Questions and Answers on Record Keeping from an Iowa Webinar - Part I

"Is there a Time-Space Percentage that gets flagged for an audit?""Can you count snacks served to after school children?""If my husband or daughter do work for my business do I need to pay them?""Would it be better to buy new furniture this year or next year?"These are some of the questions asked by family child care providers that I answered during a recent webinar "Mastering Record Keeping and Taxes" sponsored by Child Care Resource and Referral of NW Iowa.

Time-Space Percentage Questions

Q: I have a toy room that is only used for child care. My own children are grown and we don’t use it for personal use at all. How would I prove this for tax purposes?

A: You want to claim this as an exclusive business use room, because it will significantly raise your Time-Space Percentage.

Take pictures of the room so we can see everything that is in it. Write out a statement saying you never use it for personal purposes. That’s about it.

Q: How do you figure the space in a room? In my bedroom I often search Pinterest and plan activities and meals at night. It has a walk-in closet and its own bathroom. Does all the square footage count, or just the bedroom space (not the closet and bathroom)?

A: If you use the bedroom 2-3 times per week for business purposes you can count the square footage of the bedroom, but not the closet or bathroom.

Q: I have a question about exclusive use of my home. I have a level of our house we built soley for day care. Is there a way to track this now?

A: Yes, you can count this as an exclusive use room if you never used it for personal purposes in 2017.

Q: Is there a time-space percentage range that gets flagged for an audit?

A: No. Claim whatever Time-Space Percentage you have records to back it up. I’ve won audits for providers who had Time-Space Percentages ranging from 65-98%. And we won all of them.

Q: 2 years ago I converted my basement to be 100% for my business. Children do not come where I live. My business is 100% self-sufficient, except for utilities. Is this a good business?

A: It’s always financially beneficial to have an exclusive use room. It will mean a higher Time-Space Percentage, thus larger business deductions for your house expenses, thus lower taxes.

Q: Last year I was told that tracking your time was not that big of a difference. Where do I insert these hours when filing my taxes?

A: For every 1.5 hours a week you work in your home, your Time-Space Percentage goes up by 1%. If you had $10,000 of house expenses (property tax, mortgage interest, house insurance, house repairs and house depreciation) you will gain an extra $100 in business deductions. Put all the hours you work in your home, including hours you work on business activities (cleaning, etc.) when children are not present, on Form 8829, line 4.

Q: Do I have to refigure my time-space percentage each year if it has been 38% for the last three years?

A: You must recalculate your Time-Space Percentage each year.

Q: Can I deduct everything in my living room as 100% business or do I use my time-space percentage?

A: You can only deduct something as a 100% business deduction if it’s used 100% of the time in your business. Since I assume you use your living room for personal purposes you can’t deduct 100% of the cost of the items in it. Use your Time-Space Percentage.

Food Questions

Q: For those meals or snacks that are not reimbursed by the Food Program, where would you keep track of these for tax purposes on KidKare?

A: If your sponsor allows you to enter these non-reimbursed meals/snacks into KidKare, enter them just like reimbursed meals/snacks. If they don’t allow you to do so, then you’ll have to keep track on a separate piece of paper and then manually add the totals together.

Q: When claiming food expenses do you have to state the specific food or just keep records of how many breakfasts, lunches, and snacks you served?

A: When you use the standard meal allowance method to claim food expenses you do not need receipts or a recipe. You need attendance records and a daily record of the number of meals and snacks each child ate.

Q: Can you count snacks served to after school children?

A: Yes.

Q: Can you explain about Food Program reimbursements for our own children not being taxable income?

A: Reimbursements you may receive for your own children are considered a “benefit” under the IRS laws and thus are not considered taxable income.

Q: Can we deduct our meals or food expenses even for meals for which we are reimbursed?

A: Yes! This is a big misunderstanding by many providers. You are always entitled to deduct all the meals and snacks you serve whether or not you are on the Food Program. Many providers think they will lose the ability to deduct reimbursed meals if they join the Food Program. Not true.

Q: Can I deduct the non-reimbursed food I serve? If I purchased cookies, can I deduct the total cost of the cookies?

A: Yes. Yes. Use the standard meal allowance rate for up to one breakfast, one lunch, one supper and three snacks per day per child.

Employee Questions

Q: If my husband or daughter do work for my business do I need to pay them?

A: No. If you do pay them you’ll need to follow all the federal and state payroll tax laws.

Q: Can an assistant be considered an independent contractor?

A: Only if the person meets one of these criteria: They are in the business of providing substitute care (meaning they work for other providers and have a business name), they offer an activity (music lesson, puppet show, etc.), or they work for an employment agency and you hire the agency, not the person. Otherwise, anyone caring for children is your employee regardless of how little you pay them.

Q: How much can you pay your assistant who is your child? Does my child have to report it?

A: You can pay your child a reasonable wage (at least the federal minimum wage of $7.25 per hour) for doing work directly related to your business. You can pay your own children under age 18 up to $6,350 a year and the child does not have to report it as income. Once your child turns 18 they do have to report their income.

Q: If I hire a 14 year old as a helper, is she an employee?

A: Yes.

Mileage Questions

Q: Most of the meals I serve are meals that I prepared extra when I cooked for my family the night before. So, when I shop for daycare groceries, it is with my family’s groceries. Can I claim the mileage for tax purposes?

A: You can claim miles to a grocery store only if the “primary purpose” of the trip is business. This means that more than half of the cost of the food needs to be for business food.

Q: Where can I find literature to show my tax preparer that a grocery trip is indeed deductible if it’s primarily for business?

A: Read the section about travel expenses in the IRS Child Care Provider Audit Technique Guide.

Tom Copeland - www.tomcopelandblog.com

Image credit: https://iowaccrr.org/

For further information, see my book Family Child Care Record Keeping Guide.