Welcome back, as we continue discussing depreciation. In our previous videos, we used the depreciation tables to figure out the depreciation deduction for business use personal property, and real property. But in addition to this regular depreciation calculated using the tables, taxpayers also have the option to use additional types of accelerated first year depreciation. We're using the term accelerated depreciation here to mean depreciation over and above what could be achieved with regular MACRS depreciation using those tables. The two main types of accelerated depreciation are bonus depreciation and the section 179 election. In this video, we're going to focus on on bonus depreciation. Now bonus depreciation is a fixed percentage, for example, 50 percent or 100 percent of an assets adjusted basis that is deductible as a depreciation expense in the year the asset is placed into service. This bonus depreciation is an addition to MACRS and section 179 depreciation. So you could take section 179, which we'll talk about in our next video, bonus depreciation, and regular MACRS depreciation all on the same asset up to that assets total adjusted basis. As I alluded to earlier, bonus depreciation is optional. So by default, bonus depreciation is going to be included in your depreciation calculations. However, taxpayers can elect out of bonus on an asset class by asset class basis. So a taxpayer could decide they want to take bonus depreciation on all of their eligible assets except for furniture. In which case, they could elect out a bonus for that class of assets. So now let's do a quick example to see how bonus depreciation operates and interacts with MACRS depreciation we've already learned about. Here, we have a new computer with a cost of $2,000. If that computer was placed into service on June 20th, 2017, how would we calculate bonus depreciation on this asset? Well, first we need to know what the applicable bonus depreciation percentage was during the time period the asset was placed onto service. For this example, the applicable percentage was 50 percent. So assuming the computer is eligible for bonus, we would be able to immediately deduct as depreciation 50 percent of the assets adjusted basis. So a $1,000 depreciation deduction right off the bat. But remember that I told you that bonus can be taken in addition to regular MACRS depreciation. So next, we would take the remaining basis after subtracting out bonus depreciation which would be $1,000, and we would take that remaining base to the MACRS tables to figure out what the regular MACRS depreciation deduction would be. Here, since the computer is a five-year asset, we'll use the five-year MACRS table, and we'll go ahead and assume that we're using the half-year convention. So in year one this computer gets another $200 in regular MACRS depreciation from the table, that's the remaining basis after bonus depreciation taken to the table. So the total depreciation deduction in year 1 is $1,200, that's the total of the bonus depreciation plus the regular MACRS depreciation from the table. So in year 1 we've immediately expensed 60 percent of this asset's cost, and we're left with an adjusted basis of $800 heading into year 2. So now that we've seen how it works, what property is eligible for bonus depreciation? Well, we have a couple of basic requirements. First, the property must not have a MACRS recovery period of greater than 20 years. This effectively means that most business use personal property is going to qualify. But 27.5-year residential real property and 39-year nonresidential real property is not going to qualify. So for example, you will never be able to claim bonus depreciation on a warehouse, an apartment complex, or an office building. The other big requirement for bonus depreciation is one that was actually eliminated by the Tax Cuts and Jobs Act going forward, and this is the original use requirements. Prior to the Tax Cuts and Jobs Act, in order for property to be eligible for bonus depreciation, its original use had to begin with the taxpayer. In other words, the taxpayer had to be the properties first user, it had to be new. So you couldn't claim bonus depreciation on used assets that you purchased. But starting with bonus depreciation under the TCJA, that requirement has been eliminated. So for post TCJA bonus depreciation, property can either be new or used and qualify for bonus depreciation. But there are certain safeguards in place that prevent you from buying property from say a related party just so you can immediately expense the purchase price. Moving on to the bonus percentage, we can see that the Tax Cuts and Jobs Act also dramatically increased the applicable percentage available for bonus depreciation. For the last several years, the prevailing bonus depreciation percentage was 50 percent, meaning that you could immediately write-off 50 percent of the adjusted basis of eligible new assets plus whatever other depreciation you are entitled to under regular MACRS. But now under the TCJA, for assets acquired and placed into service on or after September 28th, 2017, the bonus depreciation rate is 100 percent. In other words, you can immediately expense 100 percent of the cost of eligible new or used assets placed into service. This 100 percent percentage is going to remain the applicable percentage through 2022, at which point the bonus depreciation percentages start to phase down until they're ultimately scheduled to sunset or expire at the end of 2026. Now, this isn't the first time that bonus depreciation has been a 100 percent. In summer 2010 and all of 2011, congress also set the bonus depreciation percentage to a 100 percent. So now let's go back to our computer example, except this time let's assume the computer was placed in service during 2018. Well, it's a computer which has class life for 20 years or less, and after the TCJA, it doesn't matter if it's new or used. So this asset is going to be eligible for 100 percent bonus depreciation. That means we can take the cost multiply it by 100 percent and our depreciation deduction is the full $2,000 that the computer costs. So a 100 percent bonus depreciation certainly makes calculating appreciation a little bit easier and a whole lot quicker. So now with a 100 percent bonus you may be asking why do I even need to know about those MACRS depreciation tables. Well, there's a few things to keep in mind here. Bonus depreciation is not permanent, and starting in 2023, the bonus percentage is no longer going to be a 100 percent. Second, 100 percent bonus only applies to assets placed in service on or after September 28th, 2017. So all the assets on a taxpayer's books before that date are still going to need those appreciation tables and require depreciation calculations over multiple years. Third, bonus depreciation does not apply to all assets. For example, it doesn't apply to real property, and as we'll see in a later video a 100 percent bonus depreciation isn't generally going to allow you to expense the entire cost of an automobile because of some separate limitations that Congress has placed on autos. Fourth, many states do not allow taxpayers to claim a 100 percent bonus depreciation. So you may still need to calculate depreciation using those tables for state tax. Finally, remember that bonus depreciation is optional. Meaning a taxpayer can elect out of it. So for example, a business may elect out a bonus so that it has sufficient taxable income as opposed to a taxable loss to utilize certain tax credits.
