Premium Essay

Bonus Depreciation

In: Business and Management

Submitted By serenityao
Words 2277
Pages 10
The Discussion of Bonus Depreciation Deduction in the United States
May 6, 2015


The term paper researches the history of bonus depreciation allowance provision, the usefulness to the decision making of corporate taxpayers, and how the temporary changes in recent years affect cash flow of businesses. Under Section 168(k) of IRC, bonus depreciation is a special depreciation allowance to deduct income tax of corporate taxpayers. Though this ranges from 30% to 100% as determined by annual election of congress, bonus depreciation actually results in substantial present value tax savings for businesses when they purchase new qualified property. The introduction section is an overview of bonus depreciation, how it is relevant to businesses, and why taxpayers care about it. The legislation history is a brief description of temporary changes and the timeline of bonus depreciation. The fictional example section presents the possible effects of bonus depreciation transitioning from 50% in 2014 to 0% in 2015, and the conclusion section summarizes this research.

Keywords: Depreciation Deduction, Bonus Depreciation, Cash Savings

Outline the topic. Bonus depreciation is special depreciation allowance that allows businesses an additional first-year depreciation deduction when the qualifying asset is first purchased. It helps business recover the costs of qualified new property made in a particular year faster than the ordinary depreciation schedule allow. Bonus depreciation is eligible to new qualified property, but it is not eligible for property used outside of the US, tax-exempt use property, or tax-exempt financed property. Besides, all businesses are qualified for bonus depreciation. Bonus depreciation has no thresholds based on net income or purchase limits; it is not limited to smaller businesses.
Why this topic was chosen. Bonus…...

Similar Documents

Free Essay

Homework Corporate Taxation

...Homework #3 Problem #1 a. Feb 1, 2010 New Machine Bonus 50%: $25,000 MACRS Basis 25,000 April 1, 2010 new machine bonus 50%: $35,000 MACRS basis 35,000 October 1, 2010 used machine, no bonus MACRS basis 30,000 December 1, 2010 used machine, no bonus MACRS basis 40,000 First nine months of the year: 25,000 +35,000 = 60,000 less than 60% of the total: 130,000 – NO Half year convention For mid-quarter convention we verify 30,000+40,000=70,000 more than 40% in the last quarter Depreciation for 2010: (all 7 year table) Feb 1, New machine: 25% x 25,000 = 6,250 plus bonus: 25,000. Total $31,250 April 1, 2010 New machine: 17.85% of 35,000 = 6,247.5 plus bonus 35,000 Total $41,247.5 October 1, 2010 used machine 3.57% of 30,000= 1,071 December 1, 2010 used machine 3.57% of 40,000 = 1,428 Total 2010 Depreciation: $74,996.5 b. This changes the convention to half year convention: more than 60% in the first 9 months. New Calculations: Feb 1, 2010 machine 14.29% of 25,000 = 3,572.5 plus bonus 25,000. Total 28,572.5 April 1, 2010 machine 14.29 % of 35,000 = 5,001.5 plus bonus 35,000 Total 40,001.5 Sep 1, 2010 machine 14.29% of 30,000 = 4,287 Dec 1, 2010 machine 14.29% of 40,000 = 5,716 Total 2010 Depreciation: $78,577 Problem #2 a. Computer: MACRS Basis 16,000, 5 year table, half year, year two: 32% of 16,000 = 5,120 Machine: MACRS Basis 60,000, mid quarter convention, 7 year table, year three: 19.68% of 60,000= 11,808 Furniture: MACRS basis: 29,400 (70% of...

Words: 785 - Pages: 4

Premium Essay

Taxationforindividuals Ch 9

...for tax purposes.    True    False |   2. | Tax cost recovery methods include depreciation, amortization, and depletion.    True    False |   3. | If a business mistakenly claims too little depreciation, the business must only reduce the asset's basis by the depreciation actually taken rather than the amount of the allowable depreciation.    True    False |   4. | An asset's capitalized cost basis includes only the actual purchase price; whereas the other expenses associated with the asset are immediately expensed.    True    False |   5. | The basis for a personal use asset converted to business use is the lesser of the asset's cost basis or fair market value on the date of the transfer or conversion.    True    False |   6. | Depreciation is currently computed under the Modified Accelerated Cost Recovery System (MACRS).    True    False |   7. | The 200 percent or double declining balance method is allowable for five and seven year property.    True    False |   8. | Taxpayers may use historical data to determine the recovery period for tax depreciation.    True    False |   9. | Taxpayers use the half-year convention for all assets.    True    False |   10. | If a taxpayer places only one asset (a building) in service during the fourth quarter of the year, the mid-quarter convention must be used.    True    False |   11. | The MACRS depreciation tables automatically switch to the straight-line method when it exceeds the......

