As I said then, I don’t recommend using any tax software unless you know what you can deduct, how to calculate the business portion of your deductions and where they go on the tax forms.
Here is the additional major problem area to be aware of when using TurboTax:
Calculating your depreciation deductions is always a complicated task. Here are some tips to making this process easier if you use TurboTax:
As a general rule, items you purchased that cost less than $2,500 should be not be depreciated. See my article “Have You Bought Something for Less than $2,500?”
If you bought an item costing more than $2,500 you should depreciate it. Although there are some exceptions. If you depreciate an item it means you will be claiming the deduction over a number of years, not all in one year.
When you start entering information about an item you will depreciate into TurboTax you will see this screen, “Describe This Asset.”
Unfortunately, the screen will not tell you over how many years you can depreciate these items and you may be confused about which one to choose. I’ve listed the options below and added the number of years they are to be depreciated over.
* “Computer, Video, Photo and Telephone Equipment” – 5 year depreciation
* “Tools, Machinery, Equipment, Furniture” – 7 year depreciation
* “Real Estate” – This is where you enter home improvements and your home – 39 year depreciation
* “Intangibles, Other Property” – This is where you put land improvements (fence, patio, driveway) – 15 year depreciation
If you select the “Tools, Machinery, Equipment, Furniture” option, the next screen gives you the following options:
* “Office, furniture, fixtures and appliances”
* “General purpose tools, machinery and equipment”
* “Construction machinery and tolls”
* “Trailers and trailer-mounted containers”
Choose “Office furniture, fixtures and appliances.” These items will be depreciated over 7 years.
When you select the “Real Estate” option, the next screen will give you the following options:
* “Nonresidential real estate” – Unfortunately, TurboTax includes replacing flooring and windows under this section. Under a recent IRS regulation (1.263) it’s clear that the replacement of some flooring or windows in your home can be considered a repair. See my article “When Is a Home Improvement Now a Repair?” for further clarification on this point. I would list the replacement of a few windows or a floor from a room or two under “Miscellaneous Expenses” on Schedule C.
* “Qualified retail improvements”
* “Qualified restaurant property”
* “Qualified leasehold improvements”
Choose “Nonresidential real estate” for both home improvements and your home.
For all of the above categories of expenses, after describing what you bought and how much it cost, the next screen will say “Tell Us About this Asset.” It will give you the following three choices:
* “I traded in an old asset to acquire this one”
* “I purchased this asset new”
* “The item was sold, retired stolen, destroyed…”
What do you do if you purchased a used item? There is no place to choose this. Therefore, enter every item you purchased as “new.”
On the same screen it asks for the percentage of time you used the items for your business in 2015. In general, you will use your Time-Space%, but unless you wrote it down from an earlier screen, you will have to go back in TurboTax to find it. Go to “Home Office Summary.”
Note for furniture and appliances: Let’s say you previously began depreciating some appliances before 2015. When you enter this expense, enter a Time-Space % or actual business use percentage. If it’s less than 50% a screen entitled “Business Use Percentage” will discuss recapture of depreciation. You do not have to worry about recapture unless your previously used the Section 179 rule on an item you are trying to claim additional depreciation. On the screen “Business Use 50% or Less” it asks, “Did your business use for this asset fall to 50% or less for the first time in 2015?” Answer No, because you probably used it less than 50% of the time before 2015. The next screen will ask if you used the additional 50% depreciation allowance deduction in the first year you bought the item. If you originally bought the item used, you can not use this rule. Check “half-year convention” on the next screen.
If you have been depreciating items from earlier years, you will need to know the year you first started depreciating each item because this will affect your current year deduction.
(See my previous article “Get a Copy of Your Depreciation Schedule” to understand the importance of having your depreciation schedule from earlier tax years.)
Under the Tools, Machinery, Equipment, Furniture section it will ask if you want to take the “Special Depreciation Allowance” (called the 50% bonus depreciation). If you bought the item new in 2015 you will want to elect this rule.
For items you owned before you went into business and are now depreciating, enter the value of the items at the time you first started using them in your business, as if you purchased them new at that time. Do not use the special deduction (50% bonus rule) for such used items, because only new items can use this rule.
Home Depreciation: You are entitled to add to the purchase price of your home and home improvements you made before you started using it for your business. Turbo Tax doesn’t ask you to include this when entering the purchase price of your home, so you must do so on your own.
When I use TurboTax for my taxes I find it easier to fill out the tax forms by hand first. Then I go to TurboTax and enter my numbers. When I print out the tax forms I can compare them with the ones I completed by hand to see if TurboTax made any mistakes.
If you don’t understand what I’ve been describing in these two articles about TurboTax, don’t use it! I’ve talked with providers who did use this software, got audited, and found out that they had incorrectly entered information into TurboTax.
If you or TurboTax make a mistake, you are responsible for paying any taxes you owe.
See my previous article “A Guide to TurboTax 2015 – Part I.”
Tom Copeland – www.tomcopelandblog.com
Image credit: TurboTax
If you are doing your own taxes, you may also want to use my Family Child Care Tax Workbook and Organizer.