As I said then, I don't recommend using any tax software unless you know what you can deduct, how to calculate the business portion of your deductions and where they go on the tax forms.
Here are some additional problem areas to be aware of when using TurboTax:
Simplified House Deduction Method
House expenses represent a significant business deduction for you. They include: Property tax, Mortgage interest, House insurance, Utilities, House repairs, and House depreciation.
You are given three choices in how to claim your house expenses on a screen entitled "How do you want to enter your home office expenses?"
* "I'll enter my actual expenses with the Office Expense Expert"
* "I'll enter my actual expenses spreadsheet-style"
* "I'll take the simplified deduction"
As I've explained in an earlier article, almost every family child care provider should choose the first option. If you want, you can easily compare which option will give you the higher house deductions. Enter your expenses under the first option and see how this will impact your taxes. Then go back to this screen and choose the "simplified deduction" and you will immediately see that you will be entitled to claim fewer deductions.
The "simplified deduction" option allows all home-based businesses to multiply $5 by the number of square feet they use in their home for their business, up to a maximum of 300 square feet. This means the maximum house expenses you can claim under this option is $1,500 ($5 x 300 = $1,500). Because nearly every child care provider will have higher actual house expenses than this, it doesn't make sense to use this option.
But, more importantly, you don't want to choose the "simplified deduction" option because TurboTax has failed to include a special rule that applies only to family child care providers!
TurboTax made this same mistake last year and did not correct it this year.
This rule says that providers must first multiply the $5 by their Time Percent. So, if your Time Percent was 40%, you maximum house deduction would be $600 (40% x $5 x 300 square feet = $600). Clearly, $600 is not going to be more than your actual house expenses, unless you live in military housing.
However, TurboTax will automatically give you the $1,500 house deduction if you choose the simplified method. This is a big mistake. I don't know how you could use this software if you wanted to use this rule.
Calculating your depreciation deductions is always a complicated task. Here are some tips to making this process easier if you use TurboTax:
As a general rule, items you purchased that cost more than $500 should be depreciated. This means you will be claiming the deduction over a number of years, not all in one year. When you start entering information about an item you will see this screen, "Describe This Asset."
Unfortunately, the screen will not tell you over how many years you can depreciate these items and you may be confused about which one to choose. I've listed the options below and added the number of years they are to be depreciated.
* "Computer, Video, Photo and Telephone Equipment" - 5 year depreciation
* "Tools, Machinery, Equipment, Furniture" - 7 year depreciation
* "Real Estate" - This is where you enter home improvements and your home. 39 year depreciation
* "Intangibles, Other Property" - This is where you put land improvements (fence, patio, driveway). 15 year depreciation
If you select the "Tools, Machinery, Equipment, Furniture" option, the next screen gives you the following options:
* "Office, furniture, fixtures and appliances"
* "General purpose tools, machinery and equipment"
* "Construction machinery and tolls"
* "Trailers and trailer-mounted containers"
Choose "Office furniture, fixtures and appliances." These items will be depreciated over 7 years.
When you select the "Real Estate" option, the next screen will give you the following options:
* "Nonresidential real estate"
* "Qualified retail improvements"
* "Qualified restaurant property"
* "Qualified leasehold improvements"
Choose "Nonresidential real estate" for both home improvements and your home.
After choosing one of the asset categories, the screen will say "Tell Us About this Asset." It will give you the following three choices:
* "I traded in an old asset to acquire this one"
* "I purchased this asset new"
* "The item was sold, retired stolen, destroyed..."
What do you do if you purchased a used item? There is no place to choose this. Therefore, enter every item you purchased as "new."
On the same screen it asks for the percentage of time you used the items for your business in 2014. In general, you will use your Tims-Space %, but unless you wrote it down from an earlier screen, you will have to go back in TurboTax to find it.
Under the Tools, Machinery, Equipment, Furniture section it will ask if you want to take the "Special Depreciation Allowance" (called the 50% bonus depreciation). Unless you will show a business loss, answer yes.
For items you owned before you went into business and are now depreciating, enter the value of the items at the time you first started using them in your business, as if you purchased them new at that time. Do not use the special deduction (50% bonus rule) for such used items, because only new items can use this rule..
Depreciation from earlier years
If you have been depreciating items from earlier years, you will need to know the year you first started depreciating each item because this will affect your current year deduction.
(See my previous article "Get a Copy of Your Depreciation Schedule" to understand the importance of having your depreciation schedule from earlier tax years.)
When I use TurboTax for my taxes I find it easier to fill out the tax forms by hand first. Then I go to TurboTax and enter my numbers. When I print out the tax forms I can compare them with the ones I completed by hand to see if TurboTax made any mistakes.
If you don't understand what I've been describing in these two articles about TurboTax, don't use it! I've talked with providers who did use this software, got audited, and found out that they had incorrectly entered information into TurboTax.
If you or TurboTax make a mistake, you are responsible for paying any taxes you owe.
Tom Copeland - www.tomcopelandblog.com
Image credit: www.techyville.com
My book 2014 Family Child Care Tax Workbook and Organizer explains how to fill out all of your business tax forms.