My warning about the other two software programs applies to TaxAct. Don’t use TaxAct 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.
Note: The IRS has a program where you can use the TaxAct software, as well as other tax preparation software, for free if you are income eligible. For more information.
For this article I reviewed the TaxAct Premium product.
On the screen that says, “Income Checklist” choose “Business Income (Schedule C, Schedules K-1…).” Check “Profit or loss from business (Schedule C) on the next screen titled ”Business Income”. On the next screen also titled “Business Income” click on “Add” next to “New Copy of Federal Schedule C.”
On the screen titled “Business Income – Principal Business” enter “child care.” On the screen titled “Business Income – Business Activity Code” choose “624100 Individual and family services.”
On the screen titled “Business Income – Accounting Method” choose “Cash.” On the screen titled “Business Income – Cost of Good Sold” choose “no” because you don’t sell products and don’t keep an inventory.
On the screen titled “Business Income – Other Income” I would recommend putting your Food Program income here. You could include it earlier under “Business Income – Gross Receipts” along with your parent fees, but I think it’s better to show it here. If you got a Form 1099 MISC from your Food Program sponsor, enter that amount on the screen titled “Business Income – Form 1099-MISC.”
The screen titled “Business Income – Repair Regulations” asks if you want to apply several elections: “De minimus safe harbor election,” “Capitalize repair and maintenance costs,” and “Small taxpayer safe harbor election.”
The “Deminimus safe harbor election” refers to the $2,500 rule that allows providers to deduct in one year items costing individually less than $2,500. So, check off this box. When you enter expenses of less than $2,500 the software should attached a statement to your tax return indicating that you elected to use this rule. Since I didn’t follow through and file my taxes using TaxAct, I couldn’t tell if the proper statement was attached. Therefore, you should check to see if there is such a statement attached to your tax return before you file it.
If you check the box titled “Capitalize repair and maintenance costs” this means you will be depreciating repair and maintenance costs rather than deducting them in one year. Unless you are going to show a loss for your business, it doesn’t make sense to check this box. Checking the box will give you fewer deductions this year, but allow you to spread the deduction over a number of years.
The “Small taxpayer safe harbor election” applies to you if your home improvements and repairs are less than 2% of the purchase price of your home (up to a maximum of $10,000). If you check this box it will ask for your building property description. Enter the street address of your home.
However, when I entered information that would allow me to deduct a bathroom remodeling project under this rule, TaxAct did not correctly apply the rule. In other words, Tax Act depreciated it over 39 years as a home improvement and gave me a $123 deduction for a $5,000 bathroom project. By applying this safe harbor rule I am entitled to receive the full $5,00 deduction. This is a significant error in the software. See my article “When Can Your Home/Land Improvements Be Deducted in One Year?”
On the screen titled, “Business Income – Insurance, Taxes and Utilities” do not enter any amount under “Utilities” unless you do child care away from your home. Your utility expenses will be captured when you enter your house expenses under the section Business Use of Home.
On the screen titled “Business Income – Meals and Entertainment” only enter expenses here for food you paid for yourself or a parent or employee while away from your home. Don’t enter food expenses for daycare children here. Enter them on the screen that says “Other Expenses” later.
On the screen titled “Business Income – Other Expenses” this is where you can enter all other business expenses (except house expenses and items you are depreciating). You can use whatever description you want for your expenses. I have always recommended using the following expense categories: Food, Toys, Household Items, Cleaning Supplies and Activity Supplies. But, these are just recommendations.
TaxAct does not tell providers about the standard meal allowance method to claim food expenses and does not give the rates you can use to claim food expenses without receipts. The rates for 2016 are $1.32 breakfast, $2.48 lunch/supper and $.74 snack. You can deduct up to one breakfast, one lunch, one supper and three snacks per day per child, if you serve that many.
When entering any expense (except house expenses) into TaxAct you need to remember only to enter the business portion of your expenses, after applying your Time-Space Percentage to those items that are used by your business and your family. So, if you bought a $100 toy used exclusively for your business, enter $100. But if the toy was also used by your children during non-childcare hours and your Time-Space Percentage was 35%, enter $35.
The problem is that there is no screen that will tell you what your Time-Space Percentage is, even after you have entered your square footage and hours into the software! So, you must either calculate this on your own, or pay for the service, look at IRS Form 8829, line 7, and then go back and reenter the proper amount of your business expense to correct your tax forms before filing them.
To claim depreciation on items used for your business, you’ll need to check “yes” on the screen titled “Business Income – Depreciation.” On the screen titled “Business Income – MACRS Depreciation Review” you’ll need to click “add” next to “New Copy of Federal Form 4562 Depreciation.” This is the form used to report depreciation. However, before answering questions to fill out Form 4562 you’ll need to know what items you must depreciate and what items are not subject to depreciation.
If the item you purchased cost individually less than $2,500 you don’t have to depreciate it. Claim these items on Schedule C in the section above Depreciation. If the item is a repair, you can deduct it in one year regardless of its cost. See my article “When Is a Home Improvement Now a Repair?” to learn about the expanded definition of what is a repair.
