Bonus percentage

Definition

The bonus percentage refers to the additional amount of depreciation that taxpayers can claim on qualifying property in the first year it is placed in service, above the standard depreciation limits. This allows businesses to reduce their taxable income significantly in the year of acquisition, encouraging investment in capital assets and stimulating economic growth.

5 Must Know Facts For Your Next Test

1. For tax years 2023 and beyond, the bonus percentage is set at 80% for qualified property, which allows significant upfront deductions.
2. Bonus depreciation applies to new and used qualifying property, providing flexibility for businesses investing in both types of assets.
3. The Tax Cuts and Jobs Act allowed for 100% bonus depreciation from 2018 to 2022, but this percentage is gradually decreasing after 2023.
4. To qualify for bonus depreciation, property must be placed in service during the tax year and have a recovery period of 20 years or less.
5. Bonus depreciation can be used in conjunction with the Section 179 deduction, but businesses must elect which benefits to use based on their financial strategies.

Review Questions

• How does the bonus percentage impact a business's financial decisions regarding capital investments?
  • The bonus percentage significantly influences a business's capital investment decisions by allowing them to reduce taxable income through large upfront deductions. This incentivizes businesses to invest in new equipment and machinery since they can recover costs more quickly through tax savings. As a result, companies may prioritize purchasing qualifying property during tax years where the bonus percentage is favorable.
• Discuss the differences between bonus depreciation and Section 179 deduction, particularly regarding eligibility and limitations.
  • Bonus depreciation allows businesses to deduct a percentage of the cost of qualifying property immediately, regardless of the business's taxable income. In contrast, Section 179 has specific annual limits on how much can be deducted and is subject to taxable income limitations. While both incentivize capital investment, bonus depreciation can be claimed without regard to income levels, making it a powerful tool for businesses looking to reduce taxes on larger purchases.
• Evaluate how changes in the bonus percentage over recent years affect long-term business investment strategies and economic growth.
  • The fluctuation of the bonus percentage over recent years has profound implications for long-term business investment strategies. The transition from 100% bonus depreciation down to 80% signals a shift that may lead companies to reevaluate their timing for asset purchases and financing decisions. As tax incentives decrease, businesses might delay investments or seek alternative financing methods, which could ultimately affect economic growth as capital spending tends to drive productivity improvements and job creation.

Related terms

depreciation: The systematic allocation of the cost of a tangible asset over its useful life, allowing businesses to account for the decline in value of their assets.

Section 179 deduction: A tax deduction that allows businesses to deduct the full purchase price of qualifying equipment and software purchased or financed during the tax year, up to a certain limit.

qualified property: Tangible property that meets specific criteria set by tax law, making it eligible for bonus depreciation and other accelerated depreciation methods.