In my recent webinars “What the New Tax Law Means for Family Child Care” I discussed the significant tax changes coming in 2018. I’d previously written an article highlighting these changes.
I answered many questions from providers listening to my webinars. I will post their questions and my answers in this article and several upcoming articles so that everyone can learn from them.
100% Bonus Depreciation Rule
This rule allows providers to deduct in one year, rather than depreciating, most every item you buy that is used in your business. It includes everything except purchasing a home, adding an addition to their home, or making a major structural change to your home. The rule also applies to items you purchased that are used, as well as new.
This means you can deduct your Time-Space Percentage of kitchen or bathroom remodeling, a fence, new driveway or patio, flooring, roof, etc. This is a big deal! So, if you remodeled your kitchen and spent $10,000 and your Time-Space Percentage was 35%, your business deduction is $3,500 that you can deduct in one year. In previous years, you would have had to depreciation the $3,500 over 39 years.
Here were the questions related to this rule:
Q: When does this rule go into effect?
A: It starts for items purchased after September 27, 2017. So, if you bought something after that date in 2017, you could use this rule on your 2017 taxes.
Q: Can I choose to depreciate items and spread my deductions over a number of years, rather than using this rule?
A: Yes. You can choose to use the 50% bonus depreciation rule to depreciate an item purchased after September 27, 2017. In doing so you would claim half the depreciation in 2017 (or 2018) and depreciate the other half using the regular rules of depreciation. Most providers would benefit by claiming deductions as fast as they can. However, you may have your own reasons for wanting to spread the deduction over a number of years.
Q: If I retire after 2018 is there any negative consequences for using the 100% bonus rule?
A: There is no recapture of the depreciation claimed using the 100% Bonus Depreciation rule. So, you won’t have to pay back any taxes if you go out of business shortly after using this rule.
Q: Is a shed or deck considered an addition to a home and thus not eligible for the 100% depreciation rule?
A: A deck would clearly not qualify for this rule because it would be considered an addition to your home. It’s not clear if a shed would qualify as an addition. If the shed is permanently attached to the land, I would probably count this as an addition. If not, I wouldn’t, and thus it would be eligible for this rule. A garage would be considered an addition, as would a barn.
Q: I had a new driveway poured. Is that a land improvement and can I use the 100% rule?
A: Any item that is permanently attached to your land would be considered a land improvement. This would include a fence, patio and driveway. Land improvements are eligible for the 100% rule. The same answer would be if you widened your driveway.
Q: If I bought a land improvement after September 27, 2017 is that a 100% expense for 2017 or 2018?
Q: Does a vehicle qualify for the 100% depreciation rule?
A: Yes, but vehicles are subject to a limit on how much depreciation you can claim each year. Providers who use the standard mileage rate to claim vehicle expenses cannot depreciate their car. If you use the actual expenses method to claim vehicle expenses you can deduct the business portion of your actual expenses including gas, oil, repairs, car insurance, and vehicle depreciation. The vehicle depreciation deduct is limited to $13,160 in the first year and different limits in subsequent years. So, you can’t claim 100% of the cost in the first year.
Q: If I use the bonus rule on my vehicle that I can no longer claim mileage, true?
A: That’s true.
Q: How do I claim installing new floors for the main level of my home?
A: The rules are different if you installed them before or after September 27, 2017. If you installed them before that date and the cost was less than $2,500 you can deduct the business portion as a repair and deduct it in one year. If the cost was more than $2,500, and the new floors represented less than half of the total square feet of your home, you can also treat it as a repair and deduct the business portion in one year. If you replaced more than half of the floors, you can use the 50% bonus depreciation rule, claim half the depreciation in 2017 and depreciate the other half over 39 years as a home improvement. If you bought it after September 27, 2017 you can deduct the business portion in one year using the 100% Bonus Depreciation rule.
Q: Does the 100% rule apply to replacing an enclosed porch with a solarium?
A: It sounds like you are remodeling the porch. If so, the 100% rule applies. If you are tearing down the old porch and building a new solarium, this would be a home addition which would not qualify for this rule.
Q: Can you claim all the remaining depreciation in 2018 on items you were depreciating in earlier years?
A: No. Once you start depreciating an item under a particular depreciation rule, you must continue to depreciate it under that rule, even if rules change in later years. So, if you were depreciating a kitchen remodeling project from 2010 over 39 years, you must continue to depreciate it under the 39 year rule.
Q: Can I depreciate solar panels?
A: Yes, you can use the 100% rule on solar panels.
Q: How do I deduct an addition to my home?
A: Since an addition is not eligible for the 100% Bonus Depreciation rule, you must depreciate it over 39 years, but you can use the 50% bonus depreciation rule.
Q: How long is the 100% bonus rule going to last?
A: For five years through 2022. After than the percentage declines. But who knows what Congress will do by then!
Upcoming Webinars and a Special Deal
I am doing a series of tax and record keeping webinars over the next several months, sponsored by the National Association for Family Child Care. They are offering a special $15 discount if you register for all of these four webinars.
January 23rd: 2017 Tax Updates for Family Child Care
February 8th: Top Tax Deductions for Family Child Care
February 26th: The Basics of Family Child Care Record Keeping
March 21st: Advanced Family Child Care Record Keeping
In future articles I will address the other questions asked during these webinars.
Tom Copeland – www.tomcopelandblog.com