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Can someone explain about the bonus depreciation section of the new Tax Act Obama just signed?
Can someone explain in layman's terms about the bonus depreciation section (part of section 179 I believe) of the tax laws that Obama signed in December?
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3 Answers
Bonus depreciation allows you to choose to write off (by fully depreciating) certain qualifying assets that your business purchases. It has the similar effect of a Section 179 deduction but it is not the same and has a few key differences:
Bonus depreciation is only on new items while Sec 179 may be applied to used assets also.
Bonus depreciation is an "all or nothing" choice. If you choose bonus depreciation you must write off all the value of all assets in the same class that were purchased during the year. Sec 179 can be applied to all or any portion of any qualified asset purchased.
Sec 179 is limited to $500,000 and cannot create a net operating loss. Bonus depreciation has no limit and can create an immediate NOL which can be carried back or carried forward.
Here's an article - 2010 Tax Relief Act and the Effect on Fixed Assets Management - that discusses bonus deprecation (http://bit.ly/fGVOdk). For more details, there's a free guide - A Resource Guide for Claiming Bonus Depreciation available here: http://bit.ly/gc1tWL
Before talking about bonus depreciation let's take a look at the usual tax implications of businesses purchases. A business spends money during the year in two broad areas - services and things. Spending money on things could be office supplies, computers or inventory to name a few. Any item used during the year like office supplies is a regular expense. Items like computers, office furniture or manufacturing equipment are not expensed during the year but are classified as assets. You then are allowed to expense a portion of these assets each year through depreciation.
As a simple example if you buy computers for $5,000 you get to depreciate or expense $1,000 per year for five years. Bonus depreciation allows you to expense the entire cost of the computers in the year you buy and begin using them. In effect they turn an item from an asset to an expense.
The bonus depreciation, as mentioned in other answers, only applies to new asset purchases and not the purchase of used assets.
The new 100% bonus depreciation effective dates are for new assets purchased and placed in service from September 8, 2010 to December 31, 2011.
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