Bonus depreciation (also known as Special Depreciation Allowance) is a powerful tax incentive that allows businesses to deduct a significant percentage of the cost of qualifying new or used business assets in the year they are placed in service, rather than depreciating them over their useful life. This can lead to substantial tax savings in the short term.
Key Features and Rules:
Qualified Property: Generally includes tangible property with a MACRS (Modified Accelerated Cost Recovery System) recovery period of 20 years or less, such as machinery, equipment, furniture, and certain improvements to non-residential real property. Off-the-shelf computer software also qualifies.
Placed in Service: The asset must be ready and available for its specific use in the business.
New vs. Used: Initially, bonus depreciation was only for new property, but recent legislation (Tax Cuts and Jobs Act of 2017 and subsequent extensions) allows it for qualified used property as well, provided certain conditions are met.
Phase-Out: The bonus depreciation percentage has been subject to phase-outs. For property placed in service after September 27, 2017, the allowance was 100%. However, it began phasing out:
2023: 80%
2024: 60%
2025: 40%
2026: 20%
2027 onwards: 0% (unless extended by further legislation)
Interaction with Section 179: Businesses may elect to take the Section 179 deduction first, and then claim bonus depreciation on any remaining cost basis. The total deduction (Section 179 + Bonus Depreciation) cannot exceed the cost of the asset.
Taxable Income Limitation: The total deduction for depreciation (including bonus and Section 179) cannot exceed a business's taxable income before depreciation. Any excess must be carried forward.
How the Calculator Works
This calculator helps estimate the bonus depreciation you can claim for a specific asset in a given year. It considers:
Cost of Qualified Property: The initial purchase price of the asset.
Depreciation Year: The year in which the asset is placed in service, crucial for applying the correct bonus depreciation phase-out percentage.
Bonus Depreciation Rate (%): The statutory rate for the year the asset is placed in service (e.g., 100% for property placed in service before Jan 1, 2023, 80% for 2023, etc.).
Section 179 Deduction: If you choose to take a Section 179 deduction, this is factored in.
Taxable Business Income: The total depreciation deduction is limited to your taxable income before depreciation.
Marginal Tax Rate (%): Used to estimate the tax savings generated by the depreciation deduction.
Calculation Steps:
Calculate Potential Bonus Depreciation: Multiply the 'Cost of Qualified Property' by the 'Bonus Depreciation Rate' (adjusted for the year).
Calculate Remaining Basis: Subtract the calculated bonus depreciation from the 'Cost of Qualified Property'.
Apply Section 179: Determine the deductible amount under Section 179, limited by the asset's cost and potentially business income limits.
Calculate Total First-Year Depreciation: Sum the allowable Section 179 deduction and the portion of bonus depreciation that can be taken. The total cannot exceed the asset's cost.
Apply Taxable Income Limitation: The total depreciation deduction (including bonus and Section 179) is capped by the 'Taxable Business Income Before Depreciation'.
Determine Final Depreciation Deduction: This is the lesser of the calculated total first-year depreciation or the taxable business income.
The calculator displays the maximum depreciation deduction available in the first year, considering these factors. It does not calculate the future tax savings, which would depend on the marginal tax rate.
Disclaimer: This calculator provides an estimate for educational purposes only. Tax laws are complex and subject to change. Consult with a qualified tax professional for advice specific to your business situation.
