Bonus Depreciation on Leasehold Improvements

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

A leased asset is a resource, such as machinery or equipment, that one party agrees to transfer to another party in exchange for periodic payments. Leasehold improvements are additions and renovations to leased property.

Definition

Depreciating a leasehold improvement means recovering the cost of the improvement over a specified number of years. If you own a business and use a leased asset in operating activities, you may depreciate any improvement performed on the asset.

Bonus depreciation is an additional depreciation deduction that fiscal authorities allow on filing tax returns. The Internal Revenue Service wants to encourage small businesses to purchase or improve equipment used in operating activities.

Depreciation Methods

The IRS allows two types of leasehold improvement depreciation. You may deduct a bonus depreciation using a straight-line or accelerated method. With a straight-line procedure, you record the same depreciation amount every year. With an accelerated method, you record higher depreciation amounts in earlier years.

Financial Reporting

You report bonus depreciation on leasehold improvements in the statement of profit and loss, also known as income statement.

References

• Internal Revenue Service: Bonus Depreciation and Increased Section 179 Deduction under the American Recovery and Reinvestment Act
• Internal Revenue Service: Overview of Depreciation
• Business Dictionary: Leasehold Improvements