Depreciation Question for Tom

[llove530]

Hi Tom,

We purchase both a new gas stove and a new AC/Heating unit in December 2010. How do I claim these?

The questions Turbo Tax ask are:

Description:
Cost:
Business Use Percentage:

What I'm most confused about is how to answer the Business Use Percentage??? HELP!!! I work a 9 hour day - 5 days a week - 50 weeks a year.

Thanks!!
Laura

[TomCopeland]

Depreciation

Laura - Depreciate the gas stove over 7 years and the AC/Heating over 39 years.

The business use percent is your time-space percentage. If you don't know how to calculate this, give me the following information and I'll calculate it for you:

Total square feet of the home (include basement and garage)
Square feet of home used regularly for your business
Number of hours you work in the home (including hours spent caring for children and house spent on business activities after the children are gone)
Number of weeks you were in business in 2010

BTW: if your AC/Heating is energy efficient you are eligible for the energy tax credit. For more info: http://www.tomcopelandblog.com/2011/...providers.html

[llove530]

Hi there - my T&S is 28.54%

However, my income being only $8250 this year it is giving me a $4k loss and I think that might flag an audit?? I'm considering not claiming the heating unit. Thoughts??

[TomCopeland]

Depreciation

I would go ahead and claim these expenses, even though it creates a loss.

[llove530]

Really? I have been doing daycare for 3 yrs now and in NC you can only watch 2 children without a license. So I have NOT really made any profit. I really don't want to be flagged for an audit.

Also, to depreciate the AC/Heating Unit over 39 years is this considered a Non-Residential property??

Thank you so much for all your help - I really appreciate it!

[TomCopeland]

Depreciation

Yes, it's non-residential real property. If you continue to care for only two children (because of your licensing rules) over the years it will be increasing a problem for you if you show losses three or more years out of every five years. Doing this can attract IRS attention. They may assume that you are not trying to make a profit and deny some of your deductions. I would recommend that either you reduce some your expenses or not claim them all to show a profit several times every five years.

[llove530]

Thanks Tom - I think I will take your advice and lower some of my expenses to show a profit. Even if it's a small one I would think that is better than $0

[actaktmdt]

Tom - I also have a depr question. This doesnt concern my 2010 taxes but just looking ahead for the next few years. i want to make sure i understand this correctly. Let's say i have a couch (prior to opening my business in Jan 2010) that i placed a FMV of $100 on for 2010. My T/S% is 25%. So now my business basis for the couch would be $25.00. I will use the 7year 200%DB depreciation method so $25 x 14.29% (year 1) = $3.57 I am allowed to depreciate in 2010. Ok this is where i am confused a bit. I assume my FMV is locked in at $100 for the life of the couch and because i used the 7year 200%DB method, i'm locked into that as well. However, i know my t/s % is likely to change from year to year. If my t/s% changes to 30% in year 2, is the depr calculated by using a new business basis? i.e. 100 FMV x 30% = $30 business basis x 24.49% (year 2) = $7.35 depreciable in year 2011?

[TomCopeland]

Depreciation

Tom - I also have a depr question. This doesnt concern my 2010 taxes but just looking ahead for the next few years. i want to make sure i understand this correctly. Let's say i have a couch (prior to opening my business in Jan 2010) that i placed a FMV of $100 on for 2010. My T/S% is 25%. So now my business basis for the couch would be $25.00. I will use the 7year 200%DB depreciation method so $25 x 14.29% (year 1) = $3.57 I am allowed to depreciate in 2010. Ok this is where i am confused a bit. I assume my FMV is locked in at $100 for the life of the couch and because i used the 7year 200%DB method, i'm locked into that as well. However, i know my t/s % is likely to change from year to year. If my t/s% changes to 30% in year 2, is the depr calculated by using a new business basis? i.e. 100 FMV x 30% = $30 business basis x 24.49% (year 2) = $7.35 depreciable in year 2011?

The $100 number will always stay the same. If your t/s% changes then this will affect the business basis. Your answer for year 2 is correct! Great work!