Ask Tom

Question: May I deduct car insurance and monthly car payments if I use the standard mileage rate?

No. There are two ways to claim expenses for your vehicles. You can use the standard mileage rate or the actual expenses method.

If you use the standard mileage rate for 2016 you can deduct $.54 per business mile (the 2017 rate is $.535). In addition, you can deduct parking, ferries, tolls and the business portion of car loan interest and vehicle property tax. Some states have an annual vehicle property tax that is part of the license plate fee. That’s it.

If you use the actual expenses method you can claim the business portion of all expenses associated with the vehicle: gas, oil, repairs, car wash, parking, new tires, jumper cables, car loan interest, and so on. You can also depreciate the vehicle over five years.

The business portion of the vehicle is based on the number of business miles driven divided by the total number of miles driven. So, if you drove 2,000 business miles and 10,000 total miles, your business percent is 20%.

You can never deduct a portion of your monthly car payment. If you use the standard mileage method the cost of the car is included in the rate. If you use the actual expenses method you can claim depreciation on the vehicle.

Question: Can I deduct my cell phone?

Maybe.

You can’t deduct the monthly fee for the first phone line into your home, whether it’s a cell phone or a landline. You can deduct a second line (or more) if you use it for your business. Use your time-space % to determine the business portion of a second or third line. You can decide which is the first line into your home.

If your phone, Internet and cable TV bill is bundled together, determine your business deduction following this formula: divide the total monthly bill by three. Deduct the time-space % of your Internet and cable TV portion (assuming you use these for your business. Divide the last third by the number of phone lines into your home. Don’t count one of the lines. Deduct the time-space % of other phone lines used for your business, unless one or more lines is used exclusively for your business. If so, deduct 100% of an exclusively business line.

You can deduct other costs associated with a first phone line: the cost of the phone, caller id, long distance calls, etc.

Question: Can Parents Claim the Child Care Tax Credit if I’m Not Licensed?

Yes, under two circumstances.

First, if you are caring for six children or fewer (not counting your own children) parents can claim the credit. In this situation it doesn’t matter if you are in violation of your state’s child care licensing rules.

Second, if you are caring for more than six children, parents can claim the credit as long as you are not in violation of your state’s child care licensing rules.

See the Instructions to IRS Form 2441 Child and Dependent Care Expenses.

Comment: It doesn’t make sense to me to allow parents to claim the child care tax credit when they use a caregiver caring for six children or fewer and who is violating their state’s child care licensing rules. If the state doesn’t think it’s safe for children to be in such a setting, why give their parents a tax credit? But that’s the law.

Question: Can I deduct the cost of renting a truck?

The answer is yes if you are using the truck for business purposes.

If you rent a truck to pick up day care equipment that is used 100% for your business, deduct 100% of the cost of the rental, including gas.

If you are transporting items used by your family and your business (patio furniture, appliances, hauling trash, etc.) deduct your time-space % of the cost.

Enter this expense on Schedule C, line 20a “Rent or lease.”

Question: How can I deduct the cost of food when I go to a fast food restaurant?

If you use the standard meal allowance rate, you can’t deduct the actual cost of the food. So, if one lunch at MacDonalds costs $4.00, you could only deduct the standard meal allowance rate of $2.48 (2016 rate).

If you use the actual food cost method you could deduct $4.00.

You must use either the standard meal allowance rate or the actual food cost for all meals and snacks for the year. In other words, you can’t use the standard meal allowance rate for meals eaten at home and the actual food cost for meals eaten away from home.

You can’t deduct any food that you or your own child eats at a fast food restaurant.

Question: What expenses can I deduct for a family appreciation BBQ?

As a general rule you can deduct expenses associated with any gathering you have for the parents of the children in your program.

Expenses for a barbeque include: grill, tent for shade, water slide, food, napkins, tablecloth, beer, etc. If the items were purchased and used only for the event (food, tent and water slide rental) you can deduct 100% of the cost. If the items were used for personal purposes after the event (grill, water slide that was purchased, not rented) deduct your time-space % of the cost.

List these expenses under “Advertising” on Schedule C.

Question: If I break my contract do I need to give the parent a refund?

There are many reasons why a family child care provider may want to break her contract with a parent.

Whatever your reason, you should follow the terms of your contract about how to end it. If your contract says you must give parents a two-week notice before terminating it, do so. However, if there are special circumstances that put children, you, or your business at risk, go ahead and terminate immediately.

If you are terminating and the parent has paid for days that you aren’t willing to provide care, it is reasonable for you to refund the parent for those days. For example: On Monday morning you tell the parent you will no longer provide care as of the coming Friday. Your contract requires you to give a two-week notice and the parent has paid you for the coming two weeks. Give the parent a refund for the second week you are not willing to provide care.

If you tell the parent they can bring their child for the next two weeks and the parent decides not to bring her child, you do not owe the parent a refund.

I strongly recommend that providers put in their contract, “Provider may terminate at will” to give yourselves maximum flexibility in ending your contract.

Question: Can I deduct the cost of a cleaning lady?

Yes. If she only cleans areas used exclusively for your business you can deduct 100% of the cost. If she cleans areas also used by your family, deduct the time-space % of the cost. The cleaning lady should be reporting this as income on her taxes. But, even if she doesn’t you can still deduct it. Keep a written record of when and how much you paid her.

If she is cleaning when children are not in your home, you can count part or all of the time she spends cleaning in your time-space % calculation.

Question: Is my clothing deductible?

Nope. Clothing is only deductible as a business expense if it meets the standard of being a uniform. A uniform is something that is not suitable to be worn in public. Examples include a police or fire person’s uniform.

The only item of clothing that could meet this definition in family child care would be scrubs or an apron.

Therefore, even clothing you buy specifically for your business and use exclusively for your business is not deductible because it suitable to wear them in public.

If you have a shirt or sweater with your business name or log on it, you can deduct this as advertising, not clothing!

Question: Is Equipment I Receive as a Grant Taxable Income?

Yes! Whether you get cash or equipment (toys, supplies, furniture, etc.) from a grant, you must report this as taxable income.

When you spend the cash on something for your business you can deduct the business portion as a business expense. If it’s used by your family and your business, deduct your Time-Space % of the cost.

When you receive equipment from a grant, deduct the business portion of the value of the equipment as a business expense.

If you spend the cash or use the equipment 100% for your business, there will be no tax consequence to you. For example, if you got a $1,000 outdoor play equipment and you used it 100% for your business, you would report $1,000 as income and $1,000 as a business expense.