Making Sense of New Depreciation Rules for 2015

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Update: After further research I have made a change in this article to include land improvements and home improvements as eligible for the new $2,500 rule. See my article: “Clarification of the $2,500 Rule.”

Recent major changes in depreciation rules affecting family child care providers are both welcome and somewhat confusing.

They are welcome because they eliminate the need to depreciate many items, saving providers the headache of record keeping and increasing their current tax deductions.

But one of the changes is confusing and it’s not clear how it applies to providers.

Definition of Depreciation

The general rule is that items purchased for your business that last longer than one year and cost more than $200 must be depreciated. That is, instead of deducting the cost in one year you spread the deduction over a number of years to reflect the life of the item.

The new rules have drastically reduced the number of items that you must depreciate.

Categories of Depreciation

Here are the categories of items that are subject to depreciation rules:

Office Equipment (computers, printers, copiers, etc.)

If an item individually cost less than $2,500 you can deduct it in one year. Remember to attach a statement to your tax return electing this rule.

If an item individually cost more than $2,500 you must depreciate it over 5 years.

If you purchased it new and used it more than 50% in your business, you can use the 50% bonus depreciation rule.

If you purchased it new or used and use it more than 50% of the time in your business you can use the Section 179 rule and deduct the business portion in one year.

 

Personal Property (furniture, appliances, playground equipment, etc.)

If an item individually cost less than $2,500 you can deduct it in one year.

Remember to attach a statement to your tax return electing this rule.

If an item individually cost more than $2,500 you must depreciate it over 7 years.

If you purchased it new you can use the 50% bonus depreciation rule.

If you purchased it new or used and use it more than 50% of the time in your business you can use the Section 179 rule and deduct the business portion in one year.

 

Land Improvement (fence, patio, driveway)

If an item individually cost less than $2,500 you can deduct it in one year.

Remember to attach a statement to your tax return electing this rule.

If it costs more than $2,500 you must depreciate it over 15 years.

If you purchased it new you can use the 50% bonus depreciation rule.

Note: See below for a situation where you may be able to deduct land improvements in one year.

 

Home Improvement (remodeling, replacing roof, adding an addition)

If an item individually cost less than $2,500 you can deduct it in one year.

Remember to attach a statement to your tax return electing this rule.

If it costs more than $2,500 you must depreciate it over 39 years.

You cannot use the 50% bonus depreciation rule.

Note: See below for a situation where you may be able to deduct home improvements in one year.

 

Home

You cannot use the $2,500 rule or the 50% bonus depreciation rule.

You must depreciate your home over 39 years.

 

Repairs vs. Home Improvements

A repair can be deducted in one year, regardless of the cost. A home improvement must be depreciated over 39 years.

New IRS rules have expanded the definition of what is a repair vs. a home improvement. Now, under certain circumstances, the following could be considered as repairs: insulation, new windows or doors, new wood/tile floors, remodeling of a basement. See my article, “When is a Home Improvement Now a Repair?”

It’s not clear if the following are repairs or home improvements: new furnace, new air conditioning unit, hot water heater, bathroom remodeling, etc. I will continue to try to seek clarification on this and will update providers when I get additional information. Talk to your tax professional about whether your expense is a repair or improvement.

Safe Harbor for Small Taxpayers: Home and Land Improvements

You may be able to deduct home and land improvements in one year under the following conditions: The combination of the cost of home and land improvements and house repairs in one year is the lessor of 2% of the adjusted basis of the home or $10,000. If so deduct in one year. See my article “When Can Your Home/Land Improvements Be Deducted in One Year?”

Adjusted basis of home = purchase price of home, plus home improvements made before and after the business began

Example: $250,000 purchase price + $50,000 home improvements before 2015 = $300,000 x 2% = $6,000

Therefore, if a provider spent a total of less than $6,000 (the lessor of $6,000 and $10,000) on home and land improvements and house repairs in 2015 she would qualify for this rule. If her expenses were $6,500 this rule would not apply and the first $6,000 could not be deducted in one year.

Summary Considerations

  • Since most office equipment and personal property items shown above will cost individually less than $2,500 there is no need to depreciate them or to use the 50% bonus depreciation rule or the Section 179 rule.
  • If you are eligible to use the Section 179 rule, use it rather than the 50% bonus depreciation rule, unless you plan to go out of business in the next few years. The Section 179 rule allows you to deduct the entire business portion of an item in one year. But, if you use the Section 179 rule and later use the item less than 50% of the time for your business you will have to pay back some of the deductions you claimed.
  • If you do spend money on a land or home improvement that costs more then $2,500, check to see if you are eligible to use the Safe Harbor for Small Taxpayers rule and deduct them in one year.

Depreciation is the most complicated area of the tax law! These new changes do make it easier to deduct items, so it’s to your benefit to take advantage of them.

I’ve attached a handout that summarizes these rules that you can share with your tax professional or use in a training workshop.

2015 Tax WorkbookMy 2015 Family Child Care Tax Workbook and Organizer has a chapter on depreciation that explains these rules in more detail.

Tom Copeland – www.tomcopelandblog.com

Image credit: https://www.flickr.com/photos/sitkaprojects/


Categories: Depreciation and Home, Record Keeping & Taxes

14 replies

  1. I have spent $2500 to cut down some trees in my yard. Iuse this home for child care 100 %. How should I deduct this?
    Thank you

    • You can deduct this expense in one year as a repair. Since you use the home 100% for your business (I assume you don’t live in the home) then you can deduct 100% of the cost. If you live in the home deduct your time-space % of the cost.

  2. We bought our home 23 years ago, since have added an unattached large metal building that I started using for my pre-school/daycare. To figure my depreciation for taxes, do I use the information for all of the property or just the separate building. It is used 100% business, for last year I figured my time space as 15% as I only work part time compared to most providers. This part is confusing and I want to start right this year. Thank you so much for the help and advice you give us!
    Marilyn G

    • You should depreciate the separate building as a separate home improvement over 39 years. Since you use it 100% for your business, you can depreciate 100% of the cost.

      • Thanks so much, as this is in my backyard can I still depreciate my house? And do I use my T/S% for the property taxes & home insurance? The building is not separated on taxes/insurance. My students do not use the house at all.

  3. If you use your home for your business you can also depreciate your home. When figuring out your time-space % for the home for your property tax and house insurance count your separate structure and your home as space.

  4. We spent $3800 for a new septic field for our house. Would this be considered repairs or home improvements where we must depreciate over 39 years?

    • It’s a land improvement that gets depreciated over 15 years. You can also use the 50% bonus depreciation rule. You may also be eligible to use the Safe Harbor Small Taxpayer rule.

  5. How would I handle a bathroom that had to be installed in my playroom according to state regulations? The costs were around $3000 and installed in 2015.

  6. Do these rules apply to rental property

  7. My business began in December 2016. Do these rules apply only to items purchased in the tax year 2016? How do I handle household inventory purchased in prior years?

    • The $2,500 rule applies to items purchased in 2015 and later years. For items you owned before December 2016 that you didn’t purchase for your business, you must depreciate them over 7 years, even though they individually cost less than $2,500.

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