Clarification on Depreciation of Home Improvements
A recent change in the tax laws allow family child care providers to deduct most home improvements in one year, rather than depreciating them over a number of years.
This is a significant change. The business portion of any improvement to the interior portion of your home can now be deducted in one year. This includes remodeling your kitchen, bathrooms or basement. It also includes buying a new furnace or central air conditioning.
It does not include a home addition (for example a garage or new bedroom), replacing more than half of your windows or doors, or “internal structural framework” (such as removing load bearing walls). These expenses would have to be depreciated now over 15 years, rather than 39 years. Since a deck is not considered to be an addition to the structure of your home, you can deduct the business portion of a new deck in one year. Correction: a deck is not considered part of the interior portion of the home so it does not qualify for this new ruling. I apologize for this error.
There has been no change in your ability to deduct in one year, as a repair, replacing less than half of your windows or exterior doors, or replacing just the shingles on your roof.
This new law is retroactive to 2018. That means if you had depreciated a home improvement over 39 years in 2020, you may be able to amend your tax return and get a refund. Here’s an example of how amending your tax return can make a big difference. Let’s say you remodeled your kitchen in 2020 for $20,000 and your Time-Space Percentage was 40%. If you depreciated it over 39 years under the 2020 rules, you would have claimed a depreciation deduction of $205 ($20,000 x 40% = $8,000 divided by 39 years = $205). If you amend your 2020 tax return you could claim an additional business deduction of $7,795 ($8,000 - $205). To take advantage of this change, you must amend your 2020 taxes before filing your 2021 tax return.
Note: Instead of amending your tax return for these earlier years, you may be able to use IRS Form 3115 to recapture depreciation for more than one year.
To claim expenses such as a new furnace, deck or remodeling on your 2021 tax return, enter the business portion of the expense (usually your Time-Space Percentage) on IRS Form 4562 Depreciation, line 14. These expenses are now eligible to be deducted in one year under the 100% bonus depreciation rule.
This rule is also in force for purchases made in 2022, however they are scheduled to receive a reduced deduction starting in 2023. Therefore, if you have considered purchasing a new furnace or remodeling a room, doing so in 2022 will get you a bigger tax deduction than if you wait until 2023 or later.
Although deducting these expenses in one year gives you a greater tax deduction than depreciating them, some providers may choose not to take advantage of this new rule. You might consider doing this if you want to spread deductions over a number of years. If you choose to opt out of this new rule, you can depreciate these items over 15 years, instead of 39 years.
Your state may not have accepted this federal tax law change. In other words, your state may still require you to depreciate your home improvement over 39 years when calculating your state tax return. Check with your state to see if they have accepted this change.
An apology: Unfortunately, I was not aware of the change in this new law until last week when tax professional Adam McDonald, JD notified me of this change. However, I am solely responsibIe for the content of this article. I gave a number of webinars after September 2021 that did not take this new rule into account. I apologize for this. If you have already filed your 2021 taxes and did not take advantage of this change, you can amend your taxes and get a refund.
Tom Copeland - www.tomcopelandblog.com
Image credit: https://commons.wikimedia.org/wiki/File:Remodel_Works_Hughes-1.jpg
