Ask Civitas: March 2024 Reader Questions Answered!

You have questions, we have answers! Since taking over Tom Copeland’s blog last year, we’ve heard from a lot of you who have questions about the business of family child care. Here’s a roundup of the latest questions we’ve received from all of you, via the Ask the Experts page.

Unfortunately, there is no video for this month’s questions. Below are the questions we answered:

Question: For 2023, the bonus depreciation is 80 percent. What happens to the 20% in 2024? Do you depreciate the rest in 2024 or do you have to spread it out for the life of the item?  I also heard that they are working on legislation to bring back the 100% bonus rule. Will that be for 2023 taxes also? Do you think it will pass?  How long do you think it will take to pass? 

Answer: The remaining 20% is depreciated over the remaining life. The Tax Relief Act pending in the senate would restore 100% deprecation for 2023 and 2024. I’m not sure of the changes of passage. When it went through the House in January it had overwhelming bipartisan support. The Senate has been slower warming to it. Most recently supporters in the Senate have been pushing for a vote before April 15.  

Question: I closed my in-home childcare in October 2022 after being open for 25 years. I closed on the sale of my home in March 2023. I am told I will need to recapture depreciation, and this will add over $40,000 in income to my taxes and I will have to pay taxes on this. Could you please explain this to me? I want to be prepared in case I owe a large sum of money. I lost my husband to cancer in 2020 so I no longer have his income to help if I owe taxes this year.

Answer: The simple answer is that you do have to have deprecation recaptured. It is critical to know that there is a myth that if you don’t take deprecation you can avoid recapture – this is not true. If you take it or not, the business use portion is taxed. See Tax Considerations for Selling Your Home.

Question: I know most businesses can take a loss on their businesses through depreciation. I use H&R Block premium to do my taxes and although I'm pretty sure I should have a loss through depreciation, it shows my income as zero every year. Is there some exception to the depreciation loss rule for childcare providers that I am not aware of? 

Answer: It should result in a loss. I’m surprised it is not. 

Question: My wife and I have a home-based childcare business. If I have purchased new yard/lawn equipment, lawn mower, string trimmer, snow blower, etc., in 2023, do these items get depreciated for several years or is there a different way to put them in my taxes?

Answer: It depends on the time-space results and the total cost.  We have a depreciation guide that can help: See Depreciation

Question 1: Would the carpet that was replaced in 2023 in my basement (my daycare space - 100%) be depreciated or taken all in one year? The cost was $2600 so more than the $2500 deprecation rule. Can I use the safe harbor or another deduction to do it all in one year or does it need to be depreciated? Or do I need to split the receipt up for labor and materials for it to go under $2500? 

Question 2: How does replacing flooring play into expenses from a tax perspective for both 100% usage spaces and the time/space regular usage spaces?  And if the flooring is more than $2500 how does that work and does it make a difference if it is broken down in amounts under $2500 each (per room say) &  the total amount spent is over $2500?  

Answer to Question 1 and 2: For both it depends on the type of flooring. If similar to what you currently have in place you could likely expense it as a repair. If it is an improvement on the current flooring you may need to deprecate it. The first consideration is if the business portion is more than $2,500. I would be hesitant about breaking it up by room unless you were invoiced in that way. If it is over $2,500 You could take the safe harbor for up to $10,000.

Question: I plan to retire in 3 years. Should I be using Section 179 to depreciate personal property or do the 7-year depreciation? I learned that I must depreciate my vehicle for 5 years using Section 179 or face a penalty if I quit daycare in less than 5 years. 

Answer: The amount of deprecation recapture (tax on the depreciation) will vary as to the speed you take the deduction. However, you should consider two things. First, when you dispose of the property will it exceed the basis – that is if you have a car and you sell it for less than the adjusted basis, there’s no deprecation recapture. If it is sold for more, than a portion would be subject for recapture. Second, where there is recapture, if it based on your tax rate. If higher now than at retirement, you may be able to have a “win”. For example, if your in the 22% tax bracket now and at retirement you are at 12% bracket, that will decrease the overall impact. 

Question: I leased a vehicle in my name and my son makes the monthly payments directly to the lease company. My question is can he claim the standard mileage deduction since he pays the company for the vehicle and not me?

Answer: Unfortunately, no.

Question: How and what can we write off of credit cards? Fees or interest? And what fees? And how, where do we put it? 

Answer: You can write off the business portion of fees and interest. So if it is a business credit card 100%, but if it is a personal one, you will want to pro-rate it based on the amount business expenses affected fees or interest.

Question: My daughter drives my car for delivery and she pays for all the gas and maintenance. Where do I add it on her taxes Schedule C? Under miscellaneous expenses? Cause it either own car or lease it. She gives me a small amount for using it, so could you help me put it in the right place 

Answer: If the car is part of your business the amount she is paying you can be reported, but not the expenses she is paying. 

Question: I have a licensed home daycare and I am required by the state to hold an unpaid spot for my daughter. This is 1000s a year I am losing in daycare fees. I also allow my employee to bring her child for no charge resulting in more lost wages. Are these tax write offs and how would I go about writing them off? 

