The special depreciation allowance (SDA), commonly referred to as bonus depreciation is a tax incentive that allows businesses to deduct a large percentage of the cost of qualifying assets in the first year of use. This means that businesses can take advantage of the special depreciation allowance to reduce the amount they will have to pay as a tax within the first year that they put a qualifying asset into use. Normally, assets get depreciated with use and the rate of depreciation of the asset depends on the type of asset as well as the method used in determining its depreciation.
Each year, businesses deduct a particular amount known as a depreciation expense to keep track of their assets monthly or yearly depreciation and also ensure that their financial statements such as the balance sheet, income statement, and cash flow statement accurately reflect their financial position. In order to claim a special depreciation allowance, there are rules guiding the process as well as stipulated assets that qualify for the tax incentive. In this article, we shall discuss the special depreciation allowance in detail and also outline some items that qualify for this tax incentive.
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What is a special depreciation allowance?
Special depreciation allowance (SDA) is a tax incentive introduced by the U.S. government through the Job Creation and Worker Assistance Act of 2002 to encourage businesses to invest in new equipment and other capital assets. The allowance provides businesses with the ability to deduct a considerable percentage of the cost of qualifying assets in the first year of use thereby significantly reducing a business’s tax liability and increasing cash flow. Similar to other depreciation deductions, SDA adds to the accumulated depreciation of a company.
Under the Tax Cuts and Jobs Act of 2017, businesses can take advantage of a 100% bonus depreciation allowance for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. This means that businesses can deduct the full cost of qualifying property, including tangible personal property, computer software, and certain qualified improvement property, in the year in which it is placed in service. Special depreciation allowance is also known as an additional first-year allowance, bonus depreciation, or IRC 168 depreciation.
Is bonus depreciation the same as special depreciation?
Yes, bonus depreciation and special depreciation allowance refer to the same tax incentive. Bonus Depreciation is the commonly used term, but the official term in the U.S. Internal Revenue Code is special depreciation allowance. Under this tax incentive, businesses can deduct a certain percentage of the cost of qualifying assets in the first year of use. The Tax Cuts and Jobs Act of 2017 increased the bonus depreciation percentage to 100% for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023.
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Understanding special depreciation allowance
As mentioned earlier, the special depreciation allowance is a tax incentive that allows businesses to deduct a significant percentage of the cost of qualifying assets in the year they are placed in service, instead of depreciating them over several years. This incentive was designed to encourage businesses to invest in new equipment and other capital assets. The percentage of the deduction varies depending on the year the asset was placed in service and the type of property. To qualify for the special depreciation allowance, the property must meet certain criteria.
Generally, the property must be tangible personal property with a useful life of 20 years or less, computer software, or qualified improvement property (certain improvements made to the interior of nonresidential buildings). The property must be acquired and placed in service after September 27, 2017, and before January 1, 2023, or after September 27, 2017, and before January 1, 2024, in the case of certain longer production period property and certain aircraft. Additionally, the Tax Cuts and Jobs Act of 2017 increased the special depreciation allowance from 50% to 100%. It also extended the special depreciation allowance to cover used property in some instances.
Hence, the percentage depreciation for qualifying assets has been set at 100% for qualifying property placed in service after September 27, 2017, and before January 1, 2023. It is important to note that there are rules and limitations surrounding the special depreciation allowance. For example, the deduction is not available for property used predominantly outside of the United States, and the deduction may be limited for property used in a short tax year or in certain situations involving partnerships. Furthermore, businesses may be subject to recapture rules if they dispose of the property before the end of its useful life or if the property is no longer used in a qualifying manner.
Recapture rules require the business to add back a portion of the special depreciation allowance claimed in prior years. The purpose of special depreciation allowance is to encourage businesses to invest in equipment and other capital assets, by allowing them to deduct the cost of these assets more quickly and reduce their tax liability.
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What qualifies for a special depreciation allowance?
The special depreciation allowance is applicable to new and used qualified property which includes tangible personal property with a recovery period of 20 years or less, computer software, water utility property, and qualified improvement property. Tangible personal property includes office equipment such as computers, printers, and furniture; machinery and equipment, such as manufacturing equipment or farming equipment; vehicles, such as cars or trucks used for business purposes; certain types of buildings, such as warehouses or retail stores, and other tangible property used in a trade or business.
Computer software includes off-the-shelf software used in a trade or business, but not custom software. Qualified improvement property (QIP) is any improvement made to the interior of a nonresidential building after it was first placed in service but excluding expenditures for enlargements, elevators, escalators, or the internal structural framework of the building. QIP includes improvements such as interior lighting systems, HVAC systems, and security systems. QIP had been previously ineligible for bonus depreciation due to a drafting error, but the Consolidated Appropriations Act of 2021 made a technical correction to include it as eligible property.
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Turbotax and special depreciation allowance
TurboTax is a tax preparation software that helps individuals and businesses prepare and file their tax returns. The software includes features that allow users to take advantage of tax incentives such as the special depreciation allowance. When you use this software to file your tax return, you will be prompted to enter information about any qualifying property that you acquired and placed in service during the tax year. The software will guide you through the process of calculating your SDA based on the type of property, date placed in service, and other relevant factors.
TurboTax will automatically calculate the maximum deduction allowed by law and apply it to your tax return. If you have any carryover or disallowed amounts from previous years, it will also help you track and apply those amounts to your current year’s return. Additionally, TurboTax offers guidance and resources to help you determine whether your property qualifies for bonus depreciation as well as other tax incentives and deductions that you may be eligible for. This can help you maximize your tax savings and ensure that you are taking advantage of all available tax benefits.
It is however important to note that TurboTax is a software tool and taxes done via the software are dependent on the information entered by the individual or business. Hence, if you have complex tax situations or questions about your eligibility for special depreciation allowance or other tax incentives, it is best to consult with a qualified tax professional.
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What is AMT special depreciation allowance?
The AMT (Alternative Minimum Tax) special depreciation allowance, also known as AMT bonus depreciation, is a tax incentive designed to encourage businesses to invest in new equipment and other capital assets. It is a special provision of the tax code that applies to businesses subject to the alternative minimum tax. Under this provision, businesses can deduct a certain percentage of the cost of qualifying assets in the year they are placed in service, instead of depreciating them over several years. The percentage varies depending on the year the asset was placed in service and the type of property.
For example, for property placed in service in 2022 or 2023, businesses may take a 30% AMT bonus depreciation deduction. This is in addition to the regular depreciation deduction that businesses may claim. However, the deduction is subject to certain limitations, such as the phase-out of the AMT exemption. The purpose of the AMT special depreciation allowance is to provide businesses with additional tax savings and improve cash flow. However, it is important to note that there are rules and limitations surrounding this tax incentive, and businesses should consult with a tax professional to determine their eligibility and how to properly use this deduction.
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Conclusion
The special depreciation allowance is a tax incentive geared towards encouraging businesses to invest in equipment and other capital assets. It allows companies to deduct a certain percentage of the cost of these qualifying equipment or assets more quickly and significantly reduce their tax liability in the first year of asset use. However, it is important to note that bonus depreciation is subject to certain limitations and exclusions, hence, businesses should consult with a tax professional to determine their eligibility for the special depreciation allowance, how to properly calculate the deduction, how to ensure compliance with the relevant rules and limitations, and how to properly take advantage of this tax incentive.
Last Updated on November 2, 2023 by Nansel Nanzip Bongdap
Blessing's experience lies in business, finance, literature, and marketing. She enjoys writing or editing in these fields, reflecting her experiences and expertise in all the content that she writes.
