Questions and Answers About Everything Else
“How many years should we keep our tax records?”
“When parents give you a check as a Christmas gift, do you have to report it as income?”
“What happens if you get audited and you’ve been honest with everything, but don’t have receipts to prove it because you wrote everything on paper?”
These are some of the many questions I’ve received during my February 10th webinar “How to Save Money on Your 2021 Taxes.” This webinar was sponsored by KidKare.
In this article I answer the remaining questions on a variety of topics.
KidKare is a comprehensive record keeping program that includes an accounting section that allows you to keep track of all your income and expenses. You can use it for free during a 30 day trial period. Afterwards it costs $99.00 a year. If you do sign up, please use the referral code 0659. If you do so, this will help support the work I do helping family child care providers be more successful as a business. Get more information about KidKare.
Questions and Answers
Q: Should we still report expenses on our tax return if we are taking the standard deduction?
A: Yes. Claiming the standard deduction on Form 1040 reduces your personal taxable income. It has nothing to do with your requirement to report your business income and claim business expenses.
Q: I closed my child care on 12/31/2021. What do I need to know about preparing my taxes?
A: See my article, "Closing Down Your Family Child Care Business."
Q: How many years should we keep our tax records?
A: Three years for your federal taxes. Some states require you to save them longer. If you have employees, save employee records for four years.
Q: I got a PPP loan but didn’t receive forgiveness for all of it. Can I deduct the interest payment as a business expense?
A: Yes.
Q: Where can I get the 2021 Family Child Care Tax Companion?
A: Here
Q: Are the SBA Paycheck Protection Program and Economic Injury Disaster Loan programs taxable income?
A: No.
Q: Do you have information about retirement?
A: Yes. See my book, "Family Child Care Money Management and Retirement Guide."
Q: Which online tax software would you recommend for providers?
A: I don’t recommend any of them as they can create many problems for providers. See my review of the 2021 Turbo Tax.
Q: Are Early Head Start payments for child care taxable?
A: Yes.
Q: I’m shopping for a new home. My lender wants me to deduct less so my profit looks greater. Can I take 2021 deductions in a later year?
A: No.
Q: What percentage do you recommend that I put aside for paying quarterly estimated taxes?
A: Roughly 20% for federal taxes. Much less for state income taxes.
Q: What are all the business forms I should use to file my taxes?
A: Assuming you are a sole proprietor: Schedule C, Form 8829, Form 4562 (maybe) and Form 1040SE.
Q: When parents give you a check as a Christmas gift, do you have to report it as income?
A: No. See my article, “The Business Side of Receiving Gifts."
Q: Is it better to have a separate business account and write myself a paycheck?
A: It is not necessary to establish a separate business checking account. Most providers have one bank account they use for both business and personal purposes. Also, you don’t have to write yourself a paycheck. That’s because all the money you earn is yours to keep. You are not an employee. You can withdraw money from your business for personal purposes whenever you want.
Q: I haven’t gotten my taxes back from the IRS from 2020. What can I do?
A: Contact the Taxpayer Advocate Office at 877-777-4778. They should be able to help.
Q: Does the H&R Block tax program do the deduction for your time-space%?
A: H&R Block like the other online software programs (TurboTax and TaxAct) only apply your time-space% to house related expenses. You must apply your time-space% to all your other expenses before entering them into the software.
Q: What happens if you get audited and you’ve been honest with everything, but don’t have receipts to prove it because you wrote everything on paper?
A: You are required to have an “adequate” record to claim business expenses. The best record you can have is a receipt. You will have a more difficult time in an audit proving your expenses if you only have notes you wrote down instead of receipts. It will help prove your deductions if you take pictures of what you bought. In the end, you may be able to prevail in an audit.
Q: Do I have to tell my tax preparer about the PPP loan I got?
A: Yes, because it should be reported on your tax return even though it’s not taxable.
Q: Is there way to claim the child dependent care credit if I have a two year old as well as run a family child care?
A: You can only claim this credit if you are paying someone else to care for your child.
Q: Should I set up a C-Corporation or S-Corporation? Which is better?
A: I don’t recommend setting up either. There are too many negatives associated with incorporating. See my article, “Should You Form an S or C Corporation?"
I've written about the pros and cons of the variety of business structures you can operate under. I strongly recommend that family child providers remain a sole proprietor in the vast majority of situations. See my book, "Family Child Care Legal and Insurance Guide."
Q: A parent receives help from another program to pay his tuition. Is this considered income to me?
A: Yes.
Q: If my daycare is closed for a year or more, when I reopen do I use the same EIN number as before?
A: Yes.
Q: My uncle lent me some money. Is that income to me?
A: No.
Q: How do I pay Social Security for myself?
A: Assuming you are a sole proprietor, after filling out Schedule C, you will transfer your profit from line 31 to IRS Form 1040SE. This form will calculate how much Social Security/Medicare taxes you will owe. These taxes then get transferring onto your Form 1040 and are added to any federal income taxes you will owe. You don’t send a separate check to Social Security.
Q: I’m in need of an accountant who specializes in day care. Can you recommend someone?
A: Unfortunately not. See my article, “How to Find, Choose, and Work with a Tax Professional."
Q: A parent handed me a check in 2021, but I didn’t deposit it into the bank until 2022. When do I claim this income?
A: 2021 because that was the year you received it.
Q: If I am an LLC, may I still claim house depreciation?
A: The answer is yes if you are a single person LLC. If you are any other type of LLC, the answer is no.
Q: I received money from the Iowa AEYC in January, but they included this amount in the 1099 they sent me for 2021. How do I report this income?
A: Include the money as income in the year you received it, not the year that is reported on your Form 1099. Don’t worry about this. If you are audited, this will be easy to sort out.
Q: What is the best way to get current on my taxes if I haven’t filed in a few years? Can I do it myself with your book?
A: My 2021 Family Child Care Tax Workbook and Organizer is only valid in filling out your 2021 taxes. For earlier years I would recommend hiring a tax professional to help you.
Q: We receive parent payments through Venmo. How will this change in 2022?
A: Venmo and other electronic payment apps will be issuing Form 1099s for any business transactions of over $600 for the year. This will not be a problem for you as long as you continue to report the income you receive from parents.
Q: I will turn age 62 next month. If I start claiming Social Security, how will that impact my child care income?
A: If you start claiming Social Security benefits before your full retirement age (age 66 or 67 depending on when you were born) and earn more than $19,560 in 2022, your Social Security benefit will be slightly reduced. See my video, “When is the Best Time to Start Claiming Social Security Benefits?"
Q: Should I file jointly with my husband or separately?
A: In almost every situation you will be better off filing jointly. Each provider’s situation can be different, so ask a tax professional to see which method is better for you.
Tom Copeland – www.tomcopelandblog.com
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