March 1, 2010

Depreciation Schedules
What they are and why you need them

I want to give you an important tip:

Be sure you get all the depreciation schedules with your tax return.

If you prepare your own tax return, print and save them. If you have your tax return professionally prepared, be sure the preparer prints this information with your copy of the tax return. Many do not.

I recommend that you ask about depreciation schedules before you agree to work with a particular tax preparer. Find out if all the schedules (both for regular tax and Alternative Minimum Tax purposes--more on this later) will be included with your copy of the tax return. If not, find someone else to work with.

This is a strong suggestion, but having the depreciation schedules in your possession is very important and certain tax professionals consider them to be privileged work papers which they don't have to provide. Many others just don't print them out of habit or because they know it will be hard for you to switch preparers without them. Either way, you lose.

"Depreciation" is a big word that intimidates many taxpayers, but it's really a simple concept. Read on for further explanation.

Does Outdoor Space Count?
A time/space percentage issue

A new client recently asked me this question:

> In your child care tax return checklist and packet it says to take home space measurements, NOT outside measurements. Everyone I know in child care measures and deducts based on both inside and outside space used for child care. I was wondering why you do not ask for the outside information? We have a large backyard with a nice play structure, sandbox, water tables, patio area, etc., and the kids use that outside space just as much as the indoor space. It seems such waste to not ask to claim that space for child care. Just wondering why you do not deduct it???? Please let me know if I am misunderstanding something.

This is a fairly common misunderstanding. The space measurements are used to calculate your time/space percentage. This percentage determines how much of your home expenses, such as rent or mortgage interest, utilities, building depreciation, etc., you can deduct as a business expense. It is meant to indicate the percentage of your home that is used for business purposes and that means the structure only. Yard space does not affect your time/space percentage.

Is Your Tax Preparer Familiar with Child Care Tax Rules?
Some suggested questions

I had the opportunity to attend a 4C's of Alameda County child care tax workshop with Tom Copeland this past week.

It remains quite difficult for day care providers to find tax professionals who really understand their tax issues. Even very well trained and experienced CPAs, Enrolled Agents, and other tax preparers are quite unfamiliar with the particular rules that affect you. This can mean lost opportunities for deductions or mistakes that can really hurt you.

Read more to see the questions that Tom suggests you ask to gauge whether a tax preparer will handle your tax return correctly.

Time/Space % May Not Be Right for Every Home Deduction
Other percentages are allowed

In a follow-up to her outdoor space question at left, the child care provider continues:

> Thank you for answering my question about yard space so quickly. Your answer does make sense. Now my question is about deducting utilities...the kids use lots of water outside (water tables, water fights, etc) a good 6 months out of the year, so I feel that that would deduct as a business expense? How does that factor in if the formula for utilities is only based off of the actual space used in the house? On a side note: I passed your answer about square footage along to my friends in child care who do count yard space in their time/space formula. One of my friends said her accountant actually came out and measured her house, backyard, and front drive for her taxes?? He said that it was because during business hours that space is used by the kids and parents?

You are not required to use your time/space percentage for all of your shared expenses, if that percentage does not accurately reflect actual business use. I have another client who says that a much greater percentage of her total water usage goes to child care activities than would be allowed with the time/space percentage. She came up with another percentage and you can do that, too, but you must have some documentation to back it up.