Is It Okay To Show A Loss For My Business?

6a0133f3fc5805970b014e608294b1970c-320wiUnder what circumstances can a family child care provider show a loss for her business?

* A new provider may have a large number of expenses to start her business and filling her spaces takes many months longer than she expected.

* Two or three families suddenly leave a child care provider who is unable to replace them for the rest of the year.

* A child care provider lives in a large home with high property taxes and mortgage interest payments.

* A child care provider decides to limit the number of children in her program to a few children.

These situations are not uncommon and the recession has reduced the income of many. Still, child care providers should understand how the IRS looks at your business if you do show a loss.

Family child care is a pro-profit business (even though it may not seem like it!). When you start your business the IRS assumes that you are trying to make a profit. As long as you do make a profit every three of five years the IRS will continue to assume you are trying to make a profit. However, if you don’t your chances of being audited increase substantially. It’s possible that even a one year loss of a large amount (thousands of dollars) can attract the attention of the IRS.

I have seen many providers get audited because of large business losses. If you do get audited because of your losses, the IRS is likely to deny some of your deductions. They will argue that a business trying to make a profit would not spend so much money.

There is one unusual Tax Court case out of California in which a new family child care provider claimed tens of thousands of dollars in losses that were disallowed, but in the end the provider was still allowed to show a loss of several thousand dollars.

My advice? Claim all the business deductions you are entitled to claim for which you have receipts or other records. Don’t worry if you show a loss every few years. Try not to show losses more than two out of every five years by reducing your expenses.

Image credit: blog.hada.org

6a0133f3fc5805970b01bb08151dd5970d-320wiFor more information, see my book, Family Child Care Record Keeping Guide.

Tom Copeland, www.tomcopelandblog.com



Categories: Record Keeping & Taxes, Tax Return

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7 replies

  1. I have heard of providers showing a loss in order to obtain a new home loan or to refinance. Is there another way of going about this?

  2. What about not making a profit or loss? Some child care providers have expensive homes with high T/S%, but their home office expenses will not allow a loss for the business. Do you think that repeatedly showing $0 for the business is a ‘red flag’ for the IRS?
    Thanks!

  3. Thanks for your comments. You don’t want to show a loss when you want to buy a home or refinance. On the contrary, you want to show as much of a profit as possible. To show more of a profit you want to point out to the loan officer that your depreciation expenses and house expenses are not direct business expenses and should be added to the profit.
    Repeatedly showing a zero profit but no loss is problematic. It doesn’t show that you are trying to make a profit and can attract more attention from the IRS.

  4. Thank you for your reply. Interesting… so we basically need to find a loan officer that will consider our income before tax (gross)? Thus far, we have been turned away because they are looking at our income after all deductions. My spouse and I are both in family child care. We found this to happen even with 20% down.

  5. Nicole – The loan officer should look at your ability to repay a loan. This is best shown by preparing a monthly cash flow statement showing income and actual expenses

  6. Thanks Tom! I’ll talk to our accountant.

  7. I used to do daycare in my home and now I want to keep the house through my husband and my divorce. I will also be opening up my daycare again. I noticed he showed a loss for the first year I opened and also depreciated the house for $3119. Will I have a penalty when I sell? What to be aware of in the divorce for recapture tax?
    Sharon Brown

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