Words: 18014 - Pages: 73

Premium Essay


...chapter 2 Property Acquisition and Cost Recovery Learning Objectives Upon completing this chapter, you should be able to: LO 2-1 Explain the concept of basis and adjusted basis and describe the cost recovery methods used under the tax law to recover the cost of personal property, real property, intangible assets, and natural resources. Determine the applicable cost recovery (depreciation) life, method, and convention for tangible personal and real property and calculate the deduction allowable under basic MACRS. Explain the additional special cost recovery rules (§179, bonus, listed property) and calculate the deduction allowable under these rules. Explain the rationale behind amortization, describe the four categories of amortizable intangible assets, and calculate amortization expense. Explain cost recovery of natural resources and the allowable depletion methods. LO 2-2 LO 2-3 LO 2-4 LO 2-5 Storyline Summary Taxpayer: Teton Mountaineering Technology, LLC (Teton)—a calendar-year single-member LLC (treated as a sole proprietorship for tax purposes) Cody, Wyoming Steve Dallimore Teton must acquire property to start manufacturing operations and wants to understand the tax consequences of property acquisitions. Location: President/ Founder: Current situation: cave waiting for the tempest to pass, Steve had an epiphany—a design for a better ice-climbing tool. Since that moment, Steve has been quietly consumed with making his dream—designing......

Words: 29125 - Pages: 117

Premium Essay

Tax Accounting Chapter 10

...any §179 expense of $732,500. Required a. Compute 2012 depreciation deductions including §179 expense (ignoring bonus depreciation). b. Compute 2013 depreciation deductions including §179 expense (ignoring bonus depreciation). c. Compute 2013 depreciation deductions including §179 expense, but now assume that Steve would like to take bonus depreciation. d. Ignoring part c, now assume that during 2013, Steve decides to buy a competitor’s assets for a purchase price of $350,000. Compute maximum 2013 cost recovery including §179 expense (ignoring bonus depreciation). Steve purchased the following assets for the lump-sum purchase price. Asset Cost Date Placed in Service Inventory $20,000 09/15/2013 Office furniture 30,000 09/15/2013 Machinery 50,000 09/15/2013 Patent 98,000 09/15/2013 Goodwill 2,000 09/15/2013 Building 130,000 09/15/2013 Land 20,000 09/15/2013 e. Complete Part I of Form 4562 for part b. a) The 2012 depreciation deduction is $513,003. Description | Cost | Sec. 179 Expense | MACRS Basis | Current MACRS Expense | Total Expense | Office Furniture | 10,000 | 10,000 | - | - | 10,000 | Machinery | 560,000 | 490,000 | 70,000 | 10,003 | 500,003 | Used Delivery Truck | 15,000 |   | 15,000 | 3,000 | 3,000 |   |   |   |   |   |   | Totals | 585,000 | 500,000 | 85,000 | 13,0032 | 513,003 | b) The 2013 depreciation deduction is $529,387. Description | Cost | Sec. 179......

Words: 749 - Pages: 3

Premium Essay

Caribbean Brewers

...performance measurement system has changed immensely. Presently, the production personnel can earn a bonus if production costs do not exceed 43% of sales. In the past, the bonus was based on a combination of average total production costs and quality control, which has since been eliminated. This change in performance measurement has also affected JJ’s benefits, eliminating his annual dividend, and decreasing his ownership in the company from 25% to 8%. Cost Control JJ, the production manager, is extremely displeased with the new performance measurement system for a variety of reasons. Regarding costs, the production personnel’s bonus is based on many factors which are out of their control. The production facilities were expanded in 2008 in order to double production capacity. Since the expansion, the plant began producing Gera beer as well. As a deposit cannot be collected on exported Gera beer bottles, all bottling costs are expensed and charged solely to Caribbean Brewers Inc., resulting in a cost increase of over $6.1 million in 2009. Depreciation is also included in determining total production costs as a percentage of sales for bonus purposes. As a result of the plant expansion, depreciation has increased, resulting in greater overhead and therefore more overall production costs. Management was behind the decision to double the plant size and thereby increase depreciation costs. These new costs cannot be controlled by production personnel. There are also quite a......

