Ask Civitas: August Reader Questions Answered!

You have questions, we have answers! Since taking over Tom Copeland’s blog last year, we’ve heard from a lot of you who have questions about the business of family child care. Here’s a roundup of the latest questions we’ve received from all of you, via the Ask the Experts page.

Can’t watch the video? Here’s a transcript:

Question: What are the standard meal allowance rates for 2023?

Answer: This is a very common question. As many of you know, every year the USDA comes out with the official food rates, they just came out a couple of weeks ago. We will post them on the site so you'll be able to see them, but remember a couple of things. First of all, the Keep Kids Ed Act expired in June 2023. That was that additional money, the differential that you were getting during the pandemic where you're getting an extra 10 cents or so per meal. That law has expired. So you won't see those supplementals anymore. You're not going crazy. They're not there anymore. The other thing to keep in mind is the reimbursement rates for your taxes -- because I know many of you want to use the standard rate on your taxes, which is great. That tier one rate, the one that you use for your taxes is the rates or the rates that were in effect on the first day of the tax year. So the ones that just came out are technically 23 to 24. Those will be used next year's taxes. For the taxes for 2023, you're still using the 2022 -2023. I know that then confuses people later on.

Question: If I have two children who are in my house, but who are not my biological children, can I claim them on my food program? I have been told that I cannot claim them because of my income.

Answer: Basically if your household is not eligible, then they would not be eligible. That’s how it works. In terms of the question around dependency, that only comes in if the household is eligible. Like if the household was eligible, then you get into a question of dependency, which is a different one. But if you're not eligible, the kids are not eligible.

Question: I’m going to ask our next two questions at the same time, because they are very similar. Here's the first one. I am retiring from daycare next month. I want to replace my flooring and carpet later this year to restore it to what it was before daycare started 17 years ago. Is this deductible to restore what to what it was, even though I'll no longer be in business? And then the second question, I've been running my home daycare in this house for 10 years, but I have been in business for 30. The living room where the kids nap and the playroom where they play is in dire need of repainting, the paint was worn and peeling off. Also, there are several broken slats on the blinds. So they needed replacing. Can I write this off as repairs or maintenance for my daycare?

Answer: The simple answer is yes to both questions. It would be deductible in the same way any other business expense would be deductible for you. So remember all the things we've talked about with your time/space calculation and exclusive use versus regular use, you're going to want to keep those in mind to temper how big a deduction it is and whether it's a deduction at all. Because if you did have a room that you redid and it's not used at all for your business, like let's say your primary bedroom, a lot of people don't use it at all for their business, which is totally understandable, then of course the cost in that room would not be eligible. So yes, you can pursue them, but pursue them in the same way you would any other deduction with your home

Question: Now we have two more related questions that are together. First one, if I provided care to a family and they did not pay for that care, can I then deduct it on my taxes if I provide proof that their child was in my care during that time? And then a similar question, if I have a parent with a past due balance of over $9,000, but under $10,000, is there a way to legally collect the money? This provider is located in Minnesota and said, I plan on terminating care for this reason, but I want to have my ducks in a row first.

Answer: Great questions, right? So let's take each one of them first because I think it can be a little bit confusing as to why I'm going to say one has this path and the other one doesn't, which is why we wanted to bundle these. In terms of the first question, did the family did not pay for care? Can I deduct it on my taxes? You really can't. The way deductions work is that you have to have revenue and an expense and they have to be able to match. In this case, you didn't get revenue off of it. You may have an expense, I don't disagree with that. But the revenue was never realized. So you can't pretend that the revenue was ever really there and it was lost. It just was never there at all. And you still get this expense to deduct, but you can't then additionally deduct revenue that didn't come in.

Now what's a little unclear is if you're in the same boat as our second reader, in this case, you've issued a bill, it sounds like, right? You probably, I hope have something in your parent handbook and in the agreement about how they have to pay their past due bills and what that timing is. Right? So in this case, you have somewhere between $9,000 and $10,000 that's owed to you. In that example you could pursue them in court, likely small claims court, depending on your municipality. I would suggest that you seek legal counsel around that because even if you pursue small claims court by yourself, it can be costly in terms of time, in terms of actual dollars that you're putting out. And so you're going to want to talk to legal counsel to really understand in your area what are the probabilities of your winning that case and what you would win. You don’t want to go and put out more than the $10,000.

Again, in that first case, if you have invoiced them and such, then theoretically there would be the opportunity to do that as well. It doesn't sound in that case like there's a large amount of money that's past due, so that may not be worth it.

