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Bonus Depreciation Limits

Does bonus depreciation have a limit? Bonus depreciation was enacted by Congress’ Job Creation and Worker Assistance Act of 2002 but, in 2017, the Tax Cuts and Jobs Act (TCJA) was passed and notable changes were made to this tax incentive. According to the rules, there are bonus depreciation limits for the maximum deduction that can be made using this tax incentive. In this article, we will discuss how bonus depreciation works and its limits.

Related: Rental Property Bonus Depreciation

Understanding bonus depreciation

Bonus depreciation (additional first-year depreciation deduction) is an accelerated tax incentive that allows you as a taxpayer to deduct the entire cost price of a qualifying asset or a large percentage of the cost price upfront in the first year that the asset was purchased and put into service. This enables you to reduce the taxable net income of your business which, in turn, reduces your tax liability.

Bonus depreciation limits
Bonus depreciation limits

According to the rules for bonus depreciation, only assets that have a useful life of 20 years or less are eligible. Hence, assets that qualify for bonus depreciation would include manufacturing equipment, furniture, vehicles, water utility property, computer software, heavy machinery, and qualified film, television, or live theatrical productions. Also, another category of asset known as ‘qualified improvement property’ are eligible for bonus depreciation. This category involves the interior upgrades made to buildings that restore, improve, or result in the betterment of the building.

In order to take advantage of this tax incentive, you have to purchase a qualified property prior to the deadline and place it in service before the end of the tax year. An asset can only be eligible for this accelerated tax deduction when placed in service prior to the deadline. This means in order to be able to claim bonus depreciation for an asset you have to place the asset in service (i.e. make use of it for the business). If it is not placed in service before the end of the tax year, it will only qualify for the next year’s bonus percentage amount.

For instance, if you purchase a piece of equipment in December 2022, but don’t make use of it until January 2023, before you can claim bonus depreciation on this piece of equipment, you would have to wait until you file your 2023 tax return. Once you have done the calculation of the bonus depreciation amount, you would fill out Form 4562 to report it on line 14 of the form, under Part II. Now, that we have an understanding of what bonus depreciation is, what are the bonus depreciation limits? let’s discuss this further.

See also: Can you take bonus depreciation on rental property?

Is there a limit on bonus depreciation?

No, bonus depreciation is not subject to an annual dollar limit, and neither is it limited to annual business profit. Compared to the Section 179 deduction, bonus depreciation has no annual limit on deduction. Unlike Section 179 which has a limit on the annual deduction and only permits taxpayers to deduct a set dollar amount, bonus depreciation permits the deduction of a percentage of an asset’s cost upfront and has no annual limit on the deduction.

In 2022, for instance, the maximum Section 179 expense deduction was $1,080,000 which means that for a taxpayer to be able to take the full deduction, the cost of the eligible property shouldn’t exceed $2,700,000. Also, Section 179 deductions are limited to annual taxable business income, which means that a company cannot deduct more money than it made. Bonus depreciation, on the other hand, does not have such a limit and can be used to create a net loss.

Read also: Adjusting Entry for Depreciation

Bonus depreciation limits

According to the new bonus depreciation rules and limitations under the 2017 TCJA, there are bonus depreciation limits for the percentage of the cost of the qualifying asset that can be deducted for each year. The new law under the 2017 TCJA increased the bonus depreciation limit on percentage from 50% to 100% for qualified property that is acquired and placed in service between Sept. 27, 2017, and Jan. 1, 2023. This means that the bonus depreciation percentage for eligible property that a taxpayer purchased before Sept. 28, 2017, and placed in service before Jan. 1, 2018, remains at 50%.

For qualified property purchased and put in service between Sept. 27, 2017, and Jan. 1, 2023, businesses can deduct 100% of its cost. For instance, if a company purchased a piece of equipment for $8,000 in 2022. The company can claim the 100% bonus depreciation limits for 2022 on the machine if the equipment was used in the same year. That is, the company can deduct the entire $8,000 ($8,000 purchase x 100% bonus depreciation rate) in the year that it bought the equipment and started using it; rather than reporting the normal $800 ($8,000/10 years) in depreciation annually for 10 years.

