IRS Letter from Mike Gallagher

August 11, 1993

Mr. Tom Copeland
Redleaf National Institute

Dear Mr. Copeland:

Thank you for your letter of July 1, regarding our day care discussion in Publication 587, Business Use of Your Home. You suggested that we revise and expand the reporting procedure for CACFP reimbursements, suggesting that all reimbursements and expenditures be accounted for on Schedule C.

The language in the 1992 revision of Publication 587 reflects the current IRS position on this issue. Revenue ruling 79-142 established that payments day-care operators receive from a sponsoring organization are excludable from income. It also stated that the expenditures by the day-care operator for food under this program are not deductible under IRC section 162, but are incurred on behalf of the sponsor. Only the excess of payments over expenditures are includible in the operator’s income. Therefore, the payment from the sponsor is not “fixed and determinable” income and does not require issuance of Form 1099-MISC under IRC section 6041. The 1990 language of Publication 587 was changed to better reflect the Service position that it is not necessary to show gross sponsor payments on Schedule C. However, in cases where the sponsor has issued Form 1099-MISC, the operator will need to account for this on the return as gross receipts.

We reviewed the list of basic points that you believe should be covered in the “Day-Care Facility” section of Publication 587. We believe that all but one of them are already covered by the text either in the “Day-Care Facility” section or other parts of the publication. With respect to your item 5, we will consider changes to clarify the distinction between benefits received for the children of providers and those received as program payments for other children.

Please note that Publication 587 is intended to provide a concise guide for all taxpayers who use their home in business, and therefore we are limited in the coverage we can devote to day-care issues. However, we will continue to consider revisions in this area, especially if legal developments enable us to provide more specific guidance on specific situations.

Thank you for sharing your ideas on this publication. Suggestions for improving our publications are always welcome.


Michael R. Gallagher

Chief, Technical Publications Branch

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