Running Head: BONUS DEPRECIATION AND EXTRA DEDUCTION a a a a 1
Milestone One: Bonus Depreciation and Extra Deduction
2
BONUS DEPRECIATION AND EXTRA DEDUCTION
Subject: Bonus Depreciation and Extra Deduction
Background
Nora is a sole proprietor who owns a bakery business called C-C Bakery, and she has
been running it for three years. The average profit of the business is $ 500,000 p.a. for the past
two years. She wishes to buy a few new as well as used equipment for her business, including
a new oven ($ 10,000), a new connected refrigerator and freezer ($ 7,000), a new bakery
display case ($ 5,000), and a used commercial mixer ($ 5,000). She also plans to make certain
improvements to the building, which will cost approximately $ 20,000. a a a a
Issues to be addressed
The main issue that has been identified and addressed in the memo is whether Nora is
eligible for bonus depreciation or not. The option for Nora to avail extra deductions has also
been ascertained.
Legal aspects and analysis
Bonus depreciation refers to the tax incentive which enables business entities to
instantly deduct a significant percentage relating to the purchase price of an eligible asset like
machinery. It is regarded to be a kind of tax relief for small- and medium-sized business firms,
especially the ones that intend to make a decent asset purchase. According to Eichfelder et al.
(2023), bonus depreciation can influence real investment decisions that are made by firms.
IRS allows companies to deduct an amount which is higher than the normal depreciation
allowance. The 2017 Tax Cuts and Jobs Act has implemented ‘100 % additional 1st year
depreciation deduction’ (Internal Revenue Service, 2020). This rule is applicable to
depreciable business assets whose recovery period of 20 years or less. Based on the provision
that has been introduced by the Act, Nora should be able to deduct 100 % of the asset value in
the first year.
3
BONUS DEPRECIATION AND EXTRA DEDUCTION
The Protecting Americans from Tax Hikes Act, which is also known as the PATH Act,
has been introduced in the US by the Obama administration. It basically allowed individuals,
businesses as well as families to renew or expand diverse tax credits. Based on the PATH Act,
which is still applicable, the bonus depreciation provision is applicable to a qualified leasehold
improvement property (United States Senate Committee On Finance). Hence in the case of
Nora, the improvements that she intends to make to the building include air condition duct as
well as roofing works, which is likely to cost around $ 20,000, is eligible for bonus
depreciation. a a a a
According to 26 U.S. Code §179, taxpayers can opt for the cost relating to the
deduction of specific kinds of property instead of needing cost capitalization and depreciation
pertaining to the property (US. Code, 2023). Section 179 (b) (1) states that a taxpayer can have
a maximum deduction of $ 1,000,000 in a year (US. Code, 2023). Thus, in the case of Nora,
she is most likely to take up to $ 42,000 (i.e., $ 10,000 + $ 7,000 + $ 5,000 + $ 20,000). The
rule of bonus depreciation is applicable on new products, and hence the value of the used
commercial mixer has not been included in the computation. The used commercial mixer has
to be entirely depreciated before the purchase. Another alternative that Nora can
hypothetically consider is that she can opt for another § 179 deduction in order to reduce the
price of the intended materials before the purchase and then make a deduction on the balance
amount.
Nora must choose the method of depreciation that will be applicable to the business
assets. She can consider both the straight-line depreciation method and the double-declining
depreciation method. But there is a possibility that Nora has to deduct the entire amount of $
42,000 in the first year, as a result of which she would not be able to make use of the bonus
depreciation option. In case that is the situation, then based on the applicable tax bracket, she
4
BONUS DEPRECIATION AND EXTRA DEDUCTION
will be able to save $ 14,700 (estimated tax bracket of 35 %) after excluding the used purchase
materials. a a
Conclusion
On the basis of the U.S. Code 179 as well as the 2017 Tax Cuts and Jobs Act, the
bakery business of Nora will be eligible to avail the provision relating to bonus depreciation
along with extra deductions. However, the extra deductions that will be applicable mainly
depend on the choices that Nora will make while choosing the type of deduction. As the
provisions will work in her favor, the decision to make purchases for her bakery business is an
ideal choice that will not only help her to expand her business but also minimize the costs that
she will have to bear. Based on the applicable tax-related requirements and regulations, her
bakery is qualified to take advantage of bonus depreciation and extra deductions.
Thank You
5
BONUS DEPRECIATION AND EXTRA DEDUCTION
Reference
26 USC 179: Election to expense certain depreciable business assets. The US. Code (n.d.).
https://uscode.house.gov/view.xhtml?req=%28title%3A26+section%3A179+edition%
3Aprelim%29
Conant, D., & Chaille, S. (2022). Asset depreciation method comparison: An Excel-based
classroom exercise. Journal of Education for Business, 97(5), 351-356.
Eichfelder, S., Knaisch, J., & Schneider, K. (2023). How does bonus depreciation affect real
investment? Effect size, asset structure, and tax planning (No. 278). Discussion Paper.
IRS finalizes regulations for 100 percent bonus depreciation. Internal Revenue Service.
(2020). https://www.irs.gov/newsroom/irs-finalizes-regulations-for-100-percent-
bonus-depreciation
The United States Senate Committee on Finance: The United States Senate Committee on
Finance. United States Senate Committee On Finance. (n.d.).
https://www.finance.senate.gov/download/summary-of-the-protecting-americans-
from-tax-hikes-path-act-of-2015
