Questions and Answers About the Time-Space Percentage - Part II
In my previous article I posted a list of questions and answers about the Time Percent. I this article I am posting questions and answers about the Space Percent and some unrelated questions.
These questions and answers were a part of a webinar I recently delivered on “The Importance of Tracking Hours When Children are Not Present.”
The webinar demonstrated how to calculate your Time-Space Percentage using KidKare.
KidKare is the most comprehensive online record keeping system designed specifically for family child care providers. You can use it for free for 30 days to see how the accounting system can help you track income and expenses, issue parent invoices and generate numerous end-of-year reports that will save you time and money on your tax return. After 30 days, the fee is $9.95 per month. If you do decide to purchase a KidKare subscription, I ask that you use the referral code 0659 to support the work I do helping providers be more successful in their business.
The webinar also briefly discusses the exclusive use room rule.
Here’s my article describing the Time-Space Percentage in detail. Here’s another article that includes a link to a calculator that allows you to determine your proper Time-Space Percentage without having to do any math.
Here are the rest of the questions and answers:
Space Percentage
Q: If I have a detached shed outside that is exclusively for daycare, I can add that to my square footage? If yes, how do I do that now since I never have before and I don't want to flag an audit.
A: If the shed is permanently attached to the ground, count it as part of the total square footage of your home. If it is used exclusively for your business, count it as an exclusive use room.
Q: If I have a basement that I use for daycare only except if I host a holiday for family, then may we use that area exclusively for business?
A: No. Exclusive use means you never, ever, use it for personal purposes. Even using your basement one day for personal use destroys its exclusivity.
Q: Do I not qualify for an exclusive daycare room if I have to walk through it to get to my furnace?
A: No. Walking through an exclusive use room to get to another room does not destroy its exclusive use.
Q: How do I calculate the square footage used for my business?
A: Look at each room in your home and determine if it’s used on a regular basis for your business. Regular use means you are using it two-three times per week for some business purpose. If the room is regularly used, count the square footage of that room as business space.
Q: I have ten rooms, can I count them?
A: You can count every room that is used either regularly or exclusively for your business.
Q: Can we count bathrooms in the Space Percent?
A: Yes, as long as you use them two-three times per week by your business.
Q: Does the backyard count as space, whether it’s used exclusively for business or not?
A: No. Outdoor space (lawn, driveway, playground area) does not count as part of the Space Percent because it’s not part of the structure of the home.
Q: What is the difference between a deck and a patio? The concrete patio is attached to our house and covered.
A: You must count space as part of the total square footage of your home if the space is attached to your home. So, a deck would count as part of your home. A patio that is not attached to your home would not count. It’s hard to know about your situation, but if your patio is right next to your home and the covering is connected to your home, then I’d probably count it.
Q: I live alone. Can I use my guest bedrooms for exclusive daycare use because that is where the infants sleep and it is not used for anything else?
A: Yes. That is the definition of an exclusive use room.
Q: My son is away from college and his room is used daily for naps. Can I count this as an exclusive use room for the months he is gone?
A: No. In order to claim an exclusive use room, it must be used exclusively for the entire year.
Q: Is a room an exclusive use room if I go into the closet twice a week to get something for my business?
A: Yes, as long as the rest of the room is never used personally.
Q: I store some daycare seasonal items at a storage facility. Can I count the space or the cost of the storage rental?
A: You can count the business portion of the cost of the storage rental. You can’t count the space because it’s not part of your home.
Q: My tax preparer uses a computer program and says he can’t use the program to calculate an exclusive use room. What should I do?
A: Tell the tax preparer to calculate your Time-Space Percentage on a separate piece of paper, including your exclusive use room. Then tell him to use 100% space and the number of hours that would result in the correct answer. In other words, let’s say your Time-Space Percentage is 40% and you have a 2,000 square foot home. Enter 2,000 for the square footage used regularly for your business on line 1 of IRS Form 8829 Expenses for Business Use of Your Home. Enter 2,000 for the total square footage of your home on line 2. Your Space Percent is now 100% on line 3. Enter 3,504 hours on line 4 (8,760 total hours in the year x 40%). Enter 8760 as the total number of hours in the year on line 5. Line 6 will be 40% Time Percent. The computer program will show your Time-Space Percentage to be 40% on line 7. Amend your previous tax returns if this wasn’t done over the past three years.
Q: Can I count my basement as regular use if I store lawn equipment and extra child care items?
A: Children don’t have to be in a room for it to be considered regularly used for your business. So, in your case you could count your basement as regularly used because you use it to store items used in your business. Other providers may have a basement laundry room, furnace area, tool bench, extra refrigerator, freezer, and storage of other household items. All of this would mean the basement is regularly used for your business.
Q: Can I count the total space of my garage as regular use space if I have some business stuff in the garage?
A: Yes, as long as your business stuff is more than one or two items. Most garages would have a garbage can, garden/outdoor tools, toys, paint cans, car, etc. that are used in your business and would make your garage a regular use space.
General Questions
Q: If I worked 13 hours a day, 5 days a week and my Space Percent is 70%, what would be my Time-Space Percentage?
A: 13 hours x 5 days a week = 65 hours per week x 52 weeks (assuming no vacation) = 3,380 business hours in the year, divided by 8,760 hours in a year = 38.5% Time. 38.5% Time x 70% Space = 27% Time-Space Percentage.
Q: I’m buying a house and planning to use my current home for daycare only. I won’t be living or storing personal items there. Can I claim 100% of all the bills and mortgage for the daycare house?
A: You can deduct 100% of all the costs associated with the home you are using exclusively for your business. You don’t need to calculate a Time-Space Percentage because you have 100% space and 100% Time.
Q: Would affect my 2021 tax return if I make changes in my Time-Space Percentage for the first time and did not do it last year?
