Bonus Depreciation

[spichon]

Hello,

So I’m clear about my next steps and before I move on to post my expenses I’d like your advice on the following:

1. Elected the De Minimis and the Special Depreciation allowance in TT for my rental property 2023 expenses

2. In 2023 I spent $2000 on new garage door, $5,094 on new carpet and $13,900 on new kitchen cabinets as well as other smaller assets/expenses totaling $30K

3. I Entered these three as Added Assets and was expecting 100% deduction for the garage door (<$2500 DeMinimis) and 80% deduction for the carpet and  cabinets under the Special Depreciation allowance.

4. Instead, TT ignored the De Minimis option, reduced the deduction to 80% on all three assets and posted it as depreciation in line 18 on Schedule E as well as in the Depreciation Report as Special Depreciation Allowance

5. Entering the garage door as expense in Line 19 on Schedule E (Other) and the carpet/cabinets as assets TT posted 100% deduction for the garage door and 80% for the carpet/cabinets as hoped

My questions are:

1. Are my two entries in 5 above correct? Specifically entering the door in line 19 on Schedule E?

2. If so, should I list the other sub $2,500 expenses (I have some 20 of them) in Other (line 19) item by item as they appear on the invoice or is there a way to consolidate?

Thank You,

[DianeW777]

The capital improvements are depreciated over 27.5 years and does not make them eligible for Section 179 or Special Bonus depreciation,  First review the information below for the DeMinimis Safe Harbor Election.

If you qualify, you have the expenses in the right place under Miscellaneous expenses, Any other rental expenses. Schedule E, line19.  Likewise you do not need to go through all of the questions below which will send you to this location to enter the expenses.  Description should be 'DeMinimis Safe Harbor Expense'.  Keep close track of any items listed here for all future returns until the assets are gone through sale, etc.

Improvements Election

This election is an option you can take each year that lets you write off some building improvements as expenses instead of assets.

Here are the rules you need to meet to take this election:

• Your gross receipts, including all your other income, are $10,000,000 or less.
• Your eligible building has an unadjusted basis of $1,000,000 or less.
• The cost of all repairs, maintenance and improvements is less than or equal to the smallest of these limits: 
  • 2% of the unadjusted basis of your building or
  • $10,000

This election for building improvements is called the Safe Harbor Election for Small Taxpayers. If you decide to take this option, a form called Safe Harbor Election for Small Taxpayers will show up in your tax return. This election will apply to all your businesses, rental properties or farms. (IRS Tangible Property FAQs)

If you qualify for this, here is the steps to entry (DO NOT SET UP AS DEPRECIABLE ASSETS)

Follow the instructions and if you have only capital improvements answer the question appropriately for $2,500 or less and move to the improvements section.

These questions come up when you select and start Improvements, furnishings and other assets.

1. When you come to the screen, Did you buy any items that each cost $2,500 or less in 2021? mark the Yes button and click Continue. 
2. On the screen Let's see if you qualify to deduct these items as expenses, mark both of the Yes buttons and click Continue.
3. On the Now, let's review each item you bought screen, mark whether all your new assets cost $2500 or less. 
4. If you mark that every item cost $2,500 or less, you will be brought to the Rental Summary screen.  You have elected the De Minimis Safe Harbor provision. 
5. If you mark that some cost above $2,500, you will be asked Did you make improvements to rental in 2021?
6. If you say Yes, you will be taken through the screens for the Improvements election.
7. If you say No, you will see the screen Do you have any items that aren't covered by your elections?  Proceed through the screens to enter these assets. 
8. On the Rental Summary screen go to the Expenses section and click on the Start/Update box. 
9. Continue to the Any Other Expenses? screen and enter the description and amount paid for the assets. Click Continue when finished
10. Continue to complete your entries

[spichon]

Thank you for your response but I have another question; I posted all the sub-$2500 properly on line 19 and moved on to the improvement. In the asset summary I added an asset for each of the improvements and elected the 80% bonus depreciation.  TT accepted my entries and provided the correct deduction of 80% in-spite of total expenses for the year being well above the $10000 limitation.

Should I accept that (preferable) or create an asset to be deducted over 5 year?

Thanks,

Spichon

[DaveF1006]

It depends on how you depreciated these. If you depreciated these assets as Residential Rental Property with a 27.5 straight line deprecation, then these assets are not eligible for the bonus depreciation. Bonus depreciation can only be applied to assets that have a useful life of 20 years or less. Here are some general guidelines to depreciation and expenses regarding residential real estate. 

1. For the carpet, the asset can depreciated over 5 years unless it is glued down and becomes a permanent fixture. If this is the case, you would need to depreciate over 27.5 and would not be eligible for the bonus depreciation if this is the case. If depreciated over 5 years, then it is eligible for bonus depreciation.
2. Kitchen cabinets are permanent structures. These should be depreciated over 27.5 years and are not eligible for bonus depreciation. I have seen similar posts where the depreciation schedule was much less but this is not the correct way of reporting because these are permanent structures
3. The garage door can be entered as an expense and not depreciated since the cost is less than $2500. 
4. All expenses under $2500 can be listed and expensed.  I would combine these per invoice just to keep in compliance with the tax code, if the amount expensed is $2500 or less.

As a rule of thumb, if your asset is a permanent fixture to your rental home, it must be depreciated over 27.5 years. This means  if the asset cannot be easily removed, then this is a permanent structure and not eligible for bonus depreciation.

Let us know if this helps.

@spichon