Eligibility Requirements for Claiming First-Year Expensing

  • You must use qualified property more than 50% for business the first year the property is placed in service to qualify for the first-year expensing deduction.
  • The equipment may be pre-owned as long as it was purchased and placed in service in the year you take the expensing deduction.
  • You may not take the deduction for property you used personally before converting it to business use.
  • Property must be both purchased and placed in service in the year you claim the deduction.
    • If you purchased property in a prior year then place it in service in the following year, you may not take the deduction for that property. You may use regular MACRS depreciation.
  • Although the first-year expensing limit for 2017 is $510,000, you don't have to claim the entire amount.
  • If you place in service more than one item of qualified property, you may allocate part of the $510,000 deduction to each item of property (i.e. Machine $20,000, computer, $900, desk, $400).
    • You may depreciate an remaining basis that you did not claim under Section 179 under the MACRS rules.

50% Bonus Depreciation Section 168(k) for 2017

Bonus depreciation is an additional first year depreciation allowance. Bonus depreciation is also referred to as a section 168(k) allowance and a special depreciation allowance.

In figuring the adjusted basis for purposes of bonus depreciation, you take any first-year (section 179) expensing deduction into account first. You then subtract the amount of the section 179 deduction from the original cost fo the property to find the adjusted basis. You then multiply the adjusted basis by 50% (for 2017) to determine tha amount of the bonus depreciation. (For 2018, the bonus depreciation percentage in 100%.)

If there is still any adjusted basis remaining after claiming section 179 and bonus depreciation, you may deduct regular MACRS depreciation applicable to the remaining basis.

Property Must Be New:

Unlike claiming the section 179 deduction, where the property may be new or used when placed in service, to claim bonus depreciation, the property must be purchasednew and placed in service in the same year it is purchased. (See update immediately below.)

Bonus Depreciation Tax Law Change Under the Tax Cut and Jobs Act Passed During December 2017:

Prior Law:
Bonus depreciation (IRC section 168(k), also called the special depreciation allowance and additional first year depreciation) was a temporary provision. After the PATH Act was passed at the end of 2015, bonus depreciation was set to be phased out, and eventually, completely eliminated. The bonus depreciation rates were set to decline, from 50% in 2017, to 40% in 2018, to 30% in 2019, and completely eliminated in 2020. The new law changes all this, and is more favorable.

New Law:
Under the TCJA, section 168(k) was amended, and is retroactive. Beginning with assets purchased after September 27, 2017 the bonus depreciation percentage is increased from 50% to 100%.

In addition, unlike the old law, where the asset had to be new when placed in service to qualify for bonus depreciation, under the TCJA the asset is no longer required to be new to be eligible for the 100% bonus depreciation deduction, as long as it is the taxpayer's first use of the property.

Computing Bonus Depreciation:

Multiply the adjusted basis of the property (cost minus first-year expensing) by the applicable percentage (50% up to Sep. 27, 2017 and100% from Sep. 28, 2017 through Dec. 31, 2018. Just as the basis of property is reduced by the section 179 deduction, the basis of property is also reduced by the amount of bonus depreciation claimed.

Keep in mind, you are deemed to have claimed bonus depreciation even if you did not and must reduce the basis of property by the amount of the deduction you could have claimed.

You May Elect to Opt Out of Bonus Depreciation (the special allowance)

You can elect not to deduct any special depreciation allowances for all property of any class (i.e. passengers cars - a 5-year property) placed in service during the tax year

To make an election, attach a statement to your return indicating what election you are making and the class of property for which you are making the election.

The election must be made separately by each person owning qualified property (for example, by the partnerships, by the S corporation, or for each member of a consolidated group by the common parent of the group).

When to make election.

Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service.

However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). Attach the election statement to the amended return. On the amended return, write "Filed pursuant to section 301.9100-2."

Revoking an election.

Once you elect not to deduct a special depreciation allowance for a class of property, you cannot revoke the election without IRS consent. A request to revoke the election is a request for a letter ruling.


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