Bonus Depreciation for Startups

The 2017 Tax Cuts and Jobs Act allows for additional depreciation in the first year that property is placed in service: bonus depreciation under section 168(k) and first-year expensing under section 179. Businesses buying (or creating) assets such as machinery, equipment, and certain computer software may deduct up to the entire cost of their purchase in the first year of service either by claiming 100% bonus depreciation on property acquired and placed in service after September 27, 2017, or by electing first-year expensing on up to $1 million o property placed in service after Dec 31, 2017.

This is in addition to regular depreciation. The adjusted basis of the asset is reduced by bonus depreciation before the regular depreciation is calculated.

It may not make sense for some taxpayers to deduct bonus depreciation like in a loss year or in a year when the taxpayer has expiring net operating loss carryovers or credit carryovers.

If this is the case, a taxpayer must elect not to deduct bonus depreciation with respect to one or more classes of property. Note that such an election applies to all qualified property in the same asset class that was placed in service during the tax year. Thus, if a taxpayer elects out of the bonus depreciation allowance with respect to an asset, all qualified property in the same asset class that was placed in service during the tax year is ineligible for bonus depreciation.

A taxpayer makes the election by attaching a statement to the income tax return for the tax year in which the election is to be effective The election is made separately by each person owning property qualifying for the bonus depreciation.

So moral of the story, if you are a new entrepreneur in your first year of business and you make eligible purchases, check with your CPA and make sure they are prepared to either take the bonus deduction or make proper election on your behalf. As always stay right so you don’t get left.