When you buy personal property for your business, such as a car or computer, that lasts for more than one year, you are required to deduct the cost a little at a time over several years. This process is called depreciation. Depending on the property involved, it can take anywhere from three to 39 years to fully depreciate the cost of business property.
In an ongoing effort to help small businesses, small business owners have been allowed to claim first-year bonus depreciation for qualifying personal property used for business purposes. Using bonus depreciation, you can deduct a certain percentage of the cost of an asset in the first year it was purchased, and the remaining cost can be deducted over several years using regular depreciation or Section 179 expensing. For tax years 2015 through 2017, first-year bonus depreciation was set at 50%. It was scheduled to go down to 40% in 2018 and 30% in 2019, and then not be available in 2020 and beyond.
The Tax Cuts and Jobs Act, enacted at the end of 2018, increases first-year bonus depreciation to 100%. It goes into effect for any long-term assets placed in service after September 27, 2017. The 100% bonus depreciation amount remains in effect from September 27, 2017 until January 1, 2023. After that, first-year bonus depreciation goes down as follows:
Bonus depreciation is optional—you don't have to take it if you don't want to. But if you want to get the largest depreciation deduction you can, you will want to take advantage of this option whenever possible. You can also use bonus depreciation to increase the amount of first-year depreciation available for business vehicles by $8,000.
Property qualifies for bonus depreciation only if:
Under prior law, you could only use bonus depreciation for new property. The Tax Cuts and Jobs Act has changed that rule and now you can use bonus depreciation for purchases of new or used property starting in 2018.
In addition, if the asset is listed property, it must be used more than 50% of the time for business to qualify for bonus depreciation. Listed property consists of automobiles and certain other personal property. Computers were listed property under prior law but starting in tax year 2018, they are no longer classified as listed property so there is no over 50% use requirement.
Bonus depreciation differs in some important ways from Section 179:
Often, the same asset will qualify for Section 179 expensing and bonus depreciation. In this event, you decide what method to use or you may choose to combine depreciation methods. If you decide to claim Section 179 expensing and bonus depreciation for the same asset, you must use Section 179 first, then bonus depreciation, and then regular depreciation (if needed).
You can take full advantage of Section 179 and bonus depreciation if you purchased qualifying property for your business any time during the tax year. Unlike with regular depreciation, you need not reduce your deduction if you purchased property late in the year.
However, Section 179 and bonus (and regular) depreciation are only available for business property you placed in service during the tax year. Property is "placed in service" when it's ready and available for its assigned function in your business. As long as it is available for such use, you don't have to actually use the property for business during the year to take depreciation.
Example: Tom, a real estate agent, purchased a camera to take photos of properties for sale. He had the device ready for use in his office on November 1, 2018. However, he had no properties to photograph until 2019. Tom may take a Section 179 or bonus depreciation deduction for the camera for 2018, even though he didn't actually use it that year, because it was ready and available for use then.
On the other hand, if you purchased property but do not place it in service that year, you can take no Section 179, or bonus or regular depreciation deduction for it.
Example: Tom also purchased a new computer for his business. He purchased and paid for the computer online on December 28, 2018. However, the computer was not delivered until January 2, 2019. Tom may not deduct any part of the cost of the computer on his 2018 return. He has to wait until the next year to take this deduction.