A Guide to Turbo Tax 2021

Should family child care providers use Turbo Tax?

Although Turbo Tax can be helpful, there are several sections that are extremely difficult to use for providers.

Entering expenses used for both business and personal purposes

• Any household expense you enter into Turbo Tax will be treated as a 100% business expense. Providers must apply their Time-Space% before entering them into Turbo Tax.

Time-Space Percentage

• Turbo Tax does not ask for the number of hours providers work in their home when children are not present. They make it very difficult for providers to calculate an accurate Time-Space%.

Recording larger expenses such as a fence, a patio and home improvements

• Turbo Tax allows providers to deduct home improvements in one year, rather than depreciating them over 39 years. The section on depreciation is confusing and often inaccurate.

In addition, Turbo Tax will not help providers identify what business expenses they can deduct.

I reviewed the Turbo Tax Basic version for this article. The three major tax preparation software programs on the market are TurboTax,H&R Block and TaxAct Software.

Note: The IRS has a program where you can use the Turbo Tax software, as well as other tax preparation software, for free if you are income eligible. For more information.

General Comments

Expenses

Turbo Tax will not tell you what you are entitled to deduct as a business expense, other than identifying the categories of expenses as they appear on the tax forms.

In other words, the software will ask you to enter your expenses for Supplies but won’t tell you what you might include as supplies. Unless you know you can deduct flashlight batteries, laundry detergent, light bulbs, tinfoil, window cleaner, toilet paper, and so on, you will miss out on a lot of deductions.

Except for house expenses and items you are depreciating, Turbo Tax will assume that any expense you enter is used 100% for your business.

Since you will have many items that are used by your business and your family, you will need to multiply them by your Time-Space Percentage before entering them into the software.

This means you will have to apply your Time-Space Percentage that is calculated elsewhere (under Home Office Deductions) on Turbo Tax.

So, watch out! If you spent $100 on supplies that were used 100% for your business, enter $100 in Turbo Tax. If you spent $1,000 on supplies and your Time-Space Percentage is 35%, enter $350 into Turbo Tax.

This is a big deal, so you want to make sure you understand the importance of entering the right numbers into Turbo Tax. You can calculate your Time-Space Percentage on your own and apply this percentage before entering deductions into Turbo Tax. But, you will want to make sure that Turbo Tax is correctly calculating your Time-Space Percentage for your house expenses. See the Home Office Deductions section below.

Here are the highlights when entering information into Turbo Tax:

“Business Code”

624410

If you identified yourself as a child care provider this code will be entered automatically.

“Do You use the cash method of accounting to run your business?”

Enter “yes.”

“Do you make any payments that required you to issue a form 1099?”

If you issued such a form to a house cleaner or someone who mowed your lawn or plowed your driveway, and you paid the person more than $600, enter “yes.” If you issue a Form 1099 to someone who helped you care for children, this was a mistake, because you should have treated them as an employee, unless the person was in the business of providing substitute care. Go ahead and enter “yes” even in this situation.

“Let’s enter the income for daycare services work”

On this screen Turbo Tax list several categories: “1099-NEC”, “Other self-employed income” and “Form 1099-MISC.”

If you received a Form 1099, enter your income under the appropriate category. Some providers received Form 1099-G. This form should have only been issued if you received unemployment benefits. If so, this should be reported as personal income on Form 1040, not on Schedule C. If you didn’t receive unemployment benefits, but did receive Form 1099-G, then this was a mistake. If this happened, to avoid Form 1099-G being reported on Form 1040, enter this income as “Other self-employed income.”

Note: Even if you didn’t receive a Form 1099 from an agency, you must still report it as income.

Under “Other self-employed income” enter your parent tuition, subsidy program income and Food Program (minus any reimbursements for your own children) income and any other income here.

“What kind of expenses did you have for Daycare services?”

