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.
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