How and When You Should Depreciate an Item

Depreciation is the most complicated of all IRS rules. I’ve yet to find a family child care provider who loves talking about depreciation!

I’ve covered the recent changes in depreciation rules in a series of articles:

Have You Bought Something for Less Than $2,500 This Year?

Major Changes in Depreciation Rules Benefit Providers!

When Is a Home Improvement Now a Repair?

Bonus Depreciation Rule Explained

Good News About Home Improvements

In all cases, these changes are good news! They allow you to avoid depreciating any item that individually costs less than $2,500. They also allow you to avoid depreciating certain items costing more than $2,500 and speed up the time you can claim depreciation.

It’s very important to understand how these rules can help you reduce your taxes. Make sure your tax professional is familiar with them!

Below is a summary of these rules that you can use as a guide when filing your taxes or share with your tax professional. I’ve also created a handout that you can easily download.

How and When Should You Depreciate an Item?

Step 1: Does it cost more than $2,500?

If yes, go to step 2.

If no, deduct it in one year. If it’s part of a home improvement, see step 4.

Step 2: Is it a repair?

If yes, deduct it in one year, regardless of the cost.

If no, go to step 3.

Step 3: Choose a depreciation category.

  • Office equipment (computer, printer, copy machine, etc.)
  • Personal property (furniture, appliances, play equipment, etc.)
  • Land improvement (fence, patio, driveway, etc.)
  • Home improvement (deck, new addition, major remodeling, etc.)
  • Home

Step 4: Follow the directions for each depreciation category.

Office equipment

  • If you use less than 50% for your business: depreciate over 5 years
  • If you use 50% or more for your business
    • If new, use Section 179 rule, or bonus depreciation rule and depreciate over 5 years
    • If used, use Section 179 rule, or depreciate over 5 years

Personal property

  • If you use less than 50% for your business:
    • If new, use bonus depreciation rule and depreciate over 7 years
    • If used, depreciate over 7 years
  • If you use 50% or more for your business:
    • If new, use Section 179 rule, or bonus depreciation rule and depreciate over 7 years
    • If used, use Section 179 rule, or depreciate over 7 years

Land improvement

  • Does the Safe Harbor for Small Taxpayers rule apply?
    • If yes, deduct in one year
    • If no:
      • If new, use bonus depreciation rule and depreciate over 15 years
      • If used, depreciate over 15 years

Home improvement

  • Does the Safe Harbor for Small Taxpayers rule apply?
    • If yes, deduct in one year
    • If no:
      • Is it improving the internal structural framework (replacing load bearing walls), or enlarging the home (adding an addition or deck)?
        • If yes, depreciate over 39 years
        • If no, use bonus depreciation rule and depreciate over 39 years

Home

  • Depreciate over 39 years

Whew!

It’s complicated, but well worth your time to follow these rules.

Tom Copeland – www.tomcopelandblog.com

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For details on how to file your taxes using these rules, see my 2016 Family Child Care Tax Workbook and Organizer.



Categories: Depreciation and Home, Record Keeping & Taxes

2 replies

  1. I’m still a bit confused on land improvement. When I bought my house in March there was a nice 4′ chain link fence around the property. CA licensing decided it needed to be a 6′ solid fence. I had to have contractors come out over Memorial Day weekend and put up wood panel fencing. Due to the holiday and late notice it cost me just over $7500.00
    Is this 100% daycare because that’s the only reason we got it? Personally we hate it because it takes away from the beautiful views that helped sell the home but licensing says it’s a safety concern.

  2. Yes, since you were required to upgrade your fence you can count 100% of the cost as a business expense. The question is when can you deduct it. Normally, a fence is considered a land improvement that you would depreciate over 15 years. If you qualify for the Safe Harbor for Small Taxpayers rule you could deduct it all in 2016. If you don’t qualify for this rule, then use the 50% bonus depreciation rule. That means claim half of $7,500, or $3,750 as the bonus and depreciation the other $3,750 over 15 years.