2017 with the Tax Cuts and Jobs Act (TCJA). The TCJA cranked the dial to 11, allowing a 100% bonus depreciation. Businesses could write off the entire cost of eligible assets bought and placed in service after September 27, 2017, and before January 1, 2023.

The Bonus Depreciation Phase-Out

But all good things must come to an end. The 100% party officially ended on December 31, 2022. Now, we’re in the middle of a bonus depreciation phase-out. Unless Congress steps in with new legislation, the percentage you can deduct is dropping by 20 points each year until it vanishes completely.

Here’s the schedule for the bonus depreciation phase out:

80% for property placed in service in 2023
60% for property placed in service in 2024
40% for property placed in service in 2025
20% for property placed in service in 2026
0% for property placed in service in 2027

So, what property qualifies for bonus depreciation? Generally, it applies to new and used property with a Modified Accelerated Cost Recovery System (MACRS) life of 20 years or less. This includes things like bonus depreciation on vehicles, machinery, equipment, and even qualified improvement property bonus depreciation for certain interior upgrades to non-residential buildings.

To how to claim bonus depreciation, you just need to buy a qualifying asset, put it to work for your business before the year ends, and report it to the IRS. It’s a powerful tool, but with the rate for bonus depreciation 2024 at 60%, the clock is ticking.

How to Calculate Bonus Depreciation

Alright, let’s get down to the numbers. To claim this sweet deal, you’ll need to report it on Part II, Line 14 of Form 4562. But before you can do that, you have to figure out the asset’s depreciable base.

First, you have to subtract any other goodies you’ve already claimed. This is a bonus, not a cheat code. That means you’ll subtract any Section 179 expense you took on the asset or reduce its basis by the percentage of any other credits you claimed (like an energy credit).

Once you have that adjusted cost, the math is surprisingly simple.

The Bonus Depreciation Formula

The formula for the bonus depreciation calculation is:

Applicable Bonus Depreciation Rate x Cost of the Eligible Asset

Let’s run through an example. Say you bought a piece of equipment for $10,000 and placed it in service in 2022. The rate was 100%, so you could deduct the full $10,000 that year. Simple.

But what if you bought that same $10,000 machine and placed it in service in 2023? The rate dropped to 80%. Your calculation would be:

80% x $10,000 = $8,000

You’d deduct $8,000 in 2023. The remaining $2,000 of the cost would then be depreciated normally over the next several years.

Timing is Everything

The key phrase here is “placed in service.” It’s not about when you buy the asset, but when you actually start using it for your business.

For instance, if you bought new software in December 2022 but didn’t install and use it until January 2023, you missed the 100% window. Since it was placed in service in 2023, you’d only be eligible for the 80% bonus depreciation on your 2023 tax return.

Remember the bonus depreciation phase-out schedule when you’re planning your purchases:

80% in 2023
60% in 2024
40% in 2025
20% in 2026
0% in 2027

Bonus Depreciation Examples: Putting It All Together

So, you want to know how to claim bonus depreciation? It’s a simple three-step dance.

First, you buy an asset that qualifies for bonus depreciation and actually start using it for your business.
Next, you calculate the bonus depreciation amount based on the rate for the year it was placed in service (e.g., 80% for 2023, 60% for 2024).
Finally, you report that total on line 14 of Form 4562 and file it with your business tax return.

Let’s see how this plays out in the real world.

The Coffee Shop

Imagine a local coffee shop buys a new espresso machine for $8,000. Instead of tediously deducting $800 a year for ten years, they can use bonus depreciation. If they bought it in 2022, they could deduct the entire $8,000 on that year’s income statement and tax return. That’s a massive, immediate boost to their cash flow.

The YouTuber

A YouTuber buys a fancy new professional camera for $10,000. This is a qualified asset, but there’s a catch: to claim bonus depreciation, it must be used for the business at least 50% of the time.

So, claiming that big deduction? Go for it. Just make sure you actually used the camera for work more than for your cat’s TikTok.

If the YouTuber meets the requirement and bought the camera between late 2017 and the end of 2022, they could write off the full $10,000 in the first year.

The Procrastinator

Let’s say Mr. Peter bought new software for his business in December 2022 but didn’t get around to installing and using it until January 2023. Bad news, Peter.

Because the asset was “placed in service” in 2023, he has to wait to file his 2023 taxes to claim the deduction. And since the bonus depreciation phase-out began in 2023, he’s only eligible for the 80% rate, not the 100% he would have gotten if he’d just installed the software a few weeks earlier.

Examples of Bonus Depreciation Calculation

Let’s stop talking in hypotheticals and run some actual numbers. Here’s how to calculate bonus depreciation in practice.

Equipment Bonus Depreciation

Let’s say ABC Company purchased $500,000 worth of qualifying equipment. The timing of that purchase is everything.

Scenario 1: Placed in Service in 2022 The bonus depreciation rate was 100%. The math is a beautiful thing: $500,000 x 100% = $500,000 Yep, ABC Company could deduct the entire half-million-dollar cost in a single year.
Scenario 2: Placed in Service in 2023 Now, let’s say they bought the same equipment but put it to work on January 10, 2023. The rate dropped to 80%. $500,000 x 80% = $400,000 They still get a massive $400,000 deduction upfront. The remaining $100,000 is then depreciated under the normal MACRS rules, starting in 2023.

Trying to time your big purchases for the sweetest tax breaks? Turns out, Uncle Sam can change the rules mid-game and leave you with 20% less of a bonus.

Furniture Bonus Depreciation

Imagine you bought $500 worth of office furniture. Since office furniture is a seven-year MACRS property, it qualifies.

If placed in service in 2022, you could deduct the full $500 (100% rate).
If placed in service in 2023, you could deduct $400 (80% rate). The remaining $100 would be depreciated over the standard 7-year schedule.

Bonus Depreciation on Vehicles

This is where things get a little more specific. Bonus depreciation for vehicles is a popular topic, especially for heavy SUVs. For vehicles over 6,000 pounds but not exceeding 14,000 pounds, the rules are nuanced.

Many business owners assume they can write off the full cost in the first year. However, there are limits. While you can still achieve a substantial first-year deduction, it often involves a combination of Section 179 and bonus depreciation.

Crucially, these deductions hinge on the vehicle being used more than 50% for business purposes. If you don’t meet that threshold, your eligibility for these tax breaks can shrink or disappear entirely. Meticulous record-keeping isn’t just a good idea; it’s essential.

Let’s look at an example. A business owner buys a qualifying vehicle for $60,000 in 2018 and uses it 100% for business. Even with 100% bonus depreciation available that year, they were limited to an $18,000 first-year deduction. The remaining $42,000 had to be depreciated over the following years.

Bonus Depreciation on Rental Property Improvements

Navigating the rules around rental properties can feel a bit tricky, so let’s break it down. You can’t claim bonus depreciation on the actual rental building itself. That’s a no-go.

However, you can claim it on improvements to the property. This is especially true for what’s known as qualified improvement property bonus depreciation, which applies to interior upgrades of non-residential buildings.

For residential properties, you can claim it on shorter-lived assets. For example, say you buy a $2,000 washing machine for your rental unit in 2023. It has a 5-year lifespan.

Without bonus depreciation, you’d deduct $400 per year for 5 years.
With bonus depreciation, you can take an 80% deduction in the first year: 80% x $2,000 = $1,600

You get a $1,600 deduction immediately. The remaining $400 is then depreciated over the next four years at $100 per year. It’s a powerful way to accelerate your tax savings.