Bonus Depreciation
Bonus depreciation is a tax incentive that allows a business to immediately deduct a large percentage of the purchase price of eligible assets, such as machinery, rather than write them off over the "useful life" of that asset. Bonus depreciation is also known as the additional first-year depreciation deduction.
Definition: Bonus depreciation is a tax incentive that allows businesses to immediately deduct a large percentage of the purchase price of eligible assets, such as machinery, instead of depreciating the asset over its useful life. Bonus depreciation is also known as additional first-year depreciation deduction.
Origin: The concept of bonus depreciation first appeared in the United States as part of economic stimulus policies. In 2002, the U.S. passed the Job Creation and Worker Assistance Act, which introduced bonus depreciation to encourage businesses to make capital investments during economic downturns.
Categories and Characteristics: Bonus depreciation mainly comes in two forms: 50% bonus depreciation and 100% bonus depreciation. The 50% bonus depreciation allows businesses to deduct 50% of the cost of eligible assets in the first year, while the 100% bonus depreciation allows businesses to deduct the entire cost in the first year. The main characteristic of bonus depreciation is that it can immediately reduce a business's taxable income, thereby lowering tax liability and encouraging capital expenditure.
Specific Cases: Case 1: A manufacturing company purchases a piece of machinery worth $1 million. Under the 100% bonus depreciation policy, the company can immediately deduct the $1 million cost in the first year, reducing its taxable income. Case 2: A tech company purchases a software system worth $500,000. Under the 50% bonus depreciation policy, the company can deduct $250,000 in the first year, with the remaining $250,000 depreciated over the following years.
Common Questions: 1. What are eligible assets? Eligible assets typically include newly purchased machinery, software systems, and certain types of buildings. 2. Is bonus depreciation applicable to all businesses? Bonus depreciation mainly applies to businesses that meet specific criteria, which may vary depending on the tax laws of different countries and regions.
