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:
Assets and Depreciation
A screen will ask, “Did you buy any items for any business, rental property and/or farm that cost $2,500 or less in 2017?” It then says, “Don’t include items you’ve already entered as expenses.” Only check “yes” if you did buy items costing individually less than $2,500, but haven’t already entered these expenses into TurboTax earlier.
So, when you check “no” the next screen will ask, “Did you make improvements to a building you used for this business in 2017?” 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. So, you can enter repair expenses under the “Home Office” section of expenses. 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, “Describe the building you made improvements to.” List your home address here.
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 (that allows you to deduct any item in one year costing less than $2,500) 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, you bought items that cost more than $2,500 and don’t fit under the two elections I just cited.
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.
The next screen will say “Tell Us About This Asset/Large Purchase.” Enter the information about your purchase.
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”
* “The item was sold, retired stolen, destroyed…”
* “None of the above”
Choose “None of the above.
On the same screen it asks for the percentage of time you used the items for your business in 2017. 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 2017 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.
Alert! Turbo Tax does not account for the recent tax law change that allows providers (and all other businesses) to use a 100% bonus depreciation rule for a home improvement (listed as non residential real estate in TurboTax) purchased after September 27, 2017. When I entered a kitchen remodeling as non residential real estate purchased in November 2017, Turbo Tax depreciated it as a home improvement over 39 years instead of allowing me to deduct the entire business portion in 2017, with no depreciation. This is a big mistake.
Turbo Tax does apply this 100% bonus depreciation rule to land improvements (listed as “Intangibles, Other Property” in TurboTax).
To solve this problem, if you have a home improvement purchased after September 27, 2017, enter it as a land improvement under “Intangibles, Other Property.”
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, 2017 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 2017 – Part I.”
Tom Copeland – www.tomcopelandblog.com
Image credit: TurboTax
For complete details on how to depreciate items and take advantage of the new tax rules, see my book 2017 Family Child Care Tax Workbook and Organizer.