The Perils of Operating at a Loss

6a0133f3fc5805970b01543581b1d3970c-320wiFamily child care is a for-profit business. Although some child care providers do earn a reasonable income, many others do not.

In 2007 I surveyed over 500 child care providers for my book on money management. I found that 74% reported a business profit of less than $20,000, and only 5% made a profit of $40,000 or more.

It’s not uncommon that some child care providers occasionally show a business loss. What happens in this situation?

There are some limitations of what deductions may be claimed if a child care provider tries to report a loss on her tax return. The house expenses that appear on IRS Form 8829 Expenses for Business Use of Your Home cannot create or increase a business loss. Instead, un-allowed expenses can be carried forward to the next year.

For example, let’s say you show $25,000 of income and $20,000 of expenses on Schedule C (before taking into account Form 8829 expenses). Your tentative profit is $5,000. If your house expenses on Form 8829 total $8,000, you will only be able to deduct $5,000 of them (which will create a zero profit) and roll over the other $3,000 of expenses to the next year.

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Categories: Record Keeping & Taxes, Tax Return

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2 replies

  1. Sometimes when I have a family child care client in a loss situation, it can be the case that eliminating some expenses to show a small profit also qualifies the client for an Earned Income Credit. I am reluctant to mess with any expenses in this case. What do you think?

  2. IRS Publication 596 (EIC) says, “When figuring your net earnings from self-employment, you must claim all your allowable business expenses.” This says you can’t play around by not claiming some deductions to get a higher EIC.

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