| 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. ... All businesses, including home daycare businesses, have depreciable business assets, meaning things you buy to use in your business that last more than one year. A family child care business also has many depreciable personal assets, purchased for your home, that are used partially for business purposes. This category includes furniture, kitchenware, window coverings, room decorations, linens, appliances, electronics, etc. These items are called "depreciable" because the cost of such items cannot necessarily be deducted fully on your tax return. You may be able to deduct 100% of the cost using the Section 179 Expense Election, but the normal procedure is to write such things off (depreciate them) over about 7 years. (The number of years will vary with the type of asset.) For 2009, we have something called bonus depreciation, which may give you a special depreciation deduction equal to 50% of the cost of the item. Your home is your biggest depreciable asset--the building value, anyway. You must allocate some of the cost of your home to land value, which cannot be depreciated. Building value for a home day care, after applying your time/space percentage, is written off over 39 years. You start with an overall property value as of your first day of business that is either your cost for the property or the fair market value on that day, whichever is lower. (2008 was the first year in 15 years of preparing tax returns that I had to calculate home depreciation based on a fair market value that was lower than what the child care provider paid for the property. Watch out for this rule. In an appreciating real estate market it never applied.) I hope the idea of depreciation makes a little bit of sense now. The question is, if you pull out last year's income tax return, will you find a page or pages that contain the kind of information shown on my sample depreciation schedule? (The format will vary.) Don't find it? You are not alone! I am very disappointed by the fact that none of the new clients I have met with so far this year have their prior year depreciation schedules. It is a simple matter for tax preparers to print these schedules with your copy of the tax return.....and you must make sure that they do! Otherwise, you don't have all the data you need to understand your tax return or to explain your depreciation deduction to an auditor. And if you decide to change preparers, you have a problem. You will have to go back to your old preparer and request the schedules. In most cases, this means waiting and waiting and calling and calling and maybe finally you will get something. One client of mine went down to her former tax preparer's office and staged a sit-in. She said she would make herself at home until she got the depreciation schedules and, when she put it that way, they did hand them over. When new clients cannot get their hands on their depreciation schedules, I am forced to guess at what has been depreciated over the years. There is a lot of information that needs to be reconstructed, especially if the provider has been in business for a while. Look at my sample depreciation schedule and see what I mean. The schedules provide a description of each asset, the date of first business use, the number of years the depreciation will last, and how much depreciation has been taken so far. I am pretty unhappy with my fellow tax professionals, at this moment. Many do print depreciation schedules with their clients' tax return copies. Many, many do not, however. In fact, based on the tax returns I see from other preparers, an overwhelming majority don't consider it necessary or important to set up their software to print out this crucial information for you. What's with that? A few extra pieces of paper and some toner?! I guess these preparers figure that if the depreciation details aren't required to be attached to the filing copy of your tax return (which is true), then you don't need them either. I feel there is something either unethical or lazy in this attitude, especially since most taxpayers aren't even aware that they need this information...but the preparer knows (or should know) that you do. It's worse than I have let on, too, by the way. In addition to a regular federal depreciation schedule, your records should include a federal alternative minimum tax* schedule. If you live in California, you also need a regular state depreciation schedule and a state alternative minimum tax schedule. Many states have depreciation rules that do not match federal rules. When I reconstruct prior year depreciation, I have to reconstruct all four of these schedules. This is time consuming and, thus, my new clients usually end up pestering their prior tax preparer for the information, even though it's the last thing they want to do. (It's also the last thing a tax preparer wants to deal with during the tax season, so, again, I don't know why they don't just give them to you in the first place.) Be sure your income tax return has all the depreciation schedules! Work only with tax professionals who include the schedules with your tax return every year. P.S. I am actually quite surprised at the wide variety of opinions I have received on this issue from tax colleagues in just the couple of days since this article was originally posted. TaxMama Eva Rosenberg and several of her readers have been been supportive and agree that tax professionals should include depreciation schedules with the client's copy of the tax return. This is not required, however, and there are those tax pros who beg to differ and consider the schedules to be their own private work papers. This sounds like legal hair splitting to me, but whatever it is, you end up with incomplete records. I firmly believe that you must have your depreciation schedules for your records to be complete and to protect yourself in case of audit, in case you want to change preparers, and simply to understand and review what's being reported on your tax return. You should not have to count on your tax preparer being able and willing to give you the information when you need it. *Alternative Minimum Tax (AMT) is an annoying fact of life. It is an alternate way to calculate your income tax. A good percentage of taxpayers actually have to pay some AMT every year, though many do not, and I rarely see child care providers paying it. Nevertheless, you have to do the AMT calculation every year and AMT has different depreciation rules, which means you need a separate AMT depreciation schedule.
Last updated 24 February 2010
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