Answer: Unfortunately, not. You are allowed to write off the expenses associated with them, but not the lost revenue.  

Question: I just recently signed up with SEIU Healthcare for Daycare and I just received a 1099 non employee compensation. The money is in line one and I do not understand if am I paying back. I don’t understand. I never got money from them. I just went to the doctor so I just need to explain this I don’t know what it is money I earned or not because I don’t know just can you help me please thank you. 

Answer: Unfortunately, it is difficult to answer without knowing the services SEIU is providing.  

Question: Can you claim tips for grocery deliveries? 

Answer: If a tip is paid for a delivery for the business, yes it is deductible.  

Question: We replaced the front door/storm door and the back door (french doors/screen door) in 2023 (April). The cost of replacement/labor was $7,450. How do I record this, please? 

Answer: Likely you will want to apply time-space and then if the cost is above $2,500, See Deprecation.  

Question: I had a client write me a personal check as a Christmas gift. Should I include the amount of the gift on her end of the year receipt and claim it as income? It was a check for $200. 

Answer: Yes, its claimed as income 

Question: I have filed my own taxes for 12 years using the KidKare program and H&R Block. In 2023 my husband suggested we start paying my 12 year old for working for me to help with a deduction for my childcare. She made $6,500 for 2023. Do I need to file any extra tax forms for her or myself or does it just go under my Schedule C? Also will she need to file a tax return? I feel like it might be more of a pain to pay her and have it as a deduction 

Answer: There are a few steps you will want to take: 

Step 1: Prepare a job description that details the responsibilities of the job. Some examples include: playing with the children, cleaning up before and after the children, preparing meals for the children, cleaning toys, and basic record-keeping. Do not include more personal activities such as shopping, mowing the lawn, running family errands, etc. In other words, don't count any work for any activity that would still be done if you weren't in business. 

Pro Tip: You will need an Employer Identification Number (EIN), even if you’re a sole proprietor. If you do not already have an EIN, you can visit the IRS website to apply for one. If you have landed on a website that charges a fee for this service, know that it is a scam.  

Step 2: Prepare a written agreement between you and your child that describes the employment arrangement: days and hours of work, pay, etc. Both parties should sign this agreement. 

Step 3: Keep a daily record of when the work was done (Monday 9:00 a.m. – 10:00 a.m., Tuesday 4:00 p.m. – 5:00 p.m., Wednesday 2:30 p.m. – 3:45 p.m., etc.). You could even take some pictures or videos of your kid working for further documentation! 

Step 4: Maintain proof of payment. If you choose to pay your child in cash, be sure you have a system in place to log that those payments were made, just like you would with any other receipt. Alternatively, there are many other systems you could use for verifiable payments, including an ACH or check.  

At the end of the year, you will want to file a W-2 for them and taxes. 

Question: I wanted to know if there is some sort of waiver, I could use to use an outdoor porta potty for children that will have a sink and will be serviced regularly. I am trying to become a certified nature-based program and am currently a licensed family childcare business. Outdoor play is very important, especially with the covid rise. 

Answer: You will want to speak to your local licensing.  

Question: My daughter and I manage my Childcare together. My CPA had another daughter as and independent contractor and didn't think anything of adding my 2nd daughter as the same classification. So she is an IC also. My problem now is that we just learned that in CA, they passed a law that she would be an employee and not an IC. I already sent in the 1099 for 2023. This is a huge problem and I don't know where to start! How can I list her as an Employee for the past 3 years. She is also living with me and all of our accounts are together.  Another question I have is, should I convert my Sole Proprietorship to Partnership? 

Answer: You will need to talk to your CPA about this since it can be complex. Having an employee will not affect your being a sole proprietorship or partnership. If she is a part owner, than yes, you will likely want to be a partnership or even an S Corporation, depending on your profits.  

Question: I have a child whose parents are not together. Only mom pays me for her 2 kids and the dad claims one child on his taxes that is his. However, only mom pays me. Dad never has. He is asking for my tax ID number. Do I need to give it to him? 

Answer: You would provide documentation to the parent or parents who is listed on the enrollment agreement.

Question: If a childcare provider changes their contract and does not ask the parent to sign a new contract, can the new contract be legally enforced? Does a childcare provider have to give any advance notice (ex. 30 days) when changing their contract? If a childcare provider changes their contract regarding withdrawal procedures from 2 weeks notice to 30 days notice - the parent does not sign the new contract and 2 weeks after new contract was sent home they withdrawal their child. Can the provider enforce the 30 day notice/payment for that family? 

Answer: If a childcare provider changes any type of policies, procedures, or contracts all parties should sign and date the new document. Providing a written notice of changes is a great practice. For further guidance, refer to Contracts (texas.gov) 

Question: I was interviewed by a CPS social worker, assisted by the police and my licensor…there was a lot of personal information, so we’ll end the question there.  

Answer: Please be advised to seek legal counsel with this matter.