A: Go ahead. Having a larger Time-Space Percentage in 2021 as compared to earlier years is not a problem.
Q: If I file estimated taxes every three months, do I need to calculate my Time-Space Percentage every three months?
A: No. Use last years’ Time-Space% for your current estimated tax payments, as long as this year is not too different from last year.
Q: Can I deduct a portion of my property taxes and monthly utility bills?
A: Yes, you can deduct your Time-Space Percentage of all household expenses such as property tax, mortgage interest, rent, utilities, house insurance, house repairs and house depreciation.
Grants and Paycheck Protection Program
Q: Are the Child Care Stabilization Grants considered taxable income?
A: Yes, regardless of whether you get an IRS Form 1099 at the end of the year.
Q: How much will I receive from the Stabilization Grant?
A: Each state sets its own rules about this.
Q: We were open during COVID but lost nine children. Are there any grants for us?
A: Yes, you are eligible for the Child Care Stabilization Grants once your state starts accepting applications.
Q: I was just closed for COVID. Can I use the week of payment I lost due to that to pay myself with my stabilization grant?
A: You can always use the Stabilization Grant to pay yourself, whether you are closed or not.
Q: To pay myself with the Stabilization Grant, do I have to be a corporation?
A: No!
Q: How do I pay myself with the Stabilization Grant?
A: See my article, "What Does it Mean to 'Pay Yourself" With the Stabilization Grant?"
Q: If I receive a grant, should I take out a percentage for taxes before spending it all?
A: Unless you are spending all of the grant money on items used exclusively for your business, you will owe some taxes on the grant. After paying yourself with some of the money, set aside about 20% of the amount you are not spending on business items for your federal and state taxes.
Q: Is the Paycheck Protection Program (PPP) forgivable loan taxable income?
A: No.
Q: Are Eager to Learn Grants taxable? I was told we don’t claim it because we will be receiving things rather than money.
A: All grants are taxable income, even if you get things rather than money. Report the value of the items you received as income. Then deduct the business portion of the items you use in your business. If you received $1,000 worth of things, report $1,000 as income. If you use all of the items exclusively in your business, show a deduction of $1,000. In that case, you would not owe any additional taxes.
Q: My daycare was closed for 14 days because my daughter tested positive for COVID. Can I apply for unemployment benefits?
A: Each state has its own rules about whether you are eligible for unemployment benefits or not. Check with your state unemployment office.
Other
Q: Can I deduct the cost of fertilizing my yard, seeding it, rolling dirt, etc. so the daycare kids can have a good yard to play in?
A: Yes. Deduct your Time-Space Percentage of these expenses.
Q: Can I deduct the cost of my lawn care expenses?
A: Yes. Apply your Time- Space Percentage.
Q: If I have a business credit card, do I still need to save the receipts in addition to the bank statement?
A: Yes! Your credit card monthly statement will only say where you spent money and how much you spent. It won’t say what you spent it on: baby wipes or shotgun shells? Save the receipt.
Q: Will there be a record keeping difference/advantage if I turn my business into a corporation?
A: Yes. There will be a lot more record keeping if you become a corporation. That’s because you will have to keep your business and personal records completely separate. You may have to create a board of directors and keep minutes of meetings.
Q: When I pickup up children from school, do I count mileage both ways?
A: If the primary purpose of the trip is to pick up children in your program, then you can count the miles both ways. You can never count miles one way. A trip is either a business trip or not. If it's a business trip, always count the round trip miles.
Q: How do we keep receipts from fading?
A: You must save your business records for at least three years. You could scan them into your computer and then save them on a flash drive. If you scan receipts, you are not required to save the paper receipt, but I still would recommend doing so.
Q: How long do we save receipts?
A: The IRS requires you to save receipts for at least three years after filing your taxes. Save payroll records for your employees for four years. Your state may require you to save receipts for longer than three years.
Q: How do I save receipts if I do a majority of online shopping on Amazon, Target and grocery shopping?
A: I assume you can still get a receipt. If not, write a note on your monthly credit card statement what the purchases were for.
Q: What does it mean that you can carry over expenses from IRS Form 8829 Expenses for Business Use of Your Home? Is it a bad thing to do this?
A: Your house expenses on Form 8829 cannot create a loss in your business. Any expense that would create or increase a loss would get carried over to the next year, when you could then deduct it. There is nothing bad about doing this.
Q: Can I have an S Corporation and file the Form 8829?
A: No, Form 8829 is only used by sole proprietors (self-employed) and single person Limited Liability Companies (LLC).
Q: I know we can deduct health insurance. Can I deduct the annual costs of dental cleaning?
A: You cannot deduct health insurance as a business expense unless you set up a Health Reimbursement Account. Same answer for dental expenses.
Q: Can I deduct homeowners’ association fees?
A: Yes, deduct your Time-Space Percentage of these fees.
Q: I issue IRS Form 1099 to my assistant, but not to me. Is that correct?
A: No. When you hire someone to help you care for children, you must treat them as an employee, with a couple rare exceptions. You will never issue this form to yourself.
Q: Can I do my own taxes with the books you sell, without any tax preparer experience?
A: Yes. My annual Family Child Care Tax Workbook and Organizer is designed for this. It takes you line by line through each business tax form, so you can fill it out yourself.
Q: Would it be beneficial to start using the accounting section of KidKare this late in the year?
A: Yes. You can go back and enter all your income and expenses from the beginning of the year. This will allow you to generate a series of reports that will be extremely helpful at tax time. You can also get familiar with the accounting section, so you will start the new year on the right foot.
Q: Is the KidKare accounting fee tax deductible?
A: Yes, 100%.
Tom Copeland - www.tomcopelandblog.com
Image credit: https://www.albertluthuli.gov.za/ecds/
