Family child care providers are responsible for the numbers that appear on their tax return.
If you don’t know where a number comes from and you can’t back it up with a receipt or other record, you will be in trouble if you are ever audited.
This is true even if your tax preparer made a mistake in putting down the wrong number!
Here’s what I see when I’m helping providers who are audited, or when I’m reviewing their tax forms:
A provider’s Schedule C says, “Supplies $1,200.” I ask the provider, “Where did this number come from?” The provider answers, “I don’t know. My tax preparer entered it.”
I ask, “Does this represent supplies that were all 100% business, all shared, or some of both?” Answer, “I don’t know.”
The problem here is not knowing what’s on your tax return. Maybe the numbers are correct, but maybe they aren’t. You need to know.
Therefore, before signing your tax return, review each line on your Schedule C, Form 8829 and Form 4562 to make sure your records back up these numbers. If not, ask your tax preparer where the number on the tax forms came from.
Sometimes providers list their business expenses under expense categories that don’t match the expense categories that their tax preparer uses. Although, in the end, it doesn’t matter what expense category you choose for each expense, you need to be able to match your expenses to specific lines on your tax return.
The main problem
The primary problem I see is that providers and/or tax preparers are not making a distinction between items that are 100% business and those items that are used for both business and personal purposes.
If a tax preparer asks, “what did you spend on supplies?” this is the wrong question! The correct questions are, “How much did you spend on supplies used 100% for your business?” and “How much did you spend on supplies that were used for both business and personal purposes?”These same questions should be asked for almost all expense categories.
My 2016 Family Child Care Tax Companion is a tool providers can use to avoid this problem. If you fill out the worksheets in the book it will ask you about 100% items versus shared items. You then can give the book to your tax preparer so they have the correct information to fill out your tax return.
After you get the book back, you can compare what you entered to what is on your tax return. Then you can ask questions if the numbers don’t match. It’s the responsibility of a tax preparer to answer your questions about what they put on your tax return. Don’t file your taxes until you are satisfied you can defend each line in an audit.
The KidKare software makes it easier to track where the numbers on your tax return come from. You can print out several end-of-year reports that mirror the Schedule C and Form 8829 tax forms. If you are doing your own taxes you can easily transfer your numbers from these reports onto your tax forms.
If you use a tax preparer you can easily monitor if the numbers on your tax forms are supported by your KidKare reports.
The Child Care Business Partnership is a program to help providers who use the accounting section of KidKare (formerly called Minute Menu Kids Pro). Members of the Partnership are entitled to have me review their tax return to help them spot errors. I’m reviewing many tax returns this time of year and always find some mistakes that save providers a lot of money. If you use Minute Menu or KidKare, you can join the Child Care Business Partnership here.
Tom Copeland – www.tomcopelandblog.com
Image credit: https://www.flickr.com/photos/moneyblognewz/
My Family Child Care Tax Companion is for providers who use tax preparers and want to make sure their tax preparer is not making any major mistakes.