Question: We live in a rural area. We bought a tractor and snowblower to make sure that the road was cleared. It was one of the first questions everyone we interviewed asked. We also advertise as a rural/farm setting. We grow a garden and get as much fresh homegrown food as we can. We ended up getting chickens and used the eggs for the daycare and personal. She has added learning about chickens as part of the preschooler's lesson plan, and they help her gather eggs. We have added more outside to try and get as much of a farm feeling as we can. I was able to get lots of materials for free since I repurposed and rebuilt broken stuff. It’s mainly time and miles driving to get stuff from farmers and neighbors. I don’t have direct expenses for most of the stuff. I just have time and mileage. We are struggling to get filled up, so I have had to spend time redoing lots of stuff to make it look better since we are a business now. Our time space is higher and our expenses are adding up since we keep trying to make it more appealing to new clients.  Would it be better to start a snow removal business separate from the daycare and bill the daycare? Would we just use time space for the bill then? Each tax person I have talked to gives me a different answer, but I haven’t found anyone with much knowledge on in-home daycares. I keep track of hours working on the chicken's stuff, gardening, and other projects for the daycare. Would you track all hours and say a portion of the hours is for the daycare? 

Answer: Without knowing the specific costs and your time-space, we cant provide a recommendation on a snowblower vs. a service. Keep in mind, costs, including time have to be ordinary and necessary for the business and parsed out from your personal costs. So how to track the hours will depend greatly on the nature of your effort and how it relates to the business. I would be very very cautious about the hours on the chickens in particular. Typically with animals the IRS is looking for a curriculum or similar structure on how they fit into your program.  

Question: Hi there! I was wondering if there was anything we could do to reverse this situation. Our HOA does not allow businesses in the home but we are desperately trying to open a licensed daycare. Any recommendations? 

Answer: This is a legal matter and you should consult with an attorney.

Question: I have an 18-year-old Substitute who had her tax guy say she needs to be an employee instead of an independent contractor even though I spent the time with her to get her own EIN. She wants to be an employee and work 2 days a week- I’m ok with that but not consistently. I don’t want her to be an employee due to the ridiculous amount of extra taxes that I am taxed as an employer state and Federal, plus unemployment tax, and workman’s comp- which I have to have anyway). What are the guidelines for hiring a substitute Independent Contractor vs having a Substitute employee who works 6 days a month? Can’t she decide to be an independent contractor so she can be a substitute in other childcare settings? 

Answer: There are a number of factors that effect being an employee vs. a contractor. Part of it is the amount of discretion they have, supervision required, and how they manage their own business (assuming they have one). You should look at the specifics in our contractor or employee guide. See When is Someone a Contractor or an Employee

Question: I incorporated my home childcare business years ago. I am a S Corporation. Do I need to file a BOI? 

Answer: Yes 

Question: How do I know if I am an LLC? How do I know if I need to report? I am a daycare provider in an in-home setting. I am the only employee at my daycare.

Answer: As an LLC you do need to file.  

Question: Can I deduct my garage for storage for toys and daycare stuff? And how about my backyard? The kids use it and I have a lot of toys there as well. 

Answer: Likely, you could deduct a portion of them. For the garage, you will want to make sure the space you are deducting is clearly separate from the personal use of the space. For example, don’t intermingle boxes with supplies for work and home. For the yard you would use time space for common area costs – such as maintaining the lawn, but not count the actual back year in the calculation.  

Question: Can we count all the time we are updating stuff to improve the daycare home? We are also improving our home so how do you decide what hours to count? Am I able to deduct the daycare percentage from the amount I spend on mortgage payments? 

Answer: You can deduct the percentage of mortgage interest. In terms of hours, I would be careful in ensuring these are ordinary and necessary for the business. The IRS is vague on these kinds of hours so I would be prudent about it. For example, setting up an exclusive use space – I would count it. Painting the entryway that is used by the family and the business- I would be cautious.  

Question: Since the meal reimbursement rates run from July to June of any given year, I am unclear which rates I use for my tax year. For example, for 2023 taxes (Jan-December), do I use the 2022/2023 rates? Or the 2023/2024 rates? I read that I should use the rates that are in effect in January of the year I am filing. So January of 2023 falls under the 2022/2023. I can't seem to find any information on this matter and I am very unclear.

Answer: Great question! You use the rates in force at the start of the year. So for 2023 you would use the 2022-2023 rates since they were applicable in January 2023.  

Question: Can you tell me what meal deductions are in Iowa currently? Breakfast, am snack, lunch, pm snack. I am not on the food program. Zip code is 52002. I look forward to your response. 

Answer: We can paste in the link. You’ll want to use the Tier I rate for 2022-2023 for your 2023 taxes.  See Reimbursement Rates

Question: I’m not on the food Program in this year will be my first year claiming the IRS standard breakfast, Lunch , & snacks deduction. I am a Domestic Limited Liability Company & file form 1065. Do I include the IRS standard food deduction on Form 1065 under other expenses as I would on Schedule C Part V under other expenses to get the credit?

Answer: Yes, that’s correct. 

Thank you all so much for all of your questions! We will be back next month with more answers for you, so keep sending your questions to us!