Let’s say before your family child care business began you bought a computer, a dining room chair, a toy and a smoke detector.
What are the rules to follow in deducting these items?
The answer depends on the cost of an item and whether or not you bought it to help you start your business.
Items Purchased to Help Start Your Business
Items costing less than $2,500
If you bought an item for less than $2,500 to help you start your business, it’s considered a start-up expense. Examples include advertising, children’s books, business name registration fees, first aid kit, supplies, training workshop fees, and so on.
Basically, if you are buying small items to help you to get ready to open your business, it’s a start up expense.
You can deduct up to $5,000 of start-up expenses in the year your business begins. For example, let’s say a provider buys $1,000 worth of small toys (none costing more than $2,500 each), $50 for a child development workshop, $80 for storage boxes, and $300 in arts and craft supplies in the summer of 2016. If she starts her business in July 2017 she will be able to deduct the full $1,430 on her 2017 tax return. This assumes she is using all of these items 100% for her business. Start-up expenses in excess of $5,000 must be amortized over 180 months (15 years).
If you did not use the item at all until your business began, deduct the purchase price. But what happens if you personally use any of these items before your business began? In this case, you must estimate the fair market value of the items at the time you business did begin before you deduct it.
For example, if you personally used the storage boxes ($80) in December 2016, you would estimate their value in July 2017 once you began using them in your business. Perhaps they would be worth $50 by then. If you use the storage boxes for both business and personal use once your business begins, multiply the $50 by your Time-Space Percentage to determine your business deduction.
If you put the storage boxes in your basement and only began using them for your business in July 2017, you would deduct the full $80.
Items costing more than $2,500
If you buy items that cost more than $2,500 (computer, swing set, washer, dryer, furniture, etc.), you must depreciate them. Depreciation means you claim a portion of the cost as a deduction over a number of years.
Most household items are depreciated over seven years. For details on depreciation rules, see my article “The Categories of Depreciation.”
It doesn’t matter if you bought these items to help you start your business or not. In most cases you will have to depreciate them. (See my article that describes an exception to this rule.)
If you bought the item before your business began, use the value of the item when it is first used in your business.
Items Not Purchased For Your Business
Family child care providers will have a house full of furniture, appliances and hundreds of household items at the time their business begins. You are entitled to depreciate all of these items once they are used in your business. You must depreciate them, even if their original cost was less than $2,500.
If you purchase an item after your business begins that costs $2,500 or more, you must follow the regular depreciation rules.
You will gain a lot of business deductions if you do a household inventory of all items in your home before your business begins. See my article on how to do this.
Confused? Here’s a summary:
Items purchased before your business began to help you start your business
* Cost less than $2,500 – deduct in one year (start-up expenses limited to $5,000)
Example: $40 toy purchased in 2016 and first used in 2017 when business begins. Deduct in 2017.
* Cost more than $2,500 – depreciate
Example: $3,000 swing set purchased and used personally in 2014. Used for business and personal use in 2016. Estimated value when first used for business: $2,000. Depreciate using your Time-Space Percentage on $2,000 in 2016.
Items Not Purchased For Your Business
Estimate the value of the item at the time it is first used in your business and depreciate it, regardless of its cost or value at the time. Apply your Time-Space Percentage if it’s used by your family and your business.
Example: $50 rocking chair and $400 freezer used both for business and personal use. Multiply by your Time-Space Percentage and depreciate both.
Although this is a relatively complicated issue, claiming start-up expenses and other deductions for items purchased before you started your business is well worth your time.
Tom Copeland – www.tomcopelandblog.com
Image credit: totkare.com
For more information, see my book Family Child Care Record Keeping Guide.