Words: 808 - Pages: 4

Premium Essay

Financial Accounting

...significantly driven by the higher cost of raw materials and staff costs. To save costs, the company switched to hiring a part-time accountant, Andrew, in November 2010. Andrew was happy in the beginning as he enjoyed working part-time and spending more time with his family. However, after some weeks with the company, he was having sleepless nights. He thus requested for a meeting with Grace, the CEO of the company. Below is an extract of the conversation between Andrew and Grace on 30 December 2010: Andrew: “I understand that the company has a tradition of paying its employees a 13th month bonus. The bonus will be paid in January the following year.” Grace: “Yes, that’s right.” Andrew: “We should record the bonus. The bonus amount for all eligible employees is $30,000.” Grace: “No, we should not. The employment contracts with the employees do not cover bonus. Hence, there was no need to provide for the bonus.” SIM UNIVERSITY Assignment 2 – Page 2 of 4 ACC201e Assignment 2 Andrew: “In October 2010, the company advertised in major newspapers and magazines. The entire amount of $25,000 was recorded as prepaid advertising.” Grace: “That’s correct. We are seeing some signs of better business due to advertising. We expect the benefits of advertising to continue and sustain through next year.” Andrew: “On 1 April 2010, the company bought and paid $10,000 for a 2-year fire insurance. Thus was recorded as prepaid insurance and there were no further entries.” Grace: “There......

Words: 909 - Pages: 4

Premium Essay

Zephrys Case

...After reviewing the Kansas City Zephrys Baseball Club case and reading arguments from both the players and the owners I can see that both parties want the same thing and that is to have more of the cash flow on their side. The players and owners appear to agree on most of the financial statements. There are five things they don’t agree on: roster depreciation, deferred compensation, amortization of signing bonuses, non-roster salaries, and stadium operations. 1. Roster Depreciation: The owners use a 50% rate of depreciation as roster depreciation. The 50% rate is the maximum allowed by the IRS and the owners state that it is common practice in the baseball industry. This is allowing the owners to conceal as much profit as they can without any actual cash loss. The player’s argument is that as the player’s age their skills improve which is actually appreciation not depreciation. I agree with the players because a player’s skill level does typically increase with experience instead of decrease. Due to the level of the player actually appreciating instead of depreciating this should not be included in the financial statements. 2. Deferred Compensation: The majority of players only receive 80% of the amount that their signed contract states because 20% of a player’s salary is deferred for 10 years. Not all companies put this money aside since it is an expense that will not occur for 10 years. I agree with the players on this. Since this 20% is used as a pension......

Words: 542 - Pages: 3

Premium Essay

Partnership Operations

...Partnership Operations 21 CHAPTER 2 MULTIPLE CHOICE ANSWERS AND SOLUTIONS 2-1: d Jordan Pippen Total Annual salary P120,000 P80,000 P200,000 Balance, equally ( 10,000) ( 10,000) ( 20,000) Total P110,000 P 70,000 P180,000 2-2: a JJ KK LL Total Bonus (.20 X P90,000) P18,000 – – P 18,000 Interest JJ (.15 X P100,000) P15,000 – –) KK (.15 X P200,000) P 30,000 –) LL (.15 X P300,000) P45,000) 90,000 Balance, equally ( 6,000) ( 6,000) ( 6,000) ( 18,000) Total profit share P27,000 P 24,000 P39,000 P 90,000 2-3: a 2-4: a Allan Michael Total Interest Allan - .10 X (P40,000 + 60,000 /2) P 5,000 ) Michael - .10 X (P60,000 + 70,000/2) P 6,500) P 11,500 Balance, equally _14,000 _14,000 __28,000 Total P 19,000 P20,500 P 28,000 2-5: a Fred Greg Henry Total Interest (.10 of average capital) P12,000 P 6,000 P 4,000 P 22,000 Salaries 30,000 20,000 50,000 Balance, equally ( 35,000) ( 35,000) ( 35,000) (105,000) Total P 7,000 ( P29,000) (P11,000) (P 33,000) 2-6: b Average Capital Capital Months Peso Date Balance Unchanged Months January 1 140,000 6 P 840,000 July 1 180,000 1 180,000 August 1 165,000 ¬¬¬5 __825,000 12 P1,845,000 Average capital - P1,845,000/12 = P153,750 Interest (P153,750 X 10%) = P 15,375 22 ...

