Questions and Answers About the New 2018 Tax Changes - Part I

We replace all six windows in your home. Is this a home improvement or a repair?

Can I deduct 100% of a concrete patio and driveway?

Can I claim a marshmallow as a snack? The Food Program won’t allow this.

These are a few of the many questions I received while conducting several webinars on the new 2018 tax changes that affect family child care providers. Here's Part I of the questions and my answers.

Home Improvement

Q: We replace all six windows in your home. Is this a home improvement or a repair?

A: When you replace more than half the windows in your homethis is considered a home improvement that must be depreciated over 39 years.Replacing less than half of the windows would be considered a repair that couldbe deducted in one year.

Q: We have two kitchens and will be remodeling one. Is this a repair or an improvement?

A: It’s an improvement because it is not less than half ofyour kitchens. If you had three kitchens and remodeled one, this would beconsidered a repair.

Q: How do I claim a major home repair?

A: If it is a repair you can deduct the business portion in one year on Form 8829, line 20. If it’s a home improvement, you must depreciate it over 39 years. There are exceptions to the 39 year rule.

Q: I live on a military base and made improvements. Can I deduct the cost even though I pay rent?

A: Yes, you can always deduct improvements to your home,even if you rent, and even if you live on base housing.

Q: Would electric solar panels be considered a home improvement?

A: Yes.

Q: Can I deduct 100% of a concrete patio and driveway?

A: You can only deduct 100% of something if it’s exclusively used for your business. I doubt that is the case for a patio and driveway. A patio and driveway are considered land improvements that are normally depreciated over 15 years. However, under the new 100% bonus depreciation rule for 2018, you can deduct the business portion of these expenses in one year. Apply your time-space percentage to the cost and report on Form 4562, line 14.

Q: I bought a home that I use exclusively use for my business. Can I deduct in one year any improvements I make that cost less than $2,500?

A: Yes. You can always deduct any expense less than $2,500 in one year, regardless of whether you live in the home or not.

Q: Would replacing a carpet with wood flooring be a home improvement or a repair?

A: If the new wood flooring represented less than half of thetotal square feet of your home, you can treat it as a repair and deduct it inone year. If not, treat it as a home improvement and depreciate it over 39years.

Q: The only reason I purchased a new fence is because I was required by licensing to do so. I have small children of my own. Can I deduct 100% of the cost?

A: If licensing requires you to purchase something I woulddeduct 100% of the cost. Get in writing a statement from licensing that saysyou must have a fence.

Q: We purchased a commercial property where we run our daycare business out of. Can we deduct any of the remodeling expenses at 100% under the new bonus depreciation rule for 2018?

A: In general, remodeling expenses are considered homeimprovements that must be depreciated over 39 years. Since you aren’t usingthis property for any personal use you can depreciate 100% of the cost over 39years.

Q: If I replaced a third of my roof is that a repair or an improvement?

A: That’s a repair. If you replace the entire roof (meaningthe boards underneath the shingles, not just the shingles) then it’s an improvement.

Q: If I repaired a new roof due to leaking, is this a repair?

A: Yes, since you didn’t replace the roof, it’s a repair.

Q: I replaced 30-year-old siding. Is that an improvement or a repair?

A: It’s an improvement.

Q: If I retile my bathroom is that a home improvement?

A: If that’s all you do in your bathroom, it’s a repair. Ifyou remodeled your entire bathroom and you have one or two bathrooms, thatwould be an improvement.

Q: Is adding new carpet an improvement?

A: No. Carpeting is always a repair that can be deducted inone year, even if it covers more than half the square feet of your home.

Q: Should I depreciate items that I could deduct in one year if my income is so low that I don’t pay much in taxes.

A: This may be a good idea. If deducting items in one year rather than depreciating them would create a loss, you are probably better off depreciating them.

Q: This is my first year and I spent $40,000 to renovate my basement. Is this a home improvement or can I deduct it in one year as a repair?

A: It’s a home improvement, so you must depreciate it over 39 years. There is an exception to this rule that says if you use the home improvement more than 50% of the time in your business you can apply the Section 179 rule and deduct it in one year. However, if you use this rule and go out of business before the end of 39 years you will have to pay some of it back. Therefore, if you plan to go out of business in the next ten years or so, I would use the Section 179 rule.

Car Expenses

Q: Do daycare children have to be in the car if I’m doing daycare business, for me to use the standard deduction to claim car expenses?

A: No. You can claim car expenses when the primary purposeof the trip is for your business. You can drive alone to the bank or libraryand count this as a business trip without having children in your car.

