First-Year Bonus Depreciation

You can take an additional first-year depreciation bonus of 20% for personal property that you acquired before 1981 and that has an estimated useful life of at least 6 years. This bonus is in addition to the depreciation that you would normally take in the first year. If you take the bonus, you subtract the amount of the bonus from the depreciable basis before you make any further calculations. You can take the 20% first-year bonus depreciation on certain assets qualifying for straight-line, declining-balance, or sum-of-the-years'-digits depreciation methods.

You calculate the 20% bonus on the acquired value of the asset without subtracting the salvage value. However, the amount that you can take is limited to $2,000 a year. A business, therefore, can take the 20% first-year depreciation bonus on no more than $10,000 of eligible property purchased during the taxable year.

Here's an example of a straight-line depreciation calculation where a corporation has taken the 20% first-year bonus:

Acquired value	$16,000
- 20% 1st year ($2,000 maximum)	2,000
- Salvage value	2,000
Depreciable basis	$12,000

 

Depreciable basis Estimated life

=

$12,000 6

= $2,000

= Annual depreciation

 

Assuming they placed the asset in service on the first of April, a company with a calendar year-end would have a first-year deduction of $3,500 (the $2,000 bonus plus 9/12ths of $2,000) instead of a yearly depreciation deduction of $2,333.33 (calculated from the depreciable basis without the bonus--$14,000--divided by 6 years). This represents a substantial increase over the first year's deduction without the bonus. For years 2 through 5, the depreciation would be $2,000 per year. In year 6, the depreciation would be $500 (3/12 x $2,000).

The 20% bonus was repealed by the Economic Recovery Tax Act of 1981 effective December 31, 1980. Its basic intent was continued as Section 179 expense.