What is bonus depreciation?
It’s a rule that allows family child care providers to depreciate certain items faster, giving them bigger deductions in the first year they purchase items costing more than $2,500.
Congress has passed various versions of this rule over the years. The latest version was passed in December 2015.
To use the bonus depreciation rule you must have purchased new one of the following items: computers and other office equipment, fence, driveway, patio, furniture, appliances, car/truck, playground equipment and home improvements. Essentially anything that costs more than $2,500. It does not apply to the purchase of a home or making an addition to the home.
Computers and vehicles must be used at least 50% of the time in your business to be eligible to use this rule.
Before 2015 this rule did not apply to a home improvement which must be depreciated over 39 years. Now home improvements are eligible for this rule which will greatly accelerate the first year deduction. See my upcoming article: “Good News About Home Improvements.”
How the Rule Works
The rule allows you to accelerate your depreciation deduction for the first year you purchased an item. For 2016 and 2017 you can deduct 50% of the depreciation in the first year. In 2018 it drops to 40% and in 2019 to 30%.
This means that for 2016 and 2017 you can deduct 50% of the business portion of eligible items 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 2016 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 2016 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 2016.
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?”
For an overview of recent changes in depreciation rules, see my article: “Major Changes in Depreciation Rules Benefit Providers!”
State Income Taxes
Some states do not follow this bonus depreciaiton 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.
2016 Family Child Care Tax Workbook
I explain this 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 2016 Family Child Care Tax Workbook and Organizer.
Tom Copeland – www.tomcopelandblog.com