On this screen Turbo Tax asks you to check off boxes where you have expenses under various categories (Supplies, Home office, Meals, Taxes and licenses, etc.). At the bottom of the screen it has a link for “Less common expenses.” Click on this link of you have business liability insurance, traveled overnight for business, paid independent contractors, paid credit card interest, rented equipment, had health insurance premiums, paid tax preparers, accountants or lawyers, purchased long-term care insurance, paid for a business meal away from your home, had office expenses, or repairs or maintenance. Do not enter anything under Inventory.

The next screen will show a list of business expenses that you checked off. Remember that any amount you enter will be treated as a 100% business expense. If it is an expense that is both business and personal, you must multiply it by your time-space percentage before entering it here. Your time-space percentage will be calculated later under your home office expense, so you may want to skip over to there before filling out these expenses.

Vehicle

After entering information about your vehicle and how many business miles you drove, a screen will ask if you have other expenses such as parking, tolls, property tax and interest. Enter your appropriate expenses, and any car loan interest if you are making payments on your vehicle.

Home Office

Turbo Tax has a series of screens to fill out to determine how much you can deduct of your house expenses. There are several screens that can cause confusion.

When asked if you use your home office “regularly”, answer yes. When asked if you use your home office as the primary place where you work, answer yes, assuming you do child care in your own home.

“In 2021, how many months did you use this office at least 15 days?”

This question is tricky because it doesn’t account for the fact that some providers may have been closed for several months because of COVID-19. If you did not care for children in a particular month or two, but still did business activities in your home for at least 15 days during that month, count this month. That’s because you might have done business activities such as distance learning, activity preparation, cleaning, etc.

“What percentage of your work for Daycare services was done at this home office?” Answer 100%.

“How big is the entire home where you did Daycare services work?”

Include the square feet of a garage or basement. Don’t count outside square feet of a patio, back or front yard or driveway.

“How many square feet were the areas of the home used for daycare work?”

If you had rooms used exclusively for your business, enter the square feet of those rooms under “Square footage used exclusively.” An exclusive use room is a room never, ever used for personal purposes. Enter the square feet of rooms used on a regular basis under “Square footage used partially.” Regular basis (or partially) means the room was used at least 2-3 times per week for some business activity. Children do not need to be in the room for it to be counted as regular use.

Special Note for the screen “How often did you use their home for daycare work in 2021?”

This screen will be extremely confusing to fill out. It asks you to enter “Hours per day you used your home for daycare” and then “Days per week the home was used for daycare” and then “Number of days the home was closed.”

Turbo Tax fails to take into account that providers don’t necessarily work the same number of hours each day. More importantly it’s doesn’t ask for how many hours you work after the children are gone on activities such as cleaning, activity preparation, meal preparation, and so on. Now what? The screen is taking the hours per day multiplied by the days in the week you were open and subtracts out the number of days you were closed in the year. If you follow these directions you will get a much lower Time-Space% and pay more in taxes than you should. See my article “How to Track Hours When Children Aren’t Present.”

Here’s how to fill out this screen. You need to determine how many hours in the year you used your home for your business. On a separate piece of paper write down the total number of hours in the year you cared for children. So, if you cared for children from 7am to 6pm from Monday – Friday and were open 52 weeks a year, your answer would be 2,750 (11 hours a day x 5 days a week x 52 weeks = 2,860 hours). If your work week varied throughout the year, determine the total number of hours in the year that you cared for children.

Next, you need to calculate how many additional hours you worked on other activities in your home when children were not present. If you spent 10 hours a week on such activities, multiply 10 hours times 50 weeks in our example to get a total of 500 extra hours. Add the extra hours to 2,860 to get a total of 3,360 hours.

Now we need to fill out the boxes in this screen to reach this total number of hours. To do so, divide your total hours by the number of weeks you were open (52 weeks in our example) and then divide that number by 5 (the number of days you worked each week) and put the answer in the first box (“hours per day you used your home for daycare”).