Nonetheless, according to the new law, this 100% bonus depreciation limit expires in 2023 and decreases every year by 20% till it phases out in 2027. That is, starting January 1, 2023, the 100% bonus depreciation limit will decrease by 20% each year until it phases out to 0%. This means that the bonus depreciation limits that are applicable when claiming this tax incentive would depend on the year in which the qualifying asset was acquired and used. For instance:

  • Bonus depreciation limits for 2022 is 100% of the cost of the qualifying property
  • The 2021 bonus depreciation limit is 100%
  • 2020 bonus depreciation limits are 100%
  • The 2019 bonus depreciation limit is 100%
  • 2018 bonus depreciation limits are 100%
  • 2017 bonus depreciation limits (after Sept. 27, 2017) are 100%
  • 2017 bonus depreciation limits (before Sept. 27, 2017) are 100%
  • 2014 bonus depreciation limit is 50%
  • 2013 bonus depreciation limit is 50%

However, for the coming years, the bonus depreciation limits would be as follows:

Placed-in-service yearBonus depreciation percentage for Qualified property in general/specified classesBonus depreciation percentage for Longer production period property and certain aircraft
Sept 28, 2017 – Dec 31, 2022100%100%
2028 and thereafterNoneNone
Bonus depreciation limits for percentage deduction by year

Related: Is Accumulated Depreciation an Expense?

Bonus depreciation limits on vehicles

One of the notable bonus depreciation limits that car owners should take note of is the luxury automobile limitation. The luxury automobile depreciation is the annual limit on the depreciation amount that a taxpayer can take on a luxury vehicle that is used for business purposes. The main essence of the annual limit placed on a luxury vehicle is to control the type and amount of money that businesses can spend on luxury vehicles for tax purposes.

The IRS definition of a ‘luxury vehicle’ is a four-wheeled vehicle that is used mainly on public roads and has an unloaded gross weight that is not more than 6000 pounds. The majority of cars (including trucks or vans), regardless of their cost fit the IRS definition of a ‘luxury vehicle’. Hence, business vehicles such as delivery vehicles, specialty vehicles like an ambulance or a hearse, cargo vans, and box trucks without passenger seats qualify for bonus depreciation. Generally, business fleets or work vehicles that have limited potential for personal use are eligible for this special depreciation allowance.

However, when it comes to the bonus depreciation limits on vehicles, the maximum amount that can be deducted each year depends on the year that the vehicle is placed in service. The 2017 TCJA made changes to the depreciation limits for luxury passenger vehicles placed in service after Dec. 31, 2017. The TCJA allows 100% first-year bonus depreciation for luxury passenger vehicles that are used only for business and placed in service between Dec. 31, 2017, and Dec. 31, 2026. This is applicable for both qualifying new and used vehicles.

If a car owner doesn’t claim bonus depreciation, the greatest allowable depreciation deduction is:

  • $10,000 for the 1st year
  • $16,000 for the 2nd year
  • $9,600 for the 3rd year
  • $5,760 for the 4th year
  • $5,760 each for other later taxable years in the recovery period

However, the bonus depreciation limits on vehicles when a car owner claims 100% bonus depreciation are:

  • $18,000 for the 1st year
  • $16,000 for the 2nd year
  • $9,600 for the 3rd year
  • $5,760 for each later taxable year in the recovery period

In order to understand this, let’s assume in 2022, a business owner decides to get a town car for his business in order to shuttle important clients to and from the local airport. Let’s say he spends $70,000 on this and claims the first-year bonus deduction. This means, according to the luxury auto bonus depreciation limits for 2022, the annual deductions will be $18,000 in the first year, $16,000 in the second year, $9,600 in the third year, and $5,760 for the rest of the depreciable period allowed.