When entering a depreciable expense on the screen titled, “Depreciation and Vehicle Expense – Asset Description” you’ll be asked to choose an “Asset type.” Here’s the options to choose from:
Computers – 5 year depreciation: “Computers and Peripheral Equipment”
Furniture, appliances, play equipment – 7 year depreciation: “Office Furniture and Fixtures”
Fences, patio, driveway – 15 year depreciation: “Land Improvements”
Remodeling, adding an addition, new deck, etc. – 39 year depreciation: “Nonresidential Real Property”
After entering an item to be depreciated, a screen titled “Depreciation – 50% Bonus Depreciation” will ask if you want to use the 50% bonus depreciation rule. Always check the box to elect this rule if the item was purchased new in 2016. This will give you a much bigger deduction in the first year.
Remember, when you are entering expenses to be depreciated, first apply your Time-Space Percentage for shared business and personal items before entering the amount into TaxAct. Any amount you enter into TaxAct will be treated as a 100% business expense (except for house expenses).
Also, beware that if you enter an expense to be depreciated and the cost is less than $2,500 TaxAct will depreciate it, rather than applying the $2,500 rule. So, you need to be sure not to enter any expense for depreciation if it costs less than $2,500.
The next screen is titled “Depreciation – Section 179 Expense.” Enter items here if they meet the following tests: They are any expense used more than 50% in your business and are not a land improvement or home improvement. So, you could enter expenses for furniture, appliances, play equipment.
If you qualify for the Section 179 rule it will give you a faster deduction than using the 50% bonus depreciation rule. The only drawback of the Section 179 rule is that if you stop using it 50% or more in your business in later years you will have to pay back some of the deduction you claimed.
When entering a home improvement, TaxAct will not apply the 50% bonus depreciation rule! This is a major omission. If you had a $5,000 remodeling project and a Time-Space Percentage of 30%, your first year deduction according to TaxAct would be $37. But, using the 50% rule it would be $768 ($5,000 x 30% = $1,500 x 50% = $750. Plus a first year depreciation deduction of $18). That’s a big mistake by TaxAct. See my article “Good News About Home Improvements.”
In addition, you may be able to deduct a home improvement in one year if you qualify for the Safe Harbor for Small Taxpayers rule. However, TaxAct will not apply this rule if you try to enter a home improvement here or later under the Business Use of Home section.
Business Use of Home
The screen titled “Business Use of Home – Method” asks you to choose between “Regular Method” and “Simplified Option.” As I have discussed elsewhere (“New Simplified Method for Claiming House Expenses Won’t Benefit Most Providers”), the vast majority of providers will be better off choosing the Regular Method. This is because you will likely get a much higher deduction than using the Simplified Option. You can explore both options and see which method gives you a higher deduction for your house expenses.
If you choose the Simplified Option a later screen titled “Business Use of Home – Gain or Loss: will ask you to enter the “Gain [or loss] derived from business use of home.” Above this will be a number telling your your “Tentative profit (loss) from Schedule C, line 29.” If you show a profit, put this number under “Gain” below. If you show a loss, put this number under “Loss” below. What this question is asking is how much of your business is based out of your home. Since all of it is, put the full amount of the gain or loss below.
Note: Unlike both TurboTax and H&R Block, TaxAct does correctly take into account the special rule affecting family child care providers when calculating house expenses using the Simplified Option.
The screen titled, “Business Use of Home – Personal Use” offers your three choices: “Exclusively for daycare only,” “Daycare areas are available for personal use,” and “Part of your home is exclusively used for daycare only and other parts are used for both daycare and personal use.” The only time you would check the “Exclusively for daycare use only” button is if you had a separate structure on your property used 100% for your business.
If you have one or more rooms in your home used exclusively for your business and other rooms used regularly for your business, check the last button. If you have no exclusive use rooms, check the second button.
The screen titled “Business Use of Home – Hours” asks you to multiply the number of days used for daycare during the years by the number of hours used per day. This is an extremely misleading statement. Providers work different hours on weekdays and weekends and don’t necessarily work the same number of hours every week of the year.
Instead, you should enter the number of hours you care for children in your home, plus the number of hours you work in your home on business activities when children are not present. Read carefully my article “How to Track Hours When Children Aren’t Present.”
Enter your real estate taxes under the “Indirect” section, not the “Direct” section. Direct expenses are deducted at 100% of the cost. TaxAct will multiply your Indirect expenses by your Time-Apace Percentage. The same goes for mortgage interest, mortgage insurance premium, casualty loss, rent, insurance, repairs and maintenance, utilities, and other expenses.
There is a screen in the Business Use of Home section titled “Business Use of Home – Addition or Improvement.” This is the second time TaxAct asks you to enter home improvements. The first time was under the Depreciation section. Again, the software fails to apply the 50% bonus rule if you enter a home improvement in the Business Use of Home section. Again, this is a major mistake.
If you do decide to use TaxAct or either of the other two online tax preparation program, I would recommend you fill out the tax forms by hand first. Then I use TaxAct and enter your numbers. When you print out the tax forms you can compare them with the ones you completed by hand to see if TaxAct made any mistakes.
My book, 2016 Family Child Care Tax Workbook and Organizer, contains a chapter where you can enter your income and expenses to make comparing it to TaxAct easy.
If you don’t understand what I’ve been describing in this article about TaxAct, don’t use it! I’ve talked with providers who did use online software, got audited, and found out that they had incorrectly entered information..
If you or TaxAct make a mistake, you are responsible for paying any taxes you owe.
See my previous articles:
Tom Copeland – www.tomcopelandblog.com
If you are doing your own taxes, you may also want to use my 2016 Family Child Care Tax Workbook and Organizer.