New Depreciation Rule starting in 2014 Will Save Providers Time and Money!
Household Deductions
All businesses can deduct expenses that are “ordinary and necessary” for their business. The definition of ordinary and necessary is helpful, typical, appropriate and useful for the business.
Since your business is providing a home learning environment for children, you are entitled to deduct hundreds of household items used in your business. This includes furniture, appliances, kitchen equipment, cleaning supplies, cable television, law care, service contracts on your appliances, new door bell, bedding, towels, floor polish, and so on.
Because of this, you should save every receipt for items that have anything to do with cleaning, repairing, or maintaining your home as a home
Note: You can only deduct a portion of items used personally as well as for your business. Use your Time-Space %.
Business Use of Your Home
You are entitled to deduct a portion of the costs associated with your house: property tax, mortgage interest, utilities (gas, oil, electric, water, garbage), house insurance, house repairs, house depreciation, and house rent.
Claim the Time-Space % of these expenses on IRS Form 8829 Expenses for Business Use of Your Home.
Your Time-Space % is based on the number of hours you use your home for business and the number of square feet your use your home for business on a regular basis.
Time
Your business is the only one that must add up all the hours you use your home for business activities.
You can count all the hours day care children are present in your home. Count from moment the first child arrives until the last child leaves. Count the extra time if parents pick up their children late, children stay overnight, or children come to your home on weekends to play.
You can also count all the hours you use your home for business activities when children are not present. This includes hours spent on cleaning, lesson planning, parent interviews, record keeping, meal preparation, parent phone calls, time on the Internet, and so on.
Hours spent away from the home shopping or taking children to school cannot be counted.
Space
Unlike all other home-based businesses, you can claim a room as a business room if it is “regularly” used for your business. Regular use means using it for your business about two-three times per week. Children do not need to be in a room for you to count it as regular use (storage room, office, garage, laundry room, etc.). Such rooms can still be counted as regular use even if your state child care licensing rules prohibit children from entering them.
It’s not unusual for many providers to use all of the rooms in their home on a regular basis for their business.
All other home-based businesses can only count rooms that are used “exclusively” for their business. However, family child care is the only business that can have both “regular” use rooms and “exclusive” use rooms. If your tax preparer challenges this, tell him or her to look at the Instructions to Form 8829, page 2 under the heading “Special Computation for Certain Daycare Facilities.”
Food Program and Food Expenses
Family child care is the only home-based business that has the CACFP Food Program. All providers are better off financially if they join the Food Program.
Food reimbursements received from the Food Program are taxable income. Exception: reimbursements received for your own children are not taxable income.
You can deduct up to one breakfast, one lunch, one supper, and three snacks per day, per child (if you serve them). Food served to your own children is never deductible.
Meals or snacks that are not reimbursed by the Food Program do not have to be nutritious.
You do not need to save any food receipts if you use the standard meal allowance method for claiming food expenses. See my article, "How to Claim Food Expenses."
You must keep a daily record of all meals and snacks served to your daycare children, particular those for which you are not reimbursed by the Food Program.
Depreciation
You always want to depreciate your home because house depreciation represents a substantial business deduction for you each year.
You are entitled to depreciate your home if you are licensed, have applied for a license or are exempt from child care licensing rules. Therefore, even if you only care for one or two children and are not required to be licensed, you can still claim house depreciation.
When you sell your home you will owe tax on the depreciation you claim, or are entitled to claim. Don’t let your tax preparer talk you out of claiming this depreciation.
You are entitled to depreciate all household items you owned before your business began that you later use in your business. This can include furniture, appliances, pots and pans, wall decorations, tables, chairs, beds, and so on.
The IRS has announced a relaxing of depreciation rules that will benefit all family child care providers.
Starting in 2014, providers can avoid depreciating items costing $500 or less. Instead, they may deduct them in one year.
This change will result in higher business deductions in 2014. It will also make it easier to avoid the time consuming challenge of trying to understand the complex depreciation rules and calculating the correct depreciation amount.
In previous years the IRS rules said that providers who purchased items lasting longer than one year should depreciate them. As a practical matter, the IRS allowed providers to deduct items that cost less than $100 in one year. I've advised providers to follow this unwritten rule for years and had never run into trouble in IRS audits.