Words: 6768 - Pages: 28

Premium Essay

Take Home Project

...called Entrepreneurship 101: Starting a Business in Fairfax County that provides overviews of Business start ups and basics, DBA workforce service and training programs, SBA financing and resources, SDB, MDE, and 8 (a) certification. 3. STATE AND LOCAL INCOME TAXES SOUTH CAROLINA a. SC doesn’t recognize bonus depreciation. Taxpayers that claim bonus depreciation must add back the difference between bonus depreciation and depreciation that would have been allowed. b. Federal net operating losses are added to federal net taxable income c. If a corporation is claiming a reduction in salaries and wages due to the federal jobs credit, the amount is subtracted for SC purposes d. The deduction for wages and salaries paid must be reduced by the amount of a credit claimed for wages paid to employees terminated due to bas closure. This amount Is added to federal taxable income e. A couple of SC credits include: New Jobs Credit and Alternative Motor Vehicle Credit NEW YORK CITY a. NYC doesn’t recognize bonus depreciation. Taxpayers that claim bonus depreciation must add back the difference between bonus depreciation and depreciation that would have been allowed. b. Interest on municipal bonds from other states is an addition to federal taxable income a. Moving expenses are an addition to federal taxable income b. Student loan interest is an addition to federal taxable income c. State lottery winnings is a subtraction to......

Words: 2055 - Pages: 9

Premium Essay

Kansas City Zephyrs Baseball Club

...Kansas City Zephyrs Baseball Club Bill Ahern had to resolve the profitability issues between the owners of the major baseball leagues and the players. The main differences were the following: - Roster depreciation: Per IRS code, 50% of the purchase price ($6M) was designated as the value of the player roaster at that time, and the owners decided to spread it over six years (they did it because they could). Players argue that no depreciation should take place because, they believe that with the experience they acquire with years of playing and practice they gain more skills which makes them more valuable. Who is right? The players, no roaster depreciation Why? Because good players, coaches and trades actually increase the value of a team and injuries and retirement decrease the value - Overstated player salary expense: Owners expense the signing bonuses in the year they are paid and players argue that it should be spread throughout the years they play. Players spread this payment based on the assumption that they won’t get hurt and continue to play in their teams. However, the bonus is paid in full at the beginning. Who is right? The owners Why? Because the bonus is disbursed up front that’s why it should be expensed - Salary expense deferred: Some teams do set aside money for the salary deferment, in that case is appropriate to recognize the entire salary amount as a current expense. However, Zephyrs don’t set money aside, - Who is right? The players Why...

Words: 401 - Pages: 2

Premium Essay

Income Taxes and Financial Accounting

...Income taxes and financial accounting Abstract: The paper discusses the basic elements of tax allocation, analyzes extensively the principal timing difference: accelerated depreciation for tax purposes and straight-line depreciation for published financial reporting, looks into the major aspects of SFAS No. 109, and explores the difference of GAAP and IFRS on tax allocation. 1. Income tax allocation In order to comply with IRS tax code and make sense of the tax expands for income statement analysis, income tax allocation involves with high level of complexity for financial statement. This paper tries to explain how income tax allocation works by comparing of accelerated tax depreciation versus straight-line for financial reporting. The paper will focus on the change from SFAS No. 109 from SFAS No. 96. The discounting of deferred tax liabilities is also mentioned and analyzed. Because of the timing difference between time of the tax return and the time of the publication of the financial statement, different taxable results incur from the IRS tax basis and the financial reporting basis. Although the different exist, the difference will be smooth out in the cumulated ways for years and years. Income tax expense and income tax liability are always differ from each other in figures, but with the difference deferred in next year. 1.1 History In 1967, APB Opinion No.11 replaced ARBs 43 and 44 under the requirement of comprehensive allocation. If there is any......

Words: 3592 - Pages: 15

Premium Essay

Kansas City Zephyrs

...Katelynn Tax 1/18/16 Kansas City Zephyrs Baseball Club, Inc. 2006 There are five main points of difference between the accounting methods of players and owners. The five main differences appear in roster depreciation, current roster salary, amortization of signing bonuses, non-roster guaranteed contract expense, and stadium operations. The following paragraphs analysis the main points above. Owners take 50% of purchase price of $228 million and depreciate it for 6 years this amounts to $19,000 a year in depreciation. While players on the other hand believe there should be no depreciation until the team is sold. They also believe that depreciation isn’t valid because players tend to improve their skills through time and therefore would increase roster value not decrease it. In my opinion I would have to side with the owners on this because generally many firms use straight line depreciation and its fairly common for depreciation to be done that way. Depreciation expenses are typically calculated at (total acquisition cost – salvage value)/useful life. It is possible that there could be no useful life or salvage value if other owners do not buy it and therefore depreciation should still remain as the owners have calculated. I also would like to note that not all players get better over time because of age, or recurring injuries so I believe that the teams do not increase roster value. In fact, I believe in the long run teams stay fairly the same with regards to performance...

