I have several day care clients. I understand how the time-space percentage works.
Normally, we figure the time-space percentage through square feet, figuring space that is exclusive to the daycare, space that is jointly used, and then multiplying it by the hours of operation percentage. That all makes sense.
And in all of my clients, I've just used that same percentage for all of their home office expenses -- taxes, interest, depreciation, furniture and fixtures, utilities, insurance, repairs, etc.
Well, I have a client who has been assigning a different percentage to everything. Their "time-space" percentage is just shy of 24%. And I completed their return using that #. But then he came back and said, Oh, no, the landscaping is 100% for the daycare, because we wouldn't do it if we didn't run a daycare. And the office windows are 50%, not 25%, because we use that office 50% for the business. And the bathroom remodel is 100%, because that's the downstairs bathroom, and it's only used for the daycare. And the utilities should be figured at 50%, because about 50% of the utilities are used in the daycare.
Now, I will buy 100% for the bathroom remodel. If the downstairs bathroom is 100% for the business (they hadn't told me that when I started, which they should have, but okay), yes, they can depreciate that 100% as business. And I can accept a 50% for the office, if they have written documentation to support that they use the office 50% or more for the business.
But the utilities? The landscaper? Has anyone here ever heard of anything that allows a higher % be used for utilities or maintenance than the time-use %?
And most importantly, if I'm right in saying this is wrong, can anyone here please help me find something that will show this client that it's not allowed?
Yes, you can use an actual-business percentage.
However, I usually don't accept random numbers. I want them to have some sort of solid, logical reason or documentation if they want to use an actual-use percentage rather then the Time/Space percentage. For example, saying 50% of utilities seems completely random unless they have documented usage from before they started daycare (and each utility should be assessed separately; just because their electric usage doubled doesn't mean their water usage doubled).
Landscaping is not 100% even if they only did it because they have daycare. They still personally benefit from it, so it is only partial business use, such as the Time/Space percentage (personally, I think using the "Time" percentage is more logical because the space percentage doesn't really affect landscape usage percentage).
Don't forget to increase the Time/Space percentage by adjusting things for the exclusive-use bathroom.
Interesting. How do you do that, on the forms? I mean, Form 8829 tells you to multiply the total utilities by the percentage from line 7. How do you make it multiply each different utility by a different percentage? Or do you simply not use Form 8829, and complete a different schedule, where you figure each utility separately, and then put it on the Schedule C, line 25?