Clarification of the $2,500 Rule

In a previous article I described a new IRS rule that allows family child care providers to deduct in one year items that cost less than $2,500.

This rule significantly benefits providers as it eliminates the need to depreciate many items used in your business.

I indicated that providers could use this rule for all items they purchase except home improvements, land improvements and a home.

After doing further research, I discovered that I made a mistake in excluding home improvements and land improvements from this rule.

So, providers who purchase a fence, patio, driveway, or do remodeling projects in their home (new floor, carpeting, windows, doors, etc.) that cost less than $2,500 can now deduct such expenses in one year and avoid having to depreciate them.

The IRS says, "The final regulations apply to anyone who pays or incurs amounts to acquire, produce, or improve tangible real or personal property." Real property includes land and home improvements.

This is good news and I apologize for not getting it right the first time.

State Tax Issue

Some states are not accepting the $2,500 rule for state tax purposes. So, although it will benefit you to use this rule on your federal tax return, be aware that you may have to add back this deduction to your state income when calculating your state income taxes. Check with your tax preparer about your state rules.

Other Clarification

Providers should also be aware that if their land improvement or home improvement costs more than $2,500 it may be possible to deduct it in one year if you qualify for the Safe Harbor for Small Taxpayers rule.

Thanks for Bill Porter.

Tom Copeland - www.tomcopelandblog.com

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