How well does H&R Block do in preparing a family child care provider’s taxes online?
The short answer is not well, unless you understand how to properly use the software and are aware of the problems I discuss in this article.
As a general rule, do not use this software or any other tax preparation software unless you know exactly what you are entitled to deduct as a business expense, how much of these expenses you can deduct, and where they should appear on your tax forms.
This is the same advice I gave when I reviewed TurboTax recently.
Here are my comments about the H&R Block Premium online software:
When H&R Block asks you to enter business expenses such as supplies, repairs, etc. it assumes that the amount you enter is used 100% for your business. It doesn’t explain how to enter these expenses that are also used personally. You must use your Time-Space Percentage with such shared expenses. So, you’ll have to complete the Home Office section of the software before you’ll know what your Time-Space Percentage is and remember to enter the business portion of these expenses into the software.
This is the same problem when using TurboTax.
H&R Block asks you to choose between using the standard meal allowance rate and entering your actual food expenses. If you use the standard meal allowance rate it does a good job of allowing you to enter the number of meals and snacks you served. It does not give the Alaska or Hawaii rates and it does not say anything about being sure to include all meals and snacks served, including those you are not reimbursed by the Food Program. This is important because if you serve one un reimbursed snack per day to one child for a year, this represents a $192 deduction.
On the screen entitled, “Home Office Expenses,” the software gives you the choice of using the Simplified Method or the actual expenses method to claim your house expenses. The vast majority of providers should not use the Simplified Method because they won’t get as high a deduction as they can using the actual expenses method (See my article explaining this). However, if you choose the Simplified Method, the software does not account for a special rule that affects only family child care providers!
All other home-based businesses can deduct up to $1,500 of their house expenses using this method. But, providers must reduce their deduction by applying their Time percent to the calculation. Although this is clearly explained in the instructions to Schedule C, the software does not apply this rule for providers! Therefore, providers will claim more in house expenses than they are entitled to if they choose this method.
In addition, the software is confusing in that it asks providers how many square feet they used exclusively for their business and uses this number to determine if you are eligible for the Simplified Method. This is wrong. Providers are eligible for the Simplified Method based on any rooms in their home that they used for their business, whether they were exclusive use rooms or rooms used only regularly for their business.
Conclusion always choose the actual expenses method unless your housing expenses are very low (you are a renter or live in off-base military housing).
Note: The software made the same mistake on its 2015 version.
Home Office Expenses
H&R Block creates confusion by labeling two different screens with the same title of “Home Office Expenses.” This second screen with this title lists a variety of expenses and asks you to put them in a column headed “Entire Home” or “Office Only.” Office Only refers to any room that you have that is exclusively used for your business. This is confusing because you should only enter expenses in the Office Only column that apply specifically to those rooms, such as repairs. Don’t try to calculate the portion of general house expenses such as mortgage interest, rent, property taxes, etc. that apply to this room. When you calculate your Time-Space percentage it will take into account any exclusive use rooms and apply this higher percentage to all of your general house expenses.
On the screen, “Daycare Size,” H&R Block simply asks you to enter “Total Hours Used for Daycare.” There is no explanation on what hours to count. In particular it doesn’t point out that you can count hours spent on business activities when children are not present. This is an important point because under counting these hours can cause you to pay much more in taxes than you should. See my article, “The Single Most Important Thing You Can Do to Reduce Your Taxes.”
In general, depreciation is the most difficult tax issue to understand. Both TurboTax and H&R Block do not do a good job in explaining how to enter items that should be depreciated.
When entering other items that may have to be depreciated on the screen, “Your Property,” it asks you to choose a category of depreciation. The choices are not helpful. The options of computers, office furniture are clear, but the other options are not. If you choose the computer option the software will correctly calculate the depreciation deduction using 5 year depreciation rules. If you choose the office furniture category the software will correctly calculate the depreciation deduction using 7 year depreciation rules.
However, if you choose the “nonresidential real estate” option, you are in trouble. Let’s say you want to depreciate a deck or an addition to your home or you have remodeled your kitchen. These items should be depreciated over 39 years using the 50% bonus depreciation rule. However, once you enter an item here you must identify it as either “real estate” or “an improvement to property.” If you choose “real estate,” the software will depreciate the item over 38 years, but it won’t apply the new 50% bonus depreciation rule! Thus, you will lose a big deduction.
