Is Now the Time to Borrow Money?

Thinking about buying a fence, installing a patio or driveway?

New tax rules make doing so more tax advantageous.

Family child care providers can now deduct in one year all expenses for your business, except a home, home improvement or a home addition (which includes a deck and a garage).You can also use this rule when buying smaller items such as furniture, appliances, playground equipment, etc.

Here's how the new law works.If you bought a fence for $6,000 and you don't have young children of your own at home, you can deduct 100% of the cost in one year, or $6,000.

If you use the fence for business and personal purposes, multiply the cost by your Time-Space Percentage. If your Time-Space Percentage is 35%: $6,000 x 35% = $2,100. Then deduct $2,100.

If you remodeled one of your two bathrooms for $10,000 you would have to depreciate it over 39 years as a home improvement: $10,000 x a Time-Space Percentage of 40% = $4,000 divided by 39 years = $102 deduction.

Here are some further details about this new law:

1) There is no limit on how much you can spend under this 100% bonus depreciation rule.

2) This law will begin to phase out after five years. In 2023 the deduction will be 80%, then 60% in 2024, 40% in 2025 and 20% in 2026.

3) If you go out of business in the next few years, you won't have to pay back any of these deductions. So, if you are planning to go out of business, you may want to plan to make these improvements before you do go out of business.

4) Try not to buy these items after September 30th. That's because of the mid quarter convention rule. This rule says that if you purchase more than 40% of capital expenses (items that normally are depreciated, which include furniture and appliances and a fence, but not counting the house or home improvements) you will not be able to claim the full expense in the current year.

See my annual Family Child Care Tax Workbook and Organizer for details on this rule.)

Some providers may not want to use this rule and instead will depreciate fences, patios and driveways over 15 years and home improvements over 39 years. This may make sense if you will show a loss this year or intend to have a much higher profit over the next few years. That's because you won't get the full tax benefit this year and can spread out your deductions to reduce income in the coming years.

A Friendly Warning

Although this rule is a significant benefit to providers, I am not recommending that you go out and buy something, just to get this big deduction!

First - If you spend $6,000 on a fence that is only used for your business, your taxes will not go down by $6,000. Since most providers are in a 30-40% tax bracket, you would only save $1,800 - $2,400 in taxes.

Second - My father always told me to only borrow money for items that will appreciate in value over time. The only items that meet this definition are a home, a home improvement and education. Pay cash for everything else, he said. So, if you need to buy that fence or do that big remodeling project, go ahead. Now is the time to do it. But, don't borrow money needlessly, and certainly not to get a tax deduction.

Where to get a loan?

If you live in Minnesota, Iowa, North or South Dakota or Michigan First Children's Finance offers low interest loans to family child care providers and child care centers.

The law also contains many other provisions that benefit providers.

Tom Copeland - www.tomcopelandblog.com

Image credit: https://www.tcfence.com/wood-privacy-fences

For more about saving and spending money wisely, see my book Family Child Care Money Management and Retirement Guide.