Christmas is a time of gift giving.
As a family child care providers you may give gifts to the families of the children in their care, or you may receive gifts from parents. Gifts can be homemade (winter scarfs, photo albums showing pictures of the child from the past year), books, pillow pets, gift cards, etc..
What are the tax consequences of giving and receiving gifts?
Now you may think that I’m being Scrooge-like to discuss taxes when talking about gifts, but that’s what this blog is about!
Many family child care providers serve families who are struggling financially. Some providers want to help these families celebrate Christmas by giving them gifts. Such caring and generosity is admirable.
IRS rules say that you can deduct gifts as a business expense up to $25 per person per year. This means that if you give $25 worth of gifts (birthday cards, Christmas presents, Mother’s Day gifts, etc.) to a child’s mother and another $25 to the child’s father you can deduct the full $50. If you give gifts worth $15 to the mother and $45 to the father, you can deduct $40 ($15 plus $25).
The same $25 per person limit applies to gifts you give to the children in your care. However, the IRS Child Care Audit Guide says, “[IRS] Examiners should not confuse expenses related to activities done with the children with gifts.”
Let’s say you give a toy as a Christmas present to a child. If the toy is wrapped and the child takes it home to open it, then it’s a “gift” subject to the $25 limit. Likewise, if you bought clothing for a child or gave a gift card to the child it would also be considered a “gift.”
However, if the child opens the present at your home and plays with the toy with the other children, then this could be said to be an activity expense not subject to the $25 limit. This would be true even if the child later took the toy home and did not return with it.
The difference between a gift and an activity expense may be a fine line. Certainly all the expenses associated with a Christmas or holiday party in your home for the children in your care are 100% deductible. Such expenses may include: party decorations, food, games, balloons, party favors, Christmas cookies and treats, etc.
You cannot claim a personal charitable contribution on any of the gifts you give to the families in your care. This is because families are not a charitable organization. Examples of non-profit charitable organizations are churches, Salvation Army, Goodwill, colleges, etc. You can claim a charitable contribution to such organizations on your IRS personal itemized tax form Schedule A. Gifts to charities cannot be deducted as business expenses.
Gifts From Parents
How do you treat a gift from a parent?
If a parent gives you a gift of cash or a cash equivalent (gift card), you must report this as income. If a parent gives you a non-cash gift (book, scarf, flowers, etc.) from a parent this would be considered a gift and is not reportable as income.
If you spend the gift card on something that you use in your business you can deduct it under the normal rules of business deductions.
The holiday season is a time of giving, but don’t let the tax consequences determine what you do. Gifts should be seen as gifts, not tax deductions.
Tom Copeland – www.tomcopelandblog.com