This rule allows you to claim 50% of the regular depreciation in 2013 on certain items that are purchased new (not used). Items that are eligible for this rule include: new office equipment (computers, printers, etc.), furniture, appliances, play ground equipment, carpeting, fence, patio and other equipment. Home improvements and the purchase of homes are not eligible.
Here's an example of how the 50% rule works. Let's say you buy a fence in 2013 for $1,000 and your Time-Space Percentage (and here) was 40%. Your business portion would be $400. Normally you would depreciate the $400 over 15 years (as a land improvement). But the 50% depreciation rule allows you to deduct 50% of the amount, or $200 ($400 x 50%). You would depreciate the other $200 over 15 years. Your 2013 deduction on the second $200 would be $10 ($200 x 5% = $10 first year of fifteen year depreciation) for a total deduction of $210.
Without this new rule, you would have to depreciate the full $400 over 15 years: $400 x 5% = $20 deduction for 2013. This example would be the same if you bought the fence in 2012.
Although this is a nice tax break, do not use this rule as an excuse to buy stuff for your business that you don't need! Never buy something just to get a tax break. Your taxes will never go down the same amount as the cost of the item. In other words, in the above example, even if your fence was used 100% for your business you will still get a tax deduction of only $525 ($1,000 x 100% business use = $1,000 x 50% = $500 + $25). If you were in a very high tax bracket, your taxes would only go down by about $250.
I've written more about this in my article, "It's Deductible! Why Shouldn't I Buy it?"
Note: To use this 50% rule on new office equipment, televisions, and dvd players you must use the items at least 50% of the time in your business. All other property eligible for this rule does not have to meet this test.
State Income Taxes
Some states do not follow this 50% rule and deny child care providers this deduction on their state tax return. They may require you to report as income on your state tax return some of the amount you deducted using this rule. Check with your state department of revenue or your tax professional.
The 50% additional depreciation rule (also called the bonus depreciation rule) was first introduced in 2008 and expired at the end of 2010. In 2011 we had a 100% bonus depreciation rule that expired at the end of 2011. In 2012 we went back to the 50% rule that expired at the end of 2012. The latest government action now extends the 50% rule through the end of 2013. Still with me?
I've written previously about the 50% rule here.
For details about 50% bonus depreciation and all other new rules affecting your business in 2012 see my 2012 Family Child Care Tax Workbook and Organizer now available from Redleaf Press.
Tom Copeland - www.tomcopelandblog.com
Image credit: lemontreefcc.com