We’ve all heard the term, but what is bonus depreciation and how does it work? Normally, when a business purchases a piece of durable capital equipment such as a printing press, a backhoe or a corporate jet, that business is allowed to deduct the cost of the equipment from its taxable income, thereby reducing its tax burden.
Keep in mind, however, that the business can’t deduct the full amount all at once. Instead, it has to divide up the purchase price and spread it out over several years (the number varies depending on the type of equipment purchased — for bizjets it’s currently set at five years, but the Obama Administration would like to stretch it to seven). The idea is that as the equipment wears out or becomes obsolete, its value to the business decreases, and the business is allowed to recognize this loss in value — the depreciation — as a deductible business expense.
