The Truth About Claiming Business Deductions

6a0133f3fc5805970b01b7c6e167e4970b-200wiHave you ever heard this from your tax preparer or another family child care provider?

You can’t deduct that because you use it for personal purposes.”

“You can’t deduct that because you owned it before your business began.”

“You can’t deduct your house expenses because you are not licensed.”

“You can’t deduct food expenses because you are on the Food Program.”

I have. I’ve even heard them from IRS agents.

They are all false.

The IRS Child Care Audit Technique Guide is a publication used to train IRS auditors on how to audit family child care providers. It contains a lot of clarifying information that will help us find out what the truth is for the above statements.

“You can’t deduct that because you use it for personal purposes.”

The Audit Guide says, “It is important to stress the fact that having a personal usage element present does not disqualify the property from being a deductible IRC Section 162 expense.” IRC Section 162 allows businesses to deduct “all ordinary and necessary expenses” for their business.

Ordinary and necessary means: common, accepted, helpful, and appropriate. The Audit Guide lists allowed expenses such as soap, kitchen equipment, furniture, appliances, piano, VCR, television, office supplies, and cleaning supplies. Clearly, these items are used for personal purposes.

“You can’t deduct that because you owned it before your business began.”

The Audit Guide says, “For many providers, when they start their business many items which were personal use only are used in the business. They are entitled to depreciate the business use portion of those assets. … The fact that the asset was only used for personal purposes prior to being placed in service does not disqualify it from being converted to use in the business.”

“You can’t deduct your house expenses because you are not licensed.”

To claim house expenses, Internal Revenue Tax Code Section 280A(c)(4)(B) says, “The provider must have applied for, been granted, or be exempt from having a license, certification, registration, or approval as a day care center or as a family or group day care home under state law.”

This language is repeated in The Audit Guide and in IRS Publication 587 Business Use of Your Home. So, if you applied for a license in 2014 and didn’t get your license until 2015, you can still deduct your house expenses on your 2014 tax return.

“You can’t deduct food expenses because you are on the Food Program.”

In 2003 the IRS issued a ruling (IRS Rev. Proc. 2003-22) that established the standard meal allowance rate. It says, “The rates [standard meal allowance rate] apply regardless of whether a family day care provider is reimbursed for food costs, in whole or in part, under the CACFP, or under any other program, for a particular meal or snack.”

Summary

The Audit Guide is not the final word on these statements, as new Tax Court decisions or other IRS documents may offer new clarifications. However, you can use the Audit Guide in conversations with your tax preparer or auditor to make a persuasive case in your defense.

Therefore, if you hear someone make one of the above statements, or any other statement that you are not sure is correct, ask the person, “Where does it say that?” If the person can’t back up what they are saying with some written IRS document, you should not accept their position.

For copies of all IRS documents, court cases, and other materials, see the IRS Audits/Documents section of my blog.

Tom Copeland – www.tomcopelandblog.com

Image credit: lessaccounting.com

Record Keeping smallFor a list of over 1,000 allowable business deductions, see my book Family Child Care Record Keeping Guide. 9th Edition!



Categories: Deductions, Record Keeping & Taxes

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