There have been a number of changes in the IRS depreciation rules over the past several years that greatly benefit family child care providers.
Depreciation rules are complicated and many providers are probably not aware of how these changes can help reduce your taxes.
This is the first of a series of articles that will explain the new changes. Before filing your taxes make sure you and your tax preparer understand them.
General rule about depreciation
If you bought something for your business that costs less than $2,500 you can deduct the business portion of the expense in one year. To use this rule you must file a statement with your tax return to elect the rule.
See my article: “Have You Bought Something For Less Than $2,500 This Year?”
If you bought something that costs more than $2,500 you may not be able to deduct the business portion in one year. Instead, you may have to claim the deduction over a number of years using a variety of depreciation rules. When you depreciate an item you purchased, you won’t get the full tax benefit until the end of the depreciation period, which could last as long as 39 years!
But, because of this $2,500 rule, many providers will not have to worry about depreciating most of the items they purchase for their business.
Even if you do buy something that costs more than $2,500, there are several IRS rules that can help you avoid or mitigate the consequences of depreciation.
Repair versus home improvement
If you spend money to repair something you can deduct the cost in one year, regardless of the cost. If you make a home improvement you must depreciate the cost over 39 years. A big difference! However, new IRS rules have greatly expanded the definition of what is considered a repair.
Replacing less than half of your windows, flooring or other structural components of your home may now be considered a repair and thus be deducted in one year.
See my article, “When is a Home Improvement Now a Repair?”
In addition, if you are eligible for the Safe Harbor for Small Taxpayer rule (see below) you may be able to deduct your home improvement in one year.
Section 179 rule
If you buy office equipment, furniture, appliances or play equipment that cost more than $2,500 and are used more than 50% of the time in your business, you can deduct the business portion in one year, rather than having to depreciate them.
See my article, “The Section 179 Rule: A Powerful Way to Cut Your Taxes.”
The bonus depreciation rule allows you to claim half the depreciation deduction in the first year. Items purchased must be new and the rule applies to everything except the purchase of a home.
See my article, “Bonus Depreciation Rule Explained.”
A recent change allows you to use the bonus depreciation rule on the cost of home improvements! This will make a significant difference in reducing your taxes in the year you make the improvement.
Watch for my upcoming article, “Good News About Home Improvements.”
Safe Harbor for Small Taxpayers
There is one last rule that may allow you to deduct home and land improvements in one year if you meet certain eligibility requirements.
See my article, “When Can Your Home/Land Improvements be Deducted in One Year?”
This is a lot to take in!
The main message is to pay attention if you buy something that costs more than $2,500.
Be aware that one of the rules above may allow you either avoid deducting the expense over a number of years through depreciation or claim a significant portion of the depreciation expense in the first year.
Watch for my upcoming article, “How and When Should You Depreciate an Item?” where I summarize all of these rules in an easy-to-follow chart that you can share with your tax preparer.
Tom Copeland – www.tomcopelandblog.com
Image credit: https://www.flickr.com/photos/efsavage/
For more details, see my 2016 Family Child Care Tax Workbook and Organizer.