Question: I run a childcare in my home. In 2022, I received a COVID grant for $13,000. That was specifically for replacing the flooring in my home from carpet and switching it out to something that was easily cleaned and sanitized. I used the grant money to pay for the flooring and to pay the installers. I guess I assumed this would be a wash on my taxes, but my accountant said since it is in my home and we use it outside of business hours, that the amount of the flooring and the installation has to be depreciated. So this money was counted as income. I am a single parent and am on Medicaid. This extra income will now make me ineligible. I am not sure why it can't be deducted or at least a portion of it. This is going to cost me more than I ended up getting. Is my accountant correct or am I able to deduct a portion of this?

Answer:  In this case it's a little bit difficult, because we're lacking some key details, but let me fill in some of the gaps and what I think is likely. It sounds like what we're talking about is covid relief funding, which you may have heard called stabilization or stimulus for childcare. Those relief funds, at a most basic level on your taxes, are treated as revenue. Just like any other income. Now you have an expense, in this case, the replacement of flooring. And you know, what I'm hearing and I think is happening is that you paid for the flooring.

Let's say it's $10,000 and now your accountant is saying you have to apply time/space to it because this is not an exclusive use room. That can be a little bit of a surprise. Right? So if, let's say we have the example of you had a $13,000 grant, right? Let's make it a little bit, you know, an odd number and you have time space of 75%. In that case, you, you would say I got $13,000. I spent $13,000 on the floor. That's a wash. Just like you said. However, you're still subject to time/space. This is a regular use area. So we have to only deduct 75%, which is $9,750. The other $3,250 would not be deductible against the business that's taxable. Right?

The other challenge, and this is an important one to know as you're thinking about this tax year, since we're talking about 2022, unfortunately all your options are closed at this point. There's nothing extra you could do to change that. Now, what I always recommend is when you're getting your taxes prepared, look through every one of your bills, personal and business, look through every one of your credit cards, personal and business, make sure you didn't miss any deductions. Max out that home deduction. Make sure you're getting all those deductions. That's about the best you can do. But unfortunately, it's not like I could say, okay, reader, you know, go and put a little bit of money into, um, you know, a 401k or a SEP IRA at this point, because 2022 is over.

What you can do is look at 2023, look for anything you can scrounge to bring that number down. Because I do hear what you're saying and we've seen this a fair amount over the past two years, where people got surprised when time/space hit. They got surprised at the difference and it's impacting them on their taxes, but it's also impacting them, as you said, on eligibility for social programs. We’ve also seen it impact folks whose kids are in college. This is real. So it's a good time to take a hard look at your revenue and your expenses from this year and see are you doing better? Are you doing worse? Are you putting aside enough tax money? Is your tax bill going to be bigger this year? Make sure you get ahead of that.

Question: Can you also speak about depreciation a little bit in relation to that one? So if, if the time space came out to $9,750, would she then have to depreciate that? Or does that not qualify?

Answer: That's a great point. We don't have a whole lot of information on the flooring and the nature of the work, but there is a chance you would have to depreciate it. This is what compounds the challenges that people see. Stabilization funding has been wonderful, it’s so well deserved. But we are seeing challenges with taxes and how providers get surprised at the end of the year. Here’s the issue: we already have a mismatch with time/space. Well now if we have to depreciate it over a number of years, the amount you could deduct this year becomes even lower. And we've seen this with decks, with roofs that have gotten redone. So yes, it could be a compounding factor. So, yes, if she has to depreciate it, then her deduction is going to be even lower, which means her tax bill will be, be even higher and she'll have those impacts to her benefits in an even bigger way.

Question: If you paid your child $12,000, would you no longer be able to claim them as a dependent?

Answer: As long as they meet the other criteria for claiming them a dependent then it’s likely they would be. So one, are they related to you? There's a whole litany, right? People who are dependent, son, daughter, stepchild, eligible, foster child, et cetera. Do they meet the age requirements? Are they under 19? If they're a full-time student, they could be up to 24. Do they live with you? Typically they have to live with you more than half the year. Of course, an exception is if they're away for college, that's okay. Right. But if you're sharing custody with a former spouse or significant other, the question would be are they with you more than half the year?

Do you financially support them? Your child can have a job and still remain as your dependent, but they can't provide more than half of their own support. So, the question is, is the $12,000 in and of itself hitting that number? However, you have to keep in mind, like if they have a second job, or some relative left them some money and there's a little bit of investment income coming in. Doesn't have to be a large amount. But then when we start adding these things in, that could be a problem. So definitely pay attention to those numbers. On the surface it doesn't sound like a big deal, so don't panic, but just make sure, as our previous reader said, you have all your ducks in a row when hiring your child.

Thanks for all of your questions. We will be back next month with more answers for you, so keep sending your questions in!