A Guide to TurboTax 2016 – Part II

My previous article discussed some problems that you will encounter if you use TurboTax software to prepare your tax return.

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.

Note: The IRS has a program where you can use the TurboTax software, as well as other tax preparation software, for free if you are income eligible. For more information.

Here is the additional major problem area to be aware of when using TurboTax:

Business Assets and Depreciation

Note: If you bought anything that cost more than $200 you should enter at least some expenses under this section, even if you don’t believe you will have to depreciate them.

If you have an item that you think you might have to depreciate you will enter it under “Business Assets.” The next screen is entitled “Any Large Purchases (Depreciable Assets)?” Check “yes” if you spent more than $200 on any individual item.

The next screen says, “Did you buy any items for any business, rental property and/or farm that cost $2,500 or less in 2016?” It then says, “Don’t include items you’ve already entered as expenses.”

Here’s where it gets tricky. If you check “yes” then TurboTax will take you to the next screen entitled “Let’s see if you can deduct these items as expenses.” You should check “yes” that both of the two conditions on this screen apply to you and “yes” that you want to take this annual election.

The next screen says, “Now, let’s review each item you bought” and asks you to enter individual items costing more or less than $2,500.

The problem is this: You can deduct any item costing less than $200 in one year without depreciating it. To claim expenses that cost between $200 and $2,500 you want to use the $2,500 rule that allows you to deduct items in one year that individually cost less than $2,500. But, if you elect this rule you must attach a statement to your tax return that says you are electing this rule. TurboTax will attach the proper statement for you to elect this rule.

However, when entering expenses under other categories in TurboTax (office expenses, repairs, supplies, and a variety of other miscellaneous expenses such as toys, equipment, etc.) it’s possible that these items cost between $200 and $2,500. If you didn’t have any such items costing more than $2,500 then you could assume that you wouldn’t have anything to enter under the heading “Business Assets” because you wouldn’t be depreciating any items.

But, if you ignored the “Business Assets” section in TurboTax, it’s not clear if the software will attach a statement to your tax return indicating that you were electing the $2,500 rule when you entered items costing less than $2,500 elsewhere in TurboTax! This would create a problem for you and might result in the IRS forcing you to depreciate any items that cost more than $200.

Therefore, you always want to enter at least one expense in the “Business Assets” section of Turbo Tax so the software will attach the proper statement that allows you to deduct all expenses in one year that cost $2,500 or less.

So, on the screen that says, “Now, let’s review each item you bought,” either check the proper box if you only bought items costing less than $2,500 or some that cost less and some that cost more.

If you checked the box “Every item I bought costs $2,500 or less” the software will take you back to the general screen “Your Family child care Business” and you are to enter these expenses under “Other Common Business Expenses.” Enter at least one expense under this category. Don’t enter expenses that you may have previously entered. It’s not clear if you previously entered some expenses under this category and did not go through the “Business Assets” section whether the software would generate the proper $2,500 statement with your tax return. Therefore, I recommend going through the “Business Assets” section and enter at least one expense here. Once you have done this you can move on to other sections of TurboTax.

If you checked the box “Some items I bought cost $2,500 or less and some cost above $2,500” the next screen says, “Did you make improvements to a building you used for this business in 2016?” If you click on “What counts as an improvement?” the software will list a number of examples: installation of new plumbing or wiring, addition of paneling to a room, installation of new cabinets, etc.

This screen is particularly not helpful. It doesn’t take into account a recent rule that expands the definition of a repair vs. a home improvement. In other words, if you replace less than half the plumbing or wiring or cabinets or paneling in your home you can treat this as a repair and deduct it in one year, rather than depreciating it. Also, the list doesn’t include improvements such as new windows, flooring or remodeling. It doesn’t make a distinction between new shingles (a repair) and a new roof (depreciation).

The bottom line is that many expenses now can be treated as a repair and deducted in one year. See my article: “When is a Home Improvement Now a Repair?”

If you answer yes, the next screen says, “Let’s see if you can claim these improvements as expenses.” This screen refers to the Safe Harbor for Small Taxpayers rule I described in my article: “When Can Your Home/Land Improvements Be Deducted in One Year?”

If you meet the tests for this Safe Harbor rule you want to take advantage of it and check “yes.” If you don’t meet the tests, check “no.” If you check no, the next screen says, “Do you have any items for this business that aren’t covered by your elections?” This refers to the $2,500 election and the Safe Harbor for Small Taxpayers rule from the previous screen. Check “yes” if you do have items that need to be depreciated. That is, items that cost more than $2,500 and don’t fit under the two elections I just cited.

Depreciation

If you checked “yes”, the next screen says, “Business Asset Summary.” Here you will list individual items costing more than $2,500 and can’t be deducted in one year. Once you add an asset, the next screen will say, “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 Property” – 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 Property” option, the next screen will give you the following options:

* “Nonresidential real estate” – Put your home and any home improvements here. Unfortunately, TurboTax includes replacing flooring, windows, electrical wiring and plumbing 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 2016. If you used it 100% for your business, check “yes.” If not, check “no.” If you check “no” you will use your Time-Space%, but unless you wrote it down from an earlier screen, you will have to go back to “Home Office Summary” in TurboTax to find it.

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 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 2016 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 any 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.

Conclusion

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. My book, 2016 Family Child Care Tax Workbook and Organizer, contains a chapter where you can enter your income and expenses to make comparing it to TurboTax easy.

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 2016 – 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.



Categories: Record Keeping & Taxes, Tax Professionals, Tax Return

6 replies

  1. We used our basement family room and bathroom for our child care business. In September 2016 the basement flooded and we had to tear out all of the carpet, bathroom, doors, and drywall and insulation 4ft up around the basement. We have now jackhammered a trench in the concrete to put a drain system to a sump pump and then will be putting in new concrete, drywall, doors, carpet, etc to put it back to the way it was. Is the expense of all the materials tax deductible for the business?

    • If you have three or more bathrooms then you can treat the expenses associated with fixing the basement bathroom as a repair and deduct it in one year. Treat the basement family room expenses including the drain system as a home improvement and depreciate it over 39 years. However, you can use the 50% bonus depreciation rule.

  2. Hi Tom., I have a parent that is using turboTax and is having a
    problem using my Tax ID#. She asking to use my SS#. My question is it okay for me to use my tax ID and my SS#? My other
    question is why is this happening with TurboTax?

    • You can use your Social Security number with one parent and your tax id number with another parent. As long as you have a valid EIN, then I wouldn’t give your Social Security number to this parent using TurboTax. Sharing Social Security numbers is a risk.

  3. I have two children under 18 that consistantly work in my daycare and help clean toys on the weekend. They earn aound $3,000 a year each. I understand that they are “Household employees” and that they need W-2 forms but that I do not have to take out fed tax, social security or unemployment tax. But do I still need to send the W-2s to the Social Security Administration? If so I think I missed the deadline? And lastly does their income effect my being able to deduct them as a dependant?

    What do I do about those W-2s? What if any are my tax consequense beside taking the deduction?

    Thanks – Looking forward to a CA seminar

    • Since your children are under age 18 you don’t have to withhold and pay Social Security/Medicare taxes on their pay. Since they earned less than about $6,300 you didn’t have to withhold federal or state income taxes and they won’t owe any federal income taxes (not sure about CA state income taxes). You don’t need to file a W-2. Keep good records showing what work they did and that you did pay them. You can still claim them as a dependent and can deduct what you paid them.

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