Ever wonder what bonus depreciation is? The term is thrown out there like everybody knows what it means. Today I would like to share with you what it is and why it is being used in 2009.
Equipment purchased for use in a business is expensed through depreciation. A concept the IRS has created that places the equipment into different classes allowing the equipment to be expensed over varying lengths of time depending on the class the equipment qualifies for. In 2009 there is a special provision that allows qualifying equipment to receive 50% of the cost as qualifying depreciation. After the 50% depreciation is calculated the regular depreciation based on the class the equipment falls in is calculated.
Let’s say you purchased a brand new piece of equipment for $100,000. The bonus depreciation rule would allow you to expense $50,000. The remaining $50,000 would be expensed over 5 to 7 years depending on what class it falls into. Let’s say the 5 year class. Another $10,000 would be expensed for a total of $60,000 on this one piece of equipment! If this same piece of equipment is purchased in 2010 only $20,000 will be expensed.
2009 might be a good year for business owners to purchase new equipment. As with everything involving the IRS there are more rules and qualifications to making the bonus depreciation work so it would be advisable for business owners to check with their tax advisor before making a large equipment purchase.