Congress has reinstated the on-again, off-again 50% bonus depreciation rule for the next five years, starting in 2015.
Before Congress acted, this rule had expired as of the end of 2014.
This rule now allows family child care providers to depreciate certain items faster, allowing them to claim higher business deductions on their 2015 tax return.
To use the 50% bonus depreciation rule for 2015 you must have purchased new one of the following items: computers and other office equipment, fence, driveway, patio, furniture, appliances, car/truck, or playground equipment. It does not apply to the purchase of a home.
Computers and vehicles must be used at least 50% of the time in your business to be eligible to use this rule.
The rule has been expanded to include eligible items called “qualified improvement property.”
Qualified improvement property is defined as “any improvement to an interior portion of a building which is nonresidential real property” made after the home was first used in your business. It doesn’t include adding an addition to your home or improving the “internal structural framework” of your home.
What does this mean? The IRS considers the business portion of your home as “nonresidential real property.” So, it appears that the 50% bonus depreciation rule now applies to home improvements such as kitchen or bathroom remodeling, new windows, doors, roof, and wood/tile floors. However, I have not seen this language clarified anywhere, so I can’t be 100% certain that these home improvements would be eligible for this rule. I strongly recommend talking with your tax preparer and ask for guidance in your situation. When, and if, I get further clarification, I will post another article.
How the Rule Works
The 50% bonus depreciation rule allows you to deduct 50% of the business portion of eligible items in 2015 and depreciate the remaining 50% using the normal rules of depreciation.
Here’s an example of how the 50% rule works. Let’s say you bought outdoor playground equipment in 2015 for $3,000 and your Time-Space Percentage was 40%. Your business portion would be $1,200. Normally you would depreciate the $1,200 over 15 years (as a land improvement). But the 50% depreciation rule allows you to deduct 50% of the amount, or $600 ($1,200 x 50%). You would depreciate the other $600 over 15 years. Your 2015 deduction on the second $600 would be $30 ($600 x 5% = $30 first year of fifteen year depreciation) for a total deduction of $630.
Without this new rule, you would have to depreciate the full $1,200 over 15 years: $1,200 x 5% = $60 deduction for 2015.
It’s not too late to purchase something in 2015 to take advantage of this rule. However, don’t buy an item just to get a tax deduction. Financially, you are better off not spending money than spending money.
Note: with the new $2,500 rule, it doesn’t make sense to use the 50% bonus depreciation rule on any item costing less than $2,500. See my article: “Have Your Bought Something for Less than $2,500 This Year?”
The 50% bonus depreciation rule has been extended through 2019. However, in 2018 it will be reduced to a 40% bonus and in 2019 to a 30% bonus.
State Income Taxes
Some states do not follow this 50% rule and deny child care providers this deduction on their state tax return. They may require you to report as income on your state tax return some of the amount you deducted using this rule on your federal tax return. Check with your state department of revenue or your tax professional.
2015 Family Child Care Tax Workbook
I explain this 50% bonus depreciation rule as well as the other significant tax changes ($2,500 rule, expanded definition of what is a repair, and when you can deduct home improvements in one year) in my 2015 Family Child Care Tax Workbook and Organizer.
Tom Copeland – www.tomcopelandblog.com