Clarification of the $2,500 Rule

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In a previous article (“Have You Bought Something for Less Than $2,500 This Year?”) I described a new IRS rule that allows family child care providers to deduct in one year items that cost less than $2,500.

This rule significantly benefits providers as it eliminates the need to depreciate many items used in your business.

I indicated that providers could use this rule for all items they purchase except home improvements, land improvements and a home.

After doing further research, I discovered that I made a mistake in excluding home improvements and land improvements from this rule.

So, providers who purchase a fence, patio, driveway, or do remodeling projects in their home (new floor, carpeting, windows, doors, etc.) that cost less than $2,500 can now deduct such expenses in one year and avoid having to depreciate them.

The IRS says, “The final regulations apply to anyone who pays or incurs amounts to acquire, produce, or improve tangible real or personal property.” Real property includes land and home improvements.

This is good news and I apologize for not getting it right the first time.

State Tax Issue

As I said in my original article, this new rule doesn’t technically apply until the 2016 tax year, but the IRS has said it will not challenge this if a taxpayer uses this rule in 2015 and is audited. But, I have recently learned that for 2015 some states (including California) are not accepting the $2,500 rule for state tax purposes. So, although it will benefit you to use this rule on your federal 2015 tax return, be aware that you may have to add back this deduction to your state income when calculating your state income taxes. Check with your tax preparer about your state rules.

Other Clarification

I’ve updated my other article, “Making Sense of New Depreciation Rules for 2015” to reflect this new clarification.

Providers should also be aware that if their land improvement or home improvement costs more than $2,500 it may be possible to deduct it in one year if you qualify for the Safe Harbor for Small Taxpayers rule.

Thanks for Bill Porter.

Tom Copeland – www.tomcopelandblog.com

Image credit: https://www.flickr.com/photos/littlebiglens/


Categories: Depreciation and Home, Record Keeping & Taxes

6 replies

  1. Hello Mr Copeland, I wanted to ask you if a notable increase in the daycare equipment category sends a red flag to the IRS for a possible audit. My problem is that I moved my daycare from the basement to the middle floor of my home and had to do an extensive overhaul of furniture, flooring etc in order to be in compliance for the state of Virginia. If this would send a red flag should I try to look thru the receipts to see if items could fit in other categories or can I attach a comment as to why there is such an increase.
    Thank you!
    Ann Marie Ries

    • Do not hesitate to claim these higher expenses. They will not increase your chances of being audited. There is no need to attach a statement to your tax return explaining these additional expenses.

  2. Mr. Copeland,
    I am a licensed Home Daycare provider in the state of Michigan. In 2015, our hot water heater needed to be replaced when the old one died. Can we claim the cost of the water heater in one year or do we have to depreciate the water heater? Thank you for your help, Judy Gothro

  3. Hi, I am using the $2500 Safe Harbor on new flooring, ceiling and cabinets for my exclusive use room. All of the expenses add up to $2712, but no one thing is more than $ 2500. I understand that we can claim all of these or is these subject to only $2500 total? Also on the note I copied from your book, do I need to say what the expense is for specifically? Thanks you so much for all your help. This is the 1srt time I’m doing my new pre-school business taxes. I’ve done our home taxes for years, but these are a bit confusing in some areas.

    • You can use the $2,500 rule since each item costs less than $2,500. There is no limit as to how many individual items under $2,500 you can have. You don’t need to specify what each item is on your tax return.

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