There are times when a tax preparer or the IRS will tell you that you can’t deduct something on your business tax return.
When this happens, ask this question: “Why can’t I deduct it?”
Sometimes you will hear this answer:
“You can’t deduct _____ [names a household item] because you would be using it if you weren’t in the family child care business.”
This answer is wrong and let me explain why.
Ordinary and Necessary
The first response you want to give to someone who tells you that you can’t deduct an item is “Can you refer me to something in writing that supports your position?”
More often than not, the person will not be able to.
Ordinary and necessary means: common, accepted, helpful, or appropriate. See IRS Publication 535 Business Expenses, page 2.
There is nothing in the IRS code or any IRS publication that says you can’t deduct something unless you bought it specifically for your business, or you would use it even if you weren’t in business.
IRS Child Care Provider Audit Technique Guide
The IRS Child Care Provider Audit Technique Guide gives a number of examples of items that family child care providers can deduct in their business: furniture, appliances, lawn mowing service, laundry facilities, computers, kitchen equipment, playground equipment, toys, etc.
The Audit Technique Guide also refers to items a provider might own before she goes into business and then describes how to deduct them.
Clearly, there is written support for the proposition that items you use for personal purposes can also be deducted as a business expense.
You can deduct an item if it’s ordinary and necessary for your business, even if you would still use the item if you weren’t in business. I’ve been defending providers in IRS audit for decades and I’ve never seen the IRS succesfully argue this faulty position.
You can deduct an item based on how it’s used in your business, not why it was purchased or the fact that it’s also used personally, and will continue to be used personally after you are out of business. After you have retired you will continue to use your furniture and appliances and kitchen utensils and welcome mat and lawn mower and so on. They are still deductible while you use them in your business.
Story of the TV
Here’s one of my favorite stories:
Years ago I had a discussion with a tax preparer about which tax form to use to deduct a television. To settle the matter I called the IRS and pretended to be a family child care provider.
“Where can I deduct my television?” I asked. The IRS official said, “You can’t deduct your television.” “Why can’t I deduct it?” I replied.
“Because you used your television before you went into business.” I responded, “But I also used my couch and washer and dryer. What’s the difference?”
There was a long pause, then he said, “Well I guess you can deduct it.” I hung up.
It pays to ask the question “Why can’t I deduct it?”
Tom Copeland – www.tomcopelandblog.com
Image credit: cheryls-daycare.webs.com
For more information about what is deductible, see my book Family Child Care Record Keeping Guide that lists over 1,000 allowable business deductions.