If you choose the “an improvement to property” option, the next screen says, “You need a tax pro to complete your return.” Then it says you would have to spend another $79.99 to get “Best of Both,” without explaining what this service is. Wow!
Conclusion? Don’t enter any expense under this option. Instead, enter your depreciation deductions by choosing the option “Other property not listed.” This will give you the choices of depreciating items using 5 year, 7 year, 15 year and 39 year depreciation. See my article, “The Categories of Depreciation” to determine which category to choose for your items that need to be depreciated.
Note: When entering in items you want to depreciate on the screen called, “Your Property,” it automatically records that you used the item 100% for your business. Since most providers use their property for both business and personal purposes you should enter your Time-Space Percentage here. You’ll need to search back to find the screen that tells you what this is.
The biggest problem I have with this software is its apparent failure to apply the $2,500 rule that allows providers to deduct items in one year without having to depreciate them.
When I entered a $1,000 sofa (7 year depreciation) used 35% of the time for the business on the screen “Your Property,” it does apply the 50% bonus depreciation rule but ignores the $2,500 rule! Thus, instead of getting a $350 deduction, it only gives me a $200 deduction.
When I entered a $2,000 fence (15 year depreciation) used 100% of the time for the business, it does apply the 50% bonus depreciation rule but ignores the $2,500 rule. Thus, instead of getting a $2,000 deduction, it only gives me a $184 deduction.
When I entered a $2,000 new deck (39 years depreciation) used 40% of the time for the business, it does the same thing and gives me a deduction of $359 instead of $800.
This is a major problem. Providers need to understand that they can deduct in one year any item costing less than $2,500.
The software also doesn’t acknowledge the $2,500 rule when entering expenses onto Schedule C. So, if you entered $4,000 for a swing set under “Other Business Expenses” the software will allow you to deduct the full amount without regard to the $2,500 rule. The software doesn’t help you understand when it’s okay to put items directly onto Schedule C and when they may need to be depreciated. In other words, in situations where you shouldn’t be allowed to deduct something in one year, the software allows you to. This will hurt you if you are audited and don’t realize what you have done. In the example of the $4,000 swing set, a provider who uses it over 50% of the time for her business could deduct the entire business portion in the first year by using the Section 179 rule. Otherwise, she would have to depreciate it over 7 years. The software does not address either of these possibilities.
Lastly, it’s not clear if the software will attach the proper statement to your tax return when you do enter expenses costing less than $2,500. I didn’t file a tax return with H&R Block so I can’t tell if this is done. You need to check to make sure such a statement is attached. See my article, “Have You Bought Something for Less than $2,500 This Year?”
On the screen that says “Home Improvements,” it lists only the following examples: replacing a roof, installing an electrical system and putting in new carpeting. This leaves out adding an addition or deck, replacing a furnace, or installing more than half of windows, doors, pluming system, or flooring. This inadequate description of home improvements does not account for the newly expanded definition of repairs. See my article “When is a Home Improvement Now a Repair?” Also, new carpeting in less than half the rooms of your home can be treated as a repair, rather than being depreciated over 7 years.
After entering the cost and business use percentage of home improvements, the software does not indicate how it is being depreciated and whether or not it is applying the $2,500 rule or the 50% bonus depreciation rule. Therefore, I would avoid entering any expenses here and instead, enter your home improvements on the “Your Property” screen and choose “Other property not listed” and then 39 year depreciation.
Before trying to use the H&R Block software I strongly recommend that providers make sure they understand the $2,500 rule, and know how to depreciate items that should be depreciated. If the software makes a mistake in calculating your deductions, you will be responsible if you are audited.
Free Review of Your Tax Return by Tom Copeland
To make sure you aren’t cheating yourself on your tax return, I will review your tax return for free as a benefit of joining The Child Care Business Partnership. The Partnership program is for providers who are using KidKare or Minute Menu Kids Pro. It’s $15 a year. I regularly save providers much more than this whose tax returns I review each year. So, join The Child Care Business Partnership today and end your worries about whether your taxes are done properly!
Tom Copeland – www.tomcopelandblog.com
For information on how to fill out your tax forms, see my 2016 Family Child Care Tax Workbook and Organizer.