Ask Tom

Question: Can I donate my services to a parent and then deduct it on my taxes?

No. Sometimes providers help parents who are suffering a family emergency by donating free child care. Or, a provider might give parents a scholarship, discount or otherwise offer free care.

In all of these situations, the provider cannot claim unpaid care as a business deduction. This is because parents are not a tax deductible charity. So, money you don’t collect is not a deduction. It means you have less income to report at the end of the year, and therefore lower taxes.

However, don’t let the tax consequences get in the way of helping parents!

Question: May I deduct aspirin, vitamins and other medications for myself?

No*. Any medical expense for yourself is not a deductible business expense. Medicines for the daycare children would be deductible. You could deduct your own medical expenses as an itemized deduction on your personal Schedule A tax form.

Some providers believe that such over the counter medications are deductible because they help them get ready to care for children. Other providers believe they can deduct masssages, yoga, meditation tapes, etc. In all cases, these expenses are not business deductions.

  • The only way to deduct personal medical expenses would be through a medical reimbursement plan, or HRA. See my article for more details on this.

Question: Is there a minimum amount I don’t have to report as income?

Any money you earn caring for children is taxable income, no matter how small the amount. If a parent pays you $15 for one day of care and you never see the parent again, you must report the $15 (or even $1) as income on Schedule C.

Parent may or may not try to claim the child care tax credit. If they don’t, you still must report what they did pay you as income.

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.