Act (ESA) of 2008
-- Plus Numerous Extensions/Expansions through the PATH Act of 2015 --
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The critical provision involves "bonus
A short overview of the key provision is provided below, followed by a set of links to more detailed information. The reader is cautioned to refer to the tax code and/or a tax specialist when faced with these and other tax treatment issues.
Under the 2008 Act businesses are allowed to take an additional first-year depreciation deduction, commonly known as "bonus depreciation," equal to 50 percent of the original "adjusted (depreciable) basis" usually the fully installed cost of qualified property. Property eligible for this treatment includes property to which MACRS depreciation applies with a recovery period of 20 years or less. Certain types of water utility property, software, and leasehold improvements also qualify for bonus depreciation. Property must generally be purchased and placed in service in 2008. The bonus depreciation is allowed for both the regular tax and the alternative minimum tax (AMT).In addition, the business is entitled to "normal" first-year depreciation. However, the depreciable basis of the property and the regular depreciation allowances are adjusted to reflect the additional first-year depreciation deduction. And, finally, a taxpayer may elect out of the 50 percent bonus depreciation by asset class and be subject to "normal" tax depreciation on the original "adjusted (depreciable) basis."
EXAMPLE (with 50-percent bonus depreciation): On September 1, 2008, a calendar-year reporting business bought and placed in service a $100,000 five-year property class piece of equipment. The business may claim a first-year (2008) depreciation allowance of $60,000 -- i.e., a $50,000 bonus depreciation ($100,000 times 50%) plus a $10,000 normal first-year MACRS depreciation calculated on the new adjusted basis ([$100,000 minus $50,000] times 20%). In the second year (2009), the MACRS depreciation would be $16,000 ([$100,000 minus $50,000] times 32%). And, so on.
In the above example, the "effective" depreciation percentage for the first year is 60% [($50,000 bonus depreciation plus $10,000 normal first-year depreciation) divided by the $100,000 original adjusted basis]. In the second year, the "effective" depreciation is 16.00% [$16,000 divided by $100,000]. And, so on. ( More examples. )
Bonus Depreciation Extended (2009)
The American Recovery and Reinvestment Act of 2009 extends the 50-percent first-year bonus depreciation allowed under the 2008 Economic Stimulus Act through December 31, 2009. The extension is retroactive to January 1, 2009. The new law also extends, through 2010, the additional year of bonus depreciation allowed under the 2008 Economic Stimulus Act for property with a recovery period of 10 years or longer, for transportation property (tangible personal property used to transport people or property), and for certain aircraft.
Bonus Depreciation Extended and Expanded (2010)
President Obama signed The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 on December 17, 2010. This act provided for 100% bonus depreciation for capital investments placed in service after September 8, 2010 through December 31, 2011, which is then reduced to 50% bonus depreciation for assets placed in service during the 2012 calendar year. The new law also allows, through 2012, 100% bonus depreciation for certain long-lived (i.e., recovery periods of 10 years or longer) property and transportation property. This legislation had followed closely the Small Business Jobs Act of 2010, which itself provided 50% bonus depreciation for assets purchased in 2010 prior to September 9.
Bonus Depreciation Extended (2012)
The American Taxpayer Relief Act of 2012 extends the 50-percent first-year bonus depreciation that was set to expire at December 31, 2012 through December 31, 2013. Some transportation and longer-period production property is eligible for 50-percent bonus depreciation through 2014.
Bonus Depreciation Extended (2014)
The Tax Increase Prevention Act of 2014 extends the 50% first-year bonus depreciation allowance that was set to expire on December 31, 2013 for one year for qualifying property placed in service in the tax year through 2014.
Bonus Depreciation Extended and Phased Down (2015)
The Protecting Americans from Tax Hikes Act
(PATH Act) of 2015 extends bonus depreciation under a phase-down
schedule through 2019:
-- at 50% for 2015-2017;
-- at 40% in 2018; and
-- at 30 percent in 2019.
Back to Part V: Investment in Capital Assets