In our example that would be 13 hours (3,360 divided by 52 weeks divided by 5 days = 13 hours). Then enter the number of days per week you were open in the second box (5 days in our example). Then enter the number of days you were closed in the third box. Here’s where this gets tricky! Only put in the number of days you were closed, not counting Saturdays and Sundays for the weeks you were open. Only count days you were closed because of weather or you were sick, or you were closed for COVID, etc.

Note: I have tried to enter several examples and never been able to get Turbo Tax to correctly calculate a time-space percentage! It is usually off by about 1%. Although this is small, it does make a difference. I don’t know what to tell you about this. Do your best to enter numbers that get you close to your actual time-space percentage.

I strongly recommend that you calculate your Time-Space Percentage on a separate piece of paper and then compare your result with what Turbo Tax shows on several screens later entitled “Home office expenses.” Here’s an Excel spreadsheet calculator where you can do this on your own.

“Based on this info, your simplified home office deduction is $____.”

This screen is asking if you want to use the simplified method to claim house expenses. Don’t. 99% of providers use the actual expenses method, not the simplified deduction method. Check last year’s IRS Schedule C, line 31 to see which method you used. If you filed IRS Form 8829 Expenses for Business Use of Your Home, you used the actual expenses method.

“Home office expenses.”

This screen will show your Time-Space Percentage (called your home office percentage). I would recommend calculating this on your own to see if you come up with the same number.

Later screens ask you to enter your mortgage insurance premiums, excess mortgage interest, real estate taxes, utility expenses, repairs, house insurance, and other house expenses.

“Depreciating for your home office”

You always want to depreciate your home, so be sure to fill out this section.

“Assets”

Note: In my opinion, this section is extremely difficult to fill out. It doesn’t recognize that home improvements such as a new furnace, roof, kitchen remodeling or deck need to be depreciated over 39 years, unless they meet the Safe Harbor for Small Taxpayers exception. It allows you to claim all of these expenses in one year, if you choose to use the “special depreciation allowance.” If you don’t take this “special depreciation allowance” Turbo Tax will depreciate the expense. But, Turbo Tax won’t tell you that the items I’ve listed above must be depreciated. So, unless you know what should be depreciated, this section will lead you astray and deduct items in one year that should be depreciated. In addition to the list of items above that must be depreciated, other items include replacing more than half of your windows or doors or flooring.

“Any Large Purchases (Depreciable Assets)?”

If you answer yes you will asked, “Did you buy any items for any business, rental property and/or farm that cost $2,500 or less in 2021?”

The next screen says, “Let’s see if you can deduct these items as expenses.” Enter “yes” if you bought items costing less than $2,500 and not previously entered into Turbo Tax. Then enter “yes” again that you want to take advantage of the “annual election” rule that allows you to deduct these items in one year, rather than depreciating them.

The next screen says, “Now, let’s review each item you bought” and asks if you have some items that cost less than $2,500 and some that cost more. If you answer that every item cost $2,500 or less the screen will tell you to enter them as “other miscellaneous expenses, not assets.” In other words, you should have entered these items under “Other Common Business Expenses.” Now they tell us!

Otherwise, now click the box that says, “Some items I bought cost $2,500 or less and some cost above $2,500.”

“Did you make improvements to a building you used for this business in 2021?”

Click “What counts as an improvement?” to help you understand what goes here.

Let’s see if you can claim these improvements as expenses

This screen will describe a rule that allows you to deduct an improvement in one year. It’s called the Safe Harbor for Small Taxpayers. See my article to better understand this exception to the rule that you must depreciate home improvements over 39 years.

“Do you have items for this business that aren’t covered by your elections?”

Click on “I want to know more about this” to help you understand what goes here. If you click “yes” you will be able to enter expenses for other assets. In all cases, a screen will ask if you used the asset 100% for your business or if you used it for both business and personal use. If you say you use it for business and personal use, it will ask you to enter the percentage of time you used it for your business. In almost every case, this will be your Time-Space Percentage. Turbo Tax will not automatically enter this percentage. Instead, you must enter a percentage each time. If you enter something other than your Time-Space Percentage, you should have tracked the actual business use for a month or so. Don’t guess this. If you didn’t track the actual use, use your Time-Space Percentage.