Q: I purchased a 12 passenger van for my business for $13,000 in 2018. I registered the van under my business name. Can I claim 100% as a deduction?

A: Only if you used the van 100% of the time for yourbusiness. Having the van in your business name doesn’t allow you to deduct 100%of the cost of the van. You must keep records showing all the trips you made inthe van. If you only used the van for your business, then you can claim 100% ofthe costs associated with the van, including depreciating the cost, if you usethe actual expenses method for claiming van expenses, rather than the standardmileage method.

Q: I retired on August 28, 2018. Do I use the ending mileage for my vehicle on this date or on December 31, 2018?

A: Use August 28th as the ending date.

Q: Can I write off the cost of a van if I use the standard mileage rate?

A: No. You can only claim part of the cost of a vehicle if you use the actual expenses method of claiming car expenses. If you use the standard mileage method you can claim $.545 per mile for 2018, plus parking, tolls, and the business portion of car loan interest and vehicle property tax.

Q: I purchased an electric vehicle in 2018. Can I deduct the charging station?

A: Only if you use the actual expenses method for claimingvehicle expenses.

Food Expenses

Q: Can I claim a marshmallow as a snack? The Food Program won’t allow this.

A: Yes. You can deduct up to one breakfast, one lunch, onesupper and three snacks per day per child. The Food Program will only reimburseyou for three servings a day. If you serve a snack that is not beingreimbursed, that snack does not have to be nutritious.

Q: If I receive reimbursements for my own children from the Food Program can I deduct the meals and snacks I serve them during day care hours?

A: No. Meals and snacks eaten by your own children are neverdeductible. But, the reimbursements you receive for your own children are nottaxable income.

Q: Can I deduct meals given to my grandchildren during day care hours?

A: Only if you are being paid to care for them at the timethey are served a meal or snack. The amount paid to care for your grandchildrenhas to be a reasonable amount, not $5 a week.

Q: Is the money I receive from the Food Program taxable income?

A: Yes, with the exception of any reimbursements youreceived for your own children.

Q: Should I be keeping food receipts or just claim the reimbursed amount from the Food Program?

A: Neither. The vast majority of providers use the standard meal allowance to claim food expenses. You don’t need any food receipts when using this method. Add up all the meals and snacks you served, including those that were not reimbursed by the Food Program and multiply by these rates for 2018 (and 2019): $1.31 breakfast, $2.46 lunch/supper and $.73 snack. You can deduct up to one breakfast, one lunch, one supper and three snacks per day per child.

Q: If we charge a fee for lunches and breakfast, can we deduct those meals?

A: If you are on the Food Program you cannot charge parents for food. If you are not on the Food Program and charge parents for food, that money is taxable income. And you can deduct the food using the standard meal allowance method or save receipts and deduct the actual cost of the food.

Q: Do I have to have my parents sign a document that states how many meals and snacks their child ate in my program?

A: If you have not been tracking on a daily basis how many meals and snacks you served in 2018 that were not reimbursed by the Food Program I would recommend that you reconstruct this and get the parents to sign it saying they know you served these meals/snacks to their child. Going forward in 2019 it’s not necessary to have the parents sign anything as long as you are keeping daily records of these un-reimbursed meals/snacks.

Q: I serve five servings a day to the children. Can I deduct all five servings?

A: You can deduct up to one breakfast, one lunch, one supperand three snacks per day per child.

Q: Should we be keeping grocery receipt or just claim the amount we received in reimbursements from the Food Program?

A: Never use the amount you were reimbursed by the FoodProgram as your food deduction. They aren’t the same. Always report the amountyou received from the Food Program as income (exception – reimbursements foryour own children aren’t income). Then deduct food expenses using either thestandard meal allowance rate (no food receipts necessary) or the actualexpenses method (saving food receipts).

Q: Can I deduct meals and snacks served to foster children?

A: No. Foster children and adopted children are treated asyour own children for tax purposes. This means you can’t deduct food expensesfor them.

Q: How should I keep records of the extra meals I served that are not reimbursed by the Food Program?

A: You need attendance records to show which days each child was in your program and a record showing what meals and snacks they ate each day. This can be done on your copy of the monthly Food Program claim form, on KidKare software, or a calendar. You don’t need to show what food was served.

Tom Copeland - www.tomcopelandblog.com

Image credit: https://www.clipartlogo.com/istock/q-letter-colorful-icon-flat-style-design-1830397.html

For complete details on the new tax laws for 2018, see my 2018 Family Child Care Tax Workbook and Organizer.