function calculateBonusDepreciation() {
var assetCost = parseFloat(document.getElementById("assetCost").value);
var depreciationYear = parseInt(document.getElementById("depreciationYear").value);
var bonusRateInput = parseFloat(document.getElementById("bonusRate").value);
var section179 = parseFloat(document.getElementById("section179").value);
var businessIncome = parseFloat(document.getElementById("businessIncome").value);
var taxRate = parseFloat(document.getElementById("taxRate").value);
var resultDisplay = document.getElementById("result-value");
var resultExplanationDisplay = document.getElementById("result-explanation");
// Clear previous results
resultDisplay.textContent = "–";
resultExplanationDisplay.textContent = "";
// Input validation
if (isNaN(assetCost) || assetCost <= 0) {
alert("Please enter a valid cost for the qualified property.");
return;
}
if (isNaN(depreciationYear) || depreciationYear <= 0) {
alert("Please enter a valid depreciation year (must be 1 or greater).");
return;
}
if (isNaN(bonusRateInput) || bonusRateInput 100) {
alert("Please enter a valid bonus depreciation rate between 0% and 100%.");
return;
}
if (isNaN(section179) || section179 < 0) {
alert("Please enter a valid Section 179 deduction (cannot be negative).");
return;
}
if (isNaN(businessIncome) || businessIncome < 0) {
alert("Please enter a valid taxable business income (cannot be negative).");
return;
}
if (isNaN(taxRate) || taxRate 100) {
alert("Please enter a valid marginal tax rate between 0% and 100%.");
return;
}
// Determine the applicable bonus depreciation rate based on the year placed in service
var applicableBonusRate;
if (depreciationYear === 2018 || depreciationYear === 2019 || depreciationYear === 2020 || depreciationYear === 2021 || depreciationYear === 2022) {
applicableBonusRate = 100; // 100% bonus depreciation
} else if (depreciationYear === 2023) {
applicableBonusRate = 80; // 80% bonus depreciation
} else if (depreciationYear === 2024) {
applicableBonusRate = 60; // 60% bonus depreciation
} else if (depreciationYear === 2025) {
applicableBonusRate = 40; // 40% bonus depreciation
} else if (depreciationYear === 2026) {
applicableBonusRate = 20; // 20% bonus depreciation
} else {
applicableBonusRate = 0; // 0% bonus depreciation for years after 2026, or if input is > 2026
}
// Use the lower of the user's entered rate or the statutory rate for the year
var effectiveBonusRate = Math.min(bonusRateInput, applicableBonusRate);
// Calculate potential bonus depreciation amount
var potentialBonusDepreciation = assetCost * (effectiveBonusRate / 100);
// Calculate remaining basis after potential bonus depreciation
var remainingBasis = assetCost – potentialBonusDepreciation;
// Determine allowable Section 179 deduction
// Note: Simplified for this calculator. Real Section 179 has specific limits based on business type, total investment, and taxable income.
// Here, we limit Section 179 to the asset cost and ensure it's not greater than business income IF it's the only deduction.
var allowableSection179 = Math.min(section179, assetCost);
if (allowableSection179 > businessIncome) {
allowableSection179 = businessIncome; // Cannot deduct more Section 179 than available income if it's the primary deduction
}
// Calculate total potential depreciation (Section 179 + Bonus)
// First, deduct Section 179 from the asset cost to determine the basis for bonus depreciation
var basisForBonus = assetCost – allowableSection179;
var actualBonusDepreciation = basisForBonus * (effectiveBonusRate / 100);
// Ensure bonus depreciation doesn't exceed the remaining basis
actualBonusDepreciation = Math.min(actualBonusDepreciation, basisForBonus);
var totalPotentialDepreciation = allowableSection179 + actualBonusDepreciation;
// Apply taxable income limitation
var finalDepreciationDeduction = Math.min(totalPotentialDepreciation, businessIncome);
// Ensure final deduction doesn't exceed asset cost
finalDepreciationDeduction = Math.min(finalDepreciationDeduction, assetCost);
var depreciationMessage = "";
if (finalDepreciationDeduction === businessIncome && totalPotentialDepreciation > businessIncome) {
depreciationMessage = "The deduction is limited by your taxable business income.";
} else if (finalDepreciationDeduction < totalPotentialDepreciation && finalDepreciationDeduction < assetCost) {
depreciationMessage = "The deduction is limited by the asset cost or applicable rules.";
} else {
depreciationMessage = "This is the maximum first-year depreciation deduction available.";
}
resultDisplay.textContent = "$" + finalDepreciationDeduction.toFixed(2);
resultExplanationDisplay.textContent = depreciationMessage;
}