Cell Phones Are Not Listed Property - Part 2

I wanted to follow-up on this blog post where I wrote about cell phones no longer being "listed property."  Listed property is property covered under Section 274 of the Internal Revenue Code and includes "entertainment" property such as computers and cameras.  Vehicles are also considered to be listed property.  Section 274 requires strict documentation of the business vs. non-business usage of listed property.

Legislation in 2010 removed cell phones from the "listed property" category.  As I talked about in my original blog post, this is big news for employees who are provided cell phones by their employers.  The employee will no longer have to track business vs. non-business usage, and the non-business portion will no longer be included in the employee's income.  But what does it mean for people who are self-employed?

The answer is, it really doesn't change anything.  The self-employed will still have to track business vs. non-business usage, and will still only be able to deduct the business portion of cell phone expenses.

Business Credit Card Transactions Now Reported on a 1099

Starting in 2011, credit card companies will begin issuing a new type of Form 1099 (Form 1099-K) to some businesses and individuals.  The 1099-K will detail, month-by-month, the amount of income the business received from credit card transactions.  It will also apply to debit card transactions, and to payments processed by third-party providers such as Pay Pal.

Form 1099-K will only be issued to business or individuals who have at least 200 transactions and who receive at least $20,000 from those transactions.  The goal with these thresholds is to avoid having a 1099-K issued to someone who, for example, sells things casually on e-Bay.

View a draft of Form 1099-K at the IRS website.

Tax Implications of the Unlicensed Daycare Provider

One of my areas of specialty is in-home daycare operations, and it's something I haven't blogged about much.  One of the questions about in-home daycare operations is what the tax consequences are to an unlicensed daycare provider.

Different states have different licensing requirements for daycare providers.  In Iowa, an in-home provider can care for up to 5 children without being registered or licensed.  A provider caring for 6 children must be registered, and a provider caring for 7 or more children must be licensed.  (Read more at the DHS website.)

For tax purposes, your in-home daycare is considered a business whether you or not you are registered or licensed.  Income should be reported as business income; legitimate business expenses can be claimed as a deduction against business income.

The tricky part for the unlicensed/unregistered is figuring out whether they can take the deduction for "business use of the home."  This deduction allows a taxpayer to partially deduct expenses associated with the house, such as utilities and mortgage interest.  Only daycare operators who are licensed or registered with the state -- or who are not required to be licensed or registered -- can take the deduction for business use of the home.

So in Iowa, a provider caring for less than 6 children CAN take the deduction for business use of their home, because they aren't required to be registered or licensed.  But if a provider cares for 6 or more children and is not registered or licensed, then no deduction is allowed for business use of their home.  Of course, aside from the tax deduction issue, there could also be problems with the DHS!

More on Section 179 and Bonus Depreciation

I have had a number of visitors to this blog with questions about Section 179 expensing, which is something I posted about briefly last week (December 10).  I'll go into a little more detail in this post.

When a business purchases an asset that has a useful life of more than 1 year, the tax code gives the business 3 options for deducting the cost of that asset:  depreciation, Section 179 expensing, and bonus depreciation.

Depreciation means the business can deduct a certain amount of the purchase price each year over a number of years set by the tax code for that type of asset.  For example, computers are depreciated over 5 years.  The number of years is set by the code and has nothing to do with how long you actually intend to use the asset in your business. 

Section 179 expensing allows you to write off 100% of the cost of the purchase of an asset in the year of purchase.  For 2010 and 2011, a business can write off up to $500,000 of asset purchases.  If you purchase more than $2 million of assets during the year, your Section 179 deduction will be phased out.  Your total Section 179 deduction is limited to your taxable income for the year; unused Section 179 expenses in one year can be carried forward to the next year.  Please note that most - but not all - property qualifies for Section 179 expensing.  Examples of property that does NOT qualify is leased property and air-conditioning or heating units.

Note for rental property owners:  Section 179 does not apply to rental properties; if you own rental property, you can't use Section 179 expensing.

Bonus depreciation is a sort of hybrid between regular depreciation and Section 179 expensing, where you can claim 50% of the cost of an asset as a deduction, and then depreciate the remainder of the cost.  Bonus depreciation is available to rental property owners.  One caveat on bonus depreciation:  it can only be claimed on assets that are brand new.  (Section 179 can be claimed on used assets, as long as the asset is "new" to your business.)  One other note on bonus depreciation:  the tax bill being debated right now by Congress proposes to allow 100% bonus depreciation on assets purchased between September 9, 2010, and December 31, 2011.  (UPDATE:  this proposed legislation became official in the tax bill passed by Congress.)

Most of the time, a business will just take the Section 179 expense and be done with it.  It provides an immediate deduction and eliminates the need for cumbersome depreciation schedules.  However, Section 179 expenses are limited to the amount of taxable income (as calculated before the Section 179 deduction).  In other words, Section 179 cannot create a business loss.  But regular depreciation and bonus depreciation can create business losses.  Plus, if you expect that your business income will grow in future years but you won't be purchasing assets in those years, it might be nice to have a depreciation deduction available to offset the increase in income. 
As you can see, your depreciation/Section 179/bonus depreciation strategy is part of tax planning and is a good conversation to have with your tax advisor.

Section 179 Limits for 2010 and 2011

The Section 179 expensing limits have been increased for 2010 and 2011.  A Section 179 election allows businesses to elect to expense asset purchases in the year of the purchase, rather than depreciating those assets over a period of years.  For both 2010 and 2011, businesses can elect to expense up to $500,000 of assets in any one year.  (NOTE:  watch legislation this month to see if anything happens with the 2011 limits.)

Section 179 does not apply to owners of residential rental property.  However, rental owners can take advantage of "bonus depreciation," a special election to expense 50% of the cost of an asset and depreciate the remaining 50%.  Bonus depreciation is an option available to businesses, as well.  In some cases, a business may not want to take a Section 179 expense, and instead take bonus depreciation.

Iowa taxpayers should keep in mind that Iowa does not follow along with federal Section 179 rules or with federal bonus depreciation.  Iowa only allows Section 179 expensing of up to $133,000, and does not honor bonus depreciation at all.  This means an Iowa business or rental property owner could very easily have to track multiple depreciation schedules and basis information.