Define Bonus Depreciation

Bonus depreciation allows a taxpayer to record a higher depreciation expense.

Depreciation is an accounting convention that helps a corporate or individual taxpayer recover the cost of an economic resource. As a business owner, bonus depreciation allows you to record more than the standard depreciation expense.

Definition

Depreciating an asset means spreading its cost over several years. The Internal Revenue Service allows only capital-asset depreciation. Capital assets include property, plants, equipment, machinery and land. Depreciation expense is economically beneficial because you do not pay for it, yet it lowers your tax debt.

Benefits

Bonus depreciation is an additional amount of deductible depreciation that you can book beyond what you normally would report in financial statements. For example, you buy equipment valued at $10,000. IRS standard rules allow a five-year depreciation term. Accordingly, the standard annual depreciation expense is $2,000 ($10,000 divided by five). If you qualify for a bonus depreciation, you may record a depreciation expense higher than $2,000.

Significance

The IRS allows bonus depreciation to encourage capital investment from small business owners. Bonus depreciation may be advantageous to you, because you may lower tax debts by recording higher depreciation amounts.

References

• Investopedia: Bonus Depreciation
• Investopedia: Depreciation: Straight-Line Vs. Double-Declining Methods