Better than the Section 179 rule?
For years child care providers could use the Section 179 rule, which allows you to deduct the business portion of selected items in one year. But this rule applies only if you used the item more than 50% in your business.
Now you can use the 100% bonus depreciation rule without having to meet this 50% use standard. (Note: you must use “listed property” at least 50% of the time for your business to be eligible to use the 100% bonus rule. Listed property includes computers, and property used for entertainment, recreation and amusement.) Another drawback of the Section 179 rule is that, under certain circumstances, you may have to recapture some of the depreciation taken. This will happen if you use the item less than 50% for your business in later years, or if you go out of business before the end of the normal depreciation period for the item.
However, if you use the 100% bonus depreciation rule, you will not have to recapture any of the depreciation taken when you go out of business. (The exception to this is that you must recapture depreciation if you use the 100% bonus depreciation rule on a computer.)
Therefore, the vast majority of child care providers should be using the new bonus depreciation rule for new purchases in 2011. If you are using a tax professional to do your 2011 tax return, check Form 4562, line 14. This is where your bonus depreciation deduction should appear.
December 31, 2011 deadline
The 100% bonus depreciation rule is set to expire on December 31, 2011. In 2010, there was a 50% additional depreciation rule that allowed child care providers to claim 50% of the business portion of similar items in one year. The remaining 50% was depreciated. See my article on this rule. That rule expired at the end of 2010, but will return in 2012. (Yes, this can be confusing to follow!)
So, you only have until the end of December 2011 to take advantage of the 100% bonus depreciation rule. Do not, however, use this as an excuse to go out and buy more stuff for your business that you don’t need. If you were planning to buy something (such as a new computer, desk, fence or some other equipment for your business), go ahead and do so before the end of the year.
But don’t ever buy something because you want to take advantage of a tax rule. You are always better off financially if you save your money rather than spend it. I wrote an article on this called “It’s Deductible! Why Shouldn’t I Buy It?”
I’ve put this article into a handout format which can be found here (the Handouts section of my blog).
State Income Taxes
Some states have not followed this federal rule and deny child care providers the full deduction on their state tax return. They may require you to report as income on your state tax return some of the amount you deducted using this rule. Check with your state department of revenue or your tax professional.
Note: The 100% bonus depreciation rule actually went into effect on September 8, 2010. Child care providers were eligible to use this rule on their 2010 tax return if they bought an eligible item between September 8 and December 31, 2010. If you did buy something, but didn’t claim this deduction, it’s too late to amend your 2010 tax return, unless you filed an extension.
Tom Copeland – www.tomcopelandblog.com
Image credit: familysportszone.com
I describe this bonus depreciation rule in detail in my book Family Child Care Tax Workbook and Organizer.