Are You Going Out of Business or Selling Your Home?
Family child care providers who go out of business or sell their home this year should plan ahead to take advantage of the tax consequences of these decisions.
Going out of business
A recent IRS rule allows providers to deduct in one year items costing less than $2,500 in one year, rather than having to depreciate them. This means if you are planning on replacing items in your home (appliances, carpet, furniture) because they are worn out, you should replace them before the year is over while you are still in business. If you wait to replace them until next year, you won't be able to deduct any of the cost.
If you plan to make any home improvements (remodeling, new patio, new deck, new fence, etc.) that cost more than $2,500 but less than $10,000, you may be eligible to deduct them this year rather than depreciating them. If you wait to make these home improvements next year you won't be able to deduct any amount.
Selling Your Home
The tax issues involved with selling your home are complicated.
You will owe tax on any depreciation you claimed (or were entitled to claim) since 1997. Therefore, you want to make sure you claim this depreciation on IRS Form 8829 Expenses for Business Use of Your Home.
Don't let anyone tell you not to depreciate your home! Although you will owe tax on this depreciation when you sell your home, you can't avoid this tax. Therefore, you are always better off financially when you do depreciate your home.
You may also owe some tax on the profit on the sale of your home. Use IRS Publication 523 Selling Your Home to determine what tax, if any, you may owe. I strongly recommend using a tax professional to do your taxes when you sell your home.
Recapture Past Depreciation
If you have not depreciated your home in past years, you can go back and recapture this depreciation as far back as you used your home for your business. To claim this past depreciation, file IRS Form 3115 Application for Change in Accounting Method.
If you don't file this form with your 2016 taxes, you will lose the chance to recapture past home depreciation because you must file the form in the year you are still in business.
If you didn't depreciate other items in your home that you have used in your business, use IRS Form 3115 to recapture this depreciation as well. Again, if you go out of business in 2016 you must file this form to be able to recapture depreciation you didn't claim in earlier years. You can recapture depreciation for items you owned when your business began or bought afterwards, no matter how long ago, as long as you still own them and use them in your business.
Tom Copeland - www.tomcopelandblog.com
Image credit: https://www.flickr.com/photos/russelldavies/
For details about how to handle the tax consequences of going out of business, selling your home and recapturing previously unclaimed depreciation, see my Family Child Care Tax Workbook and Organizer.
