Depreciation is the process of spreading the deduction of certain items you purchase for your business over a number of years.
It’s a topic that few family child care providers fully understand.
The reason is that depreciation rules are complicated: there’s the regular rules, the 50% bonus rule, the Section 179 rule, the new $2,500 safe harbor rule, and the Safe Harbor for Small Taxpayers. It’s hard to make sense of it all.
If you have your taxes done by a tax professional, he or she will prepare a depreciation schedule (sometimes called a depreciation worksheet) that will show all the details of how your depreciation deductions for the current year were calculated.
These details include:
* The cost of the item
* The date it was first used in your business
* The number of years the item is being depreciated
* The method used (straight line or accelerated), and
* Any special rules that were applied to the item (50% bonus, Section 179, etc.).
Each year, tell you tax professional about any new depreciable items you purchased, so he or she can add them to your depreciation schedule.
The depreciation schedule is not submitted to the IRS with your tax forms. It’s a tool used by your tax professional to document how your depreciation deductions were calculated in the current year and how they will be calculated in subsequent tax years.
Your depreciation schedule is a crucial document for your business. Therefore, you will want a copy for your own tax records for each year you file your business tax forms.
If you don’t have a copy, you won’t be able to tell how the amount of depreciation was determined on IRS Form 4562 Depreciation and Amortization.
Therefore, before paying your tax professional, ask for a copy of your depreciation schedule. Although your tax professional is not required by law to give a copy to you, it’s the professional thing to do.
Some tax professionals may say that this schedule is their property and belongs to them. They may be worried that you want the schedule because you are planning to use a different tax professional in the future. Even if this is true, I don’t believe that it’s a good reason not to give you what you paid for. If you do use a new tax professional in the future, he or she will need this schedule to file an accurate tax return for you.
If your tax professional refuses to give you your depreciation schedule, explain that you need it so you can see how your depreciation deductions were calculated.
You will need your depreciation schedule if:
* You ever use a different tax professional
* If your tax professional retires, dies, or loses his or her copy, or
* If you are ever audited.
Lastly, if you do your own taxes in later years, you will not be able to accurately claim depreciation deductions without this depreciation schedule.
Before hiring a tax professional, ask if they will provide this schedule to you along with your completed tax forms. If not, look elsewhere.
Alison Jacks, an Enrolled Agent in California has written a fine article about depreciation schedules. In it, she posts an excellent sample depreciation schedule that will give you an idea of what you need for your tax files.
Tom Copeland – www.tomcopelandblog.com
Image credit: www.vertex42.com
For information on how to claim depreciation deductions, see my Family Child Care Tax Workbook and Organizer.