Are CACFP Reimbursements Taxable Income?
This question continues to confuse some family child care providers, Food Program (CACFP) sponsors, and tax professionals. The short answer is Yes.
There is an exception - reimbursements received for a child care provider's own child is not taxable income. IRS Publication 587 Business Use of Your Home says: "Do not include payments or expenses for your own children if they are eligible for the program [Food Program]." The reason is that such reimbursements are considered a "benefit" under Food Program regulations and not subject to taxes, like food stamps.
How should you report Food Program reimbursements on your tax return? Here's where there is the confusion.
IRS Publication 587 says: "Reimbursements you receive from a sponsor under the Child and Adult Care Program of the Department of Agriculture are taxable only to the extent they exceed your expenses for eligible children. If your reimbursements are more than your expenses for food, show the difference as income in Part I of Schedule C. If you food expenses are greater than the reimbursements, show the difference as an expense in Part V of Schedule C."
Therefore, if you follow these instructions and your reimbursements were $4,000 and your food expenses were $5,000 you would should show zero income and $1,000 of food expenses on Schedule C. This is called the "netting" method - you are showing the net income or expense on Schedule C.
However, a newer IRS publication has recommended that child care providers not use the "netting method". The IRS Child Care Provider Audit Technique Guide, revised in 2009, is the publication used by IRS auditors to help them understand the family child care business when they are auditing them. It says: "If the provider receives reimbursement for food costs through the CACFP or any other program, the provider can report all the reimbursements under the income section of Part I of the Schedule C and then deduct the food expenses in full, which is the recommended method."
The Audit Guide goes on: "The netting method is not a preferred method since an [IRS] Examiner will always be looking for the food reimbursement amounts. When you report the amount separately, the Examiner will more easily be able to account for the payments."
Therefore, using the above example the provider should report $4,000 as income and $5,000 as a food expense.
In my many years of experience with IRS audits I have never seen an auditor request that the child care provider use the netting method. Instead, the auditors want to see all the Food Program reimbursements reported as income and all the business food expenses claimed as a deduction.
If you use the netting method you are paying the same taxes as someone who shows all the income and all the expenses. Therefore, you won't be in trouble with the IRS if you do use this method.
If the child care provider in our example was not on the Food Program she would report zero income from reimbursements and claim $5,000 in food expenses. When she does join the Food Program her taxable income will rise by $4,000.
Don't let someone tell you that you shouldn't report your Food Program reimbursements as taxable income. They are probably confused about the netting method. Show them this blog post if you need to convince them.
Tom Copeland - www.tomcopelandblog.com
Image credit: https://www.flickr.com/photos/usdagov/33544588098
For more information, see my book Family Child Care Record Keeping Guide.
