BONUS DEPRECIATION
Back to GlossaryDefinition
A tax incentive that allows a business to immediately deduct a large percentage of the purchase price of eligible assets.
Summary
Bonus depreciation is a special tax rule that lets businesses write off (deduct) a much larger portion of certain asset purchases in the first year, rather than spreading the deduction over many years like regular depreciation. Think of it as the government saying 'you can deduct most or all of this equipment cost right now instead of waiting.' This immediate tax break helps businesses reduce their current year's taxable income significantly and improves cash flow by lowering their tax bill sooner.
Usage Context
Understanding bonus depreciation is crucial when studying business taxation, capital budgeting decisions, cash flow management, and tax planning strategies. It's particularly important when analyzing the financial impact of major equipment purchases and comparing investment alternatives.
Common Confusions
- Thinking bonus depreciation and Section 179 are the same thing
- Believing bonus depreciation creates a permanent tax savings rather than just timing differences
- Assuming all business assets qualify for bonus depreciation
- Confusing the immediate deduction with not having to depreciate the asset at all
- Not understanding that bonus depreciation reduces future depreciation deductions
