Bonus depreciation is only applicable to certain business assets that meet qualification requirements. Property must have a maximum useful life of 20 years, and it can be used for either business or personal use.

Under the Tax Cuts and Jobs Act, the taxpayer revisions to the eligibility also stipulate that:

• The asset was not used by the taxpayer prior to acquisition.

• The asset was not acquired by a related party to the taxpayer.

• The asset was not formerly owned by a component member of a controlled group of corporations.

• The asset's basis is not figured in reference to the adjusted basis of the property when under ownership of the seller.

• The asset's basis is not figured in reference to a basis acquired from a decedent.1

Recent revisions also explicitly call out assets previously not eligible for bonus depreciation but now allowable. For example, the IRS explicitly calls out qualified film, television, or theater property acquired and placed in service after Sept. 27, 2017. (This seems much too technical) 

Disqualified Assets

The IRS explicitly disqualifies certain types of assets from being able to claim bonus depreciation. Under new bonus depreciation rules, assets are not eligible if they are:

• Primarily used in the trade of furnishing or sale of electrical energy, water, or sewage disposal services.

• Primarily used in the trade of furnishing or the sale of gas or steam through distributed systems.

• Primarily used in the trade of furnishing or the sale of gas or steam by pipeline.

• Used in a trade or business that has had floor-plan financing indebtedness under certain circumstances.

• Qualified improvement property such as leasehold improvements acquired after Dec. 31, 2017.

How to Report Bonus Depreciation

Bonus depreciation is reported on a Federal tax return through Form 4562 (Depreciation and Amortization (Including Information on Listed Property).. Taxpayers must calculate their own amount of bonus depreciation to recognize and report their "special depreciation allowance" under Part II, Line 14.2

To figure the depreciable base of the asset, the taxpayer should subtract any credits or deductions allocated to the property from the basis of the asset. Special treatment exists for assets acquired in a like-kind exchange or involuntary conversion.

Election Out

If taxpayers decide it would be more advantageous to recognize depreciation over the life of the asset instead of using an accelerated method, the taxpayer can elect not to deduct any special depreciation allowance. To make this election, the taxpayer must attach a statement to their tax return indicating which class of property they wish to not make the election for. Once the election has been made, the decision cannot be revoked with the IRS's consent.2

Recapture

If a taxpayer disposes of property in which they claimed a special depreciation deduction for, the taxpayer if often required to recognized as ordinary income a recaptured amount, if the asset is sold or disposed of before the end of its useful life.2

Do you have questions on how these deductions and regulations may apply to your business?

Contact our tax team for a consultation.