Words: 786 - Pages: 4

Premium Essay

Consolidation the acquisition date. The accumulated depreciation of $60 000 [being $240 000 - $180 000] is eliminated and the plant reduced from $240 000 to fair value of $185 000, an amount of $55 000. The $5 000 difference between carrying amount and fair value is split between deferred tax liability (30%) and business combination valuation reserve (70%). This entry is used in every period while the asset continues to be held by the subsidiary. The second valuation entry reflects the fact that the plant is being depreciated on a straight-line basis over a 5-year period. As the acquisition date was 1 July 2007 and the reporting date is 30 June 2009, there is a 2-year time period between these two dates. The business combination valuation entry for equipment has to include adjustments for current period depreciation and 1-year prior period depreciation. The adjustment to the plant was $5 000. Using a 20% depreciation rate, depreciation per annum is $1 000. The current period depreciation is adjusted via depreciation expense, whereas prior period depreciation affects retained earnings. Total depreciation is adjusted against accumulated depreciation. As the asset is used up and benefits flow to the entity, the deferred tax liability is reversed. This can be observed via the change in the carrying amount of the asset with the recognition of accumulated depreciation. In the worksheet entry discussed in the prior paragraph, accumulated depreciation was increased by $2 000. This......

Words: 4719 - Pages: 19

Premium Essay

Carribian Brewers

...changed since Gera International purchased a 75 percent share of the brewery. Currently, production personnel receive a bonus if production costs are less than or equal to 43 percent of sales. In the past, the bonus was based on a combination of average total production costs and quality control, which is no longer the case. This change in performance measurement has also affected the production manager’s benefits, eliminating his annual dividend, and decreasing his ownership in the company from 25 percent to 8 percent. Cost Control JJ, the production manager, is incredibly unhappy with the current performance measurement system for many reasons. In terms of costs, the production personnel’s bonus is based on many factors which they cannot control. The CBI plant expanded in 2008 in order to increase production capacity. Since the expansion, the plant began producing Gera beer as well. As a deposit cannot be collected on exported Gera beer bottles, all bottling costs are expensed and charged solely to CBI, resulting in a cost increase of over $6.1 million in 2009. Depreciation is also included in determining total production costs as a percentage of sales for bonus purposes. Due to the plant expansion, depreciation has increased, resulting in greater overhead and therefore greater production costs. The decision to increase plant size and depreciation stems from decisions made by management. It cannot be controlled by production personnel. There are also......

Words: 2544 - Pages: 11

Premium Essay

Partnership Business

...Partnership – Basic Considerations and Formation 1 CHAPTER 1 MULTIPLE CHOICE ANSWERS AND SOLUTIONS 1-1: a Jose's capital should be credited for the market value of the computer contributed by him. 1-2: b (40,000 + 80,000) ÷ 2/3 = 180,000 x 1/3 = 60,000. 1-2: c 1-3: a Cash P100,000 Land 300,000 Mortgage payable (  50,000) Net assets (Julio, capital) P350,000 1-4: b Total Capital (P300,000/60%) P500,000 Perla's interest ______40% Perla's capital P200,000 Less: Non-cash asset contributed at market value Land P 70,000 Building 90,000 Mortgage Payable (  40,000) _120,000 Cash contribution P 80,000 1-5: d - Zero, because under the bonus method, a transfer of capital is only required. 1-6: b Reyes Santos Cash P200,000 P300,000 Inventory – 150,000 Building – 400,000 Equipment 150,000 Mortgage payable ________ ( 100,000) Net asset (capital) P350,000 P750,000 1-7: c AA BB CC Cash P 50,000 Property at Market Value P 80,000 Mortgage payable (  35,000) Equipment at Market Value _______ _______ P55,000 Capital P 50,000 P 45,000 P55,000 2 Chapter 1 1-8: a PP RR SS Cash P 50,000 P 80,000 P 25,000 Computer at Market Value __25,000 _______ __60,000 Capital P 75,000 P 80,000 P 85,000 1-9: c Maria Nora Cash P 30,000 Merchandise......

Words: 3342 - Pages: 14