We get frequent questions from readers and customers about how to allocate bonus depreciation. We certainly have our own ideas about what is best, but we also acknowledge that there is certainly more than one way to do this.
Bonus depreciation is calculated as an annual number, but how should the total dollar amount be applied in the first year? Normal depreciation is evenly spread over all the periods in the first year. So if you have a $1,000 asset with a straight line method over 5 years, you would calculate $200 in year one. If there are 4 periods in the first year then each period would get $50.
The same principle could be applied to bonus depreciation and a 50% bonus of the same $1,000 asset would yield a $500 amount in year one. Again with the same 4 periods, each period would get $125. This would reduce the basis amount from $1,000 to $500 and each period would now get $25 regular depreciation plus bonus. This logically makes sense, but can sometimes cause confusion when running a report for less than 12 periods in year one and trying to display the bonus amount.
An alternate approach is to take the entire bonus amount in the first period. So instead of seeing $150 ($25 + $125) in each period, you would get $525 ($25 + $500) in the first period and $25 in each of the remaining three periods of the first year. Both techniques yield $600 ($100 + $500) of depreciation in the first year so the annual number is consistent (see spreadsheet below). The question is how to allocate bonus depreciation. What do you think, is it better to spread the bonus amount over all periods in the first year or put the entire amount in the first period? We invite you to respond in the space below.
More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.