In the world of business, there are many expenses that can be deducted from taxes, including the cost of assets such as equipment and software. However, not all assets are created equal when it comes to tax deductions.
Bonus depreciation is a tax incentive that allows businesses to deduct a certain percentage of the cost of qualifying assets in the year they are placed in service. This begs the question, does computer software qualify for bonus depreciation? Let’s explore.
What is Bonus Depreciation?
Bonus depreciation is a tax incentive that allows businesses to deduct a certain percentage of the cost of qualifying assets in the year they are placed in service. In 2020, businesses can deduct 100% of the cost of qualified property under bonus depreciation rules. This means that if you buy $50,000 worth of qualifying property, you can deduct $50,000 from your taxable income in the year you purchased it.
What Assets Qualify for Bonus Depreciation?
To qualify for bonus depreciation, an asset must meet certain criteria. First and foremost, it must be tangible property with a useful life of 20 years or less. Additionally, it must be new or used property acquired by purchase after September 27th, 2017 and placed in service before January 1st, 2023.
Does Computer Software Qualify for Bonus Depreciation?
Computer software is an interesting case when it comes to bonus depreciation because it can fall into two categories: off-the-shelf software and custom software.
Off-the-shelf software refers to pre-packaged software that is readily available for purchase by the general public. Examples include Microsoft Office or Adobe Photoshop. The good news is that off-the-shelf software does qualify for bonus depreciation as long as it meets the criteria outlined above.
Custom software, on the other hand, is software that is specifically designed and developed for a particular business. This type of software does not qualify for bonus depreciation as it is considered to be an intangible asset.
How to Claim Bonus Depreciation for Computer Software
To claim bonus depreciation for computer software, you must include it on Form 4562, Depreciation and Amortization. You will need to list the software as a separate asset and provide a description of the software and the date it was placed in service. Additionally, you will need to specify the percentage of the cost that you are claiming as bonus depreciation.
In conclusion, off-the-shelf computer software does qualify for bonus depreciation as long as it meets certain criteria outlined by the IRS. Custom software, however, does not qualify for this tax incentive and is considered an intangible asset. As always, it’s best to consult with a tax professional to ensure that you are taking advantage of all available tax deductions.