How Do You Want to Deduct this Item?

Other than home improvements, you want to check the box that says “I’ll take the 100% special depreciation allowance. You always want to take this option because it will allow you to deduct the cost in one year rather than having to depreciate it. This is true regardless of the cost of the item.

“Real Estate Property”

When you select the “Real Estate Property” option, the next screen will give you the several options.

Choose “Nonresidential real estate” This is where to put home improvement such as a new furnace, remodeling a kitchen, replacing more than half of your windows, flooring and doors. Do not put your home here. Your home depreciation should have been entered earlier in Turbo Tax under “Depreciation for your home office” as described at the beginning of this article.

Warning! Turbo Tax will allow you to deduct the business portion of these expenses in one year, even though IRS rules would require you to depreciate home improvements over 39 years. I don’t trust Turbo Tax to calculate the deductions for home improvements. You can deduct the business portion (your time-space%) of all items in one year except home improvements, the home and a home addition. Otherwise, a home improvement must be depreciated over 39 years (with the exception of the Safe Harbor for Small Taxpayers). Turbo Tax allows you to deduct kitchen remodeling and a furnace in one year, which is incorrect! If you chose to depreciate a kitchen, Turbo Tax allows you to depreciate it over 15 years rather than 39 years. Wrong.

After the Assets section, you can start entering expenses into categories such as Supplies, Advertising, Taxes and licenses, Meals and Other expenses. Remember, Turbo Tax will deduct the full amount of any expense you enter here, rather than asking you if the item was used for both business and personal purposes. So, if you spent $400 on Supplies that were used for both business and personal purposes and your Time-Space Percentage was 30%, you should enter $120 ($400 x 30% = $120).

Meals (100% limit)

Here is where you can enter food expenses for the children in your care. It will next take you to the screen that says, “Standard meals and snack rates for your Daycare services work.”  If you click on “Learn more” at the top of the screen, the insert will say, “If you are reimbursed for meals or snacks, you can deduct only the portion of the standard allowance that exceeds the reimbursement. Enter the total amount on the next screen.” This is wrong and confusing! This is saying that if you received $4,000 from the Food Program and spent $5,000 on food, you should only enter $1,000 as an expense. The IRS does not recommend using this method. Instead, they recommend reporting the Food Program reimbursements as income, or $4,000 in our example, and reporting all your food expenses, or $5,000 in our example. The fact that Turbo Tax then says to “enter the full amount on the next screen” is very confusing. Are they saying to enter $4,000 or $1,000? It’s not clear.

The next screen will allow you to enter your food deduction. To calculate this, using the standard meal allowance rate, you must multiply your business meals and snacks by these rates and enter the total. Remember to enter your Food Program reimbursements as income earlier in Turbo Tax.

Contract Labor

Do not enter expenses here for someone you hired to help you care for children. Unless that person was in the business of providing substitute care for other providers, such persons are employees. Only enter here expenses for a cleaning person, or someone who mowed your lawn or plowed your driveway.

Conclusion

When I use Turbo Tax for my taxes, I find it easier to fill out the tax forms by hand first. Then I go to Turbo Tax and enter my numbers. When I print out the tax forms, I can compare them with the ones I completed by hand to see if Turbo Tax made any mistakes. My book, 2021 Family Child Care Tax Workbook and Organizer, contains a chapter where you can enter your income and expenses to make comparing it to Turbo Tax easy.

If you don’t understand what I’ve been describing in this article about Turbo Tax, don’t use it! I’ve talked with providers who did use this software, got audited, and found out that they had incorrectly entered information into Turbo Tax.

If you or Turbo Tax make a mistake, you are responsible for paying any taxes you owe.

Tom Copeland - www.tomcopelandblog.com

Image credit: Turbo Tax