 Hello and welcome to this session in which we will discuss the additional first year depreciation also known as bonus depreciation. In the prior session we looked at section 179 and we stated that section 179 is an election that allows businesses to deduct for example for the year 2022 up to 1,080,000. The bonus depreciation it's also another tool that congress utilizes to encourage companies to buy assets and expense them and as you expense them you lower your taxable income. So it's one of the tools for the congress to boost the economy. What does it mean to boost the economy? It means to encourage businesses to buy assets. When you encourage the business to buy assets they buy from manufacturers. Manufacturers will have to hire people. They'll have to pay those people. Those people will spend money in communities. When they spend money in the communities other businesses will benefit. They'll have to hire more people and this is how you boost the economy and bonus depreciation is another tool that helps you do so. In 2022 taxpayers can deduct 100% of the cost recovery for any eligible qualified property put in service. Now what is qualified property? So 100%. Well it encompasses the majority of the appreciable asset executing building that have a recovery period of 20 years or less. Simply put anything on the makers it can get depreciated. Anything subject to makers 20 years or less enough building. Now bonus depreciation applies to both new and pre-owned or used property. So that's the feature of it. It's used and owned as well. So let's look at the details a little bit more. Before we proceed any further I have a public announcement about my company farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true false questions as well as exercises. Go ahead start your free trial today. So section 179 is an election and guess what first-year bonus depreciation is also an election. Again what is an election? An election means you opt to take this depreciation or you opt not to. Opt means you choose to do it or you don't want to do it. Simply put if you choose to do it if you choose to use the bonus depreciation you can basically deduct everything. However there are steps in which depreciation to take first. The first election you have to take is section 179 election. So that's the first one. So when you are depreciating your asset you'd say the first thing I'm going to do I'm going to see what section 179 I'm going to take. Well if you used up all of your section 179 and you still have asset you move into bonus depreciation. Again that's if you choose to depreciate more. Now you might be saying why wouldn't I choose to depreciate more? Well section 179 could have a limitation. Okay you remember section 179 there's a limited amount every year and you are subject to your business income. Bonus depreciation you want to take it now or you may want to use this depreciation amount in future years. Then the third option after you used up section 179 or opt out after you used up bonus depreciation or opt out. Anything left if you want to use makers you can use makers. For most small businesses when they use section 179 bonus depreciation they basically wipe out everything but this is the order. Remember these options give you the deductions now. So for tax planning as a business you want to ask yourself do I want to take them now do I need the deduction this year or I may need the deduction in future years where my tax rate could be higher and where I have more income I need to reduce this income. So this is part of planning properly tax planning. Let's take a look at an example that illustrate this additional first year simple concept but very powerful and very beneficial in the real world. On February 1st Adam purchases a machine that falls under the five-year class asset depreciation costing 1,560,000. Well one thing is it's a maker five-year class it means it's subject to the bonus depreciation. So here's what Adam decided. Adam decided to use his section 179 first assuming no limitation to expense the whole thing as much as possible and anything that's left is subject to the bonus depreciation. So what did we do? Well first thing is we have assets of 1,560,000. So we're going to use the bonus depreciation to wipe out as much as possible in section 179. Again we're assuming here there are no limitation for Adam just for the sake of simplicity because we did use we did illustrate the limitation concept in section 179. What's left is 480,000 to depreciate. What can I do? Well I can take this as bonus depreciation or I can opt out and use this 480 and subject this to makers. It's up to me. Well guess what it seems Adam needs the amount now therefore we're going to depreciate everything. Notice we didn't even get to makers because by the time we get to makers we depreciated all the assets and of course I don't have to mention that the basis of the asset of the machinery is down to zero because if you take the depreciation your basis go down to zero. What should you do now? Go to far hat lectures, look at additional lectures about cost recovery, multiple choice through false that's going to help you and the notes that's going to help you do better whether you are taking an income tax course, the CPA exam, enrolled agent exam. Good luck, study hard and of course stay safe.