How bonus depreciation works

If your business claimed bonus depreciation on machinery or equipment in a previous year and then trades it in for an upgrade during 2011, you may qualify for bonus depreciation on the remaining depreciable basis in the old assets.

The calculations can seem complicated, but here's an example of how it works.

Let's say you bought a new truck (not subject to the "luxury auto" limitations) in January 2010 for $100,000. And suppose the truck is five-year MACRS property (modified accelerated cost recovery system), you use the mid-year convention and, in 2011, you trade in the old truck on a new and better truck. In addition to the trade-in, you pay $50,000 cash for the new truck.

For 2010, if you claimed 50-percent bonus depreciation, your total depreciation deduction on the old truck would have been $60,000 (50 percent of $100,000, plus a first-year MACRS deduction of .20 times the remaining $50,000).

For 2011, your MACRS deduction on the old truck is $8,000 ($50,000 MACRS cost times .32 second-year MACRS factor times ½-year MACRS convention in the year of disposition).

Your tax basis in the new truck is $82,000 [$50,000 cash, plus remaining tax basis in the truck traded in of $32,000 ($100,000 less $50,000 bonus depreciation, less $10,000 MACRS deduction for 2010, less $8,000 MACRS deduction for 2011)]. The entire $82,000 tax basis qualifies for 100-percent bonus depreciation because the new truck was acquired during 2011.

Now you have a new, better truck and $82,000 in immediate tax deductions. You get a deduction for the $50,000 cash portion of the purchase price of the new truck, and for the basis in the old truck, you have $32,000.

This rule applies to bonus-eligible property acquired through a like-kind exchange (§1031) or an involuntary conversion (§1033).

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