There are two parts to the new rule.
$200 Rule
In 2014 providers can deduct in one year any item costing $200 or less. For example, a provider who purchases a $180 rug in her living room that is used by both her business and her family can deduct the Time-Space Percentage amount in 2014. If her Time-Space Percentage was 40%, she could deduct $72 in 2014 ($180 x 40% = $72).
$500 Rule
Starting in 2014, providers can deduct in one year any item costing $500 or less if they keep the following statement in their tax files for 2014:
"Section 1.263(a)-1(f) of minimums safe harbor election - I am using the safe harbor rule under this Section for items I purchase for my business in 2014 that cost $500 or less."
Put the date you wrote down this statement, your address, taxpayer identification number and sign it. Save it with your other 2014 tax records. Revise the same statement for each tax year.
For example, if a provider buys a $480 table (new or used) that is used by her business and her family (with a Time-Space Percentage of 40%) she can deduct $192 ($480 x 40% = $192) on her 2014 tax return.
Using this new rule is voluntary. If the above provider chose to depreciate the $480 table under the normal rules of depreciation, should would claim $27.44 ($480 x 40% = $192 x 14.29% [year 1 of 7 year MACRS rules] = $27.44).
Multiple Items on One Invoice
Providers can also avoid depreciation on invoices of more than $500 if there are multiple items on the invoice that identifies the price of individual items.
For example, let's say a provider (with a Time-Space Percentage of 45%) buys six new windows and the invoice reads: "Six windows at $400 each = $2,400." She can deduct $1,080 ($400 x 45% = $180 x 6 = $1,080).
Normal Depreciation Rules
Normal depreciation rules remain in effect for 2014, including the Section 179 rule.
Providers can continue to depreciate items costing more than $500 using the normal rules of depreciation: office equipment (5 years), furniture/appliances/equipment (7 years), fence/patio/driveway (15 years), home improvements/home (39 years). See also my articles : The Categories of Depreciation and "How to Depreciate Your Home."
The Section 179 Rule allows you to deduct in one year items that are used more than 50% of the time in your business. You cannot use this rule for land improvements, home improvements, and the home.
The 50% bonus depreciation rule has been extended to 2014. It was originally set to expire at the end of 2013, but was extended by Congressional action in December 2014.
* The standard meal allowance rate for 2014 is: $1.28 breakfast, $2.40 lunch/supper and $.71 snack. Use this rates for all meals and snacks served in 2014 (including meals and snacks not reimbursed by the Food Program). You may deduct up to one breakfast, one lunch, one supper and three snacks per day, per child.
* The standard mileage rate for 2014 is $.56 per business mile. The rate for 2015 is $.575 per business mile.
* The income limits to qualify for the IRS Saver’s Credit has increased to $60,000 (adjusted gross income) for couples filing jointly; $45,000 for heads of household; and $30,000 for individuals or married people filing separately.
* Note: Under a 2013 “Simplified Method Rule ” providers can claim up to $1,500 in house expenses without saving any records, or filing IRS Form 8829 Expenses for Business Use of Your Home. However, the vast majority of providers should not use this rule and should continue to claim their house expenses on Form 8829.
There are several ways a family child care provider can reduce her taxes before the end of the year.
The goal is to accelerate your deductions in this year and delay income until the following year. Here are some ideas:
1) Stock up on business supplies and materials before the end of the year. These can include: arts and crafts supplies, cleaning supplies, kitchen supplies, curriculum materials, and so on.
2) Ask parents to pay you in 2015 for the last several weeks of December. Money you receive in the next year for child care delivered in this year is reported by you as taxable income on your following tax return.
3) The sooner you make a contribution to an IRA, the more money you will have at retirement. You can set up a Traditional IRA or SEP IRA before April 15, 2015. Any contributions you make to these IRAs before then will reduce your personal taxable income.
If you set up or contribute to a Roth IRA you won't reduce your taxes this year, but you will save money later when you withdraw the contribution and interest at retirement tax free.
4) If you make contributions to a charitable organization before the end of the year, you may be able to reduce your personal taxable income if you can itemize your taxes.
Follow these simple steps to save a little more money in yours tax!
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