Ask Civitas: May 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.
Can’t watch the video? Here’s a transcript:
Question: Is there a law by the IRS that determines times meals should be served?
Answer: On the IRS side, there's no predetermined standard times for meals, but they do suggest breakfast being at the beginning of the day or close to it, lunch or supper with a gap of at least three hours between one meal to another, snacks at least two hours before or after a meal service, and no more than three hours between any meal or snack service.
Question: I have a childcare center that is an S Corp and I don’t anywhere indicating that a provider isn't allowed to use the CACFP per diem rates when figuring daycare meals, correct?
Answer: If it's a center, no, they can't use them. It's actually in IRS Publication 587. Using that tier one standard meal rate, that's only for family childcare, says it quite clearly in there. I don't know the page offhand.
Question: Could I get more expenses to write off if I use the fruit program reimbursement? I have seven kids and only bring in about $300 a month for food with the program this year. Lots of my colleagues have gone off the food program and just keep track and claim their meals and snacks with the tax accountant for expenses. Is this better way to go now in 2023?
Answer: So I think what you're saying is really two things: One, is it better to use the food deduction? If you are family care providers, you can use those tier one rates. I have not seen tax return where it isn't beneficial for you to use it. That's number one. Number two: food program. I also have not seen a tax return where it isn't worth the money. And I know sometimes the record keeping can be a pain, but think about logs, think about an app, think about a CCMS. What I see in this is having looked at hundreds, if not at this point 1000s of family care provider tax returns, is that you make money off of it. So I strongly recommend. Try to work on how you can make it more efficient, but try to stay in that program.
Question: I plan to retire from daycare in five to seven years. What do I do with the items I purchased, like high chairs, toys, and cribs? I've already written them off but no longer need it. So do I rummage through everything related to the daycare? Or do I keep the items for the daycare?
Answer: You can pretty much do whatever you want. The impact depends on what you do with it. If you donate it, if it has any value, you can certainly write that value out. If you want to sell it, you can, but that would be considered revenue against your business, as liquidates, which is the fancy way of saying it ends. Certainly, if any of that had a basis increase, you're gonna have to do depreciation recapture. I wouldn't worry about it. Chances are your high chair is not going to be a collector's item, so that shouldn't be an issue. But I would just think about those two big things: you could donate it or if you sell it, you should report that revenue.
Question: I've been a small daycare licensed for 12 years in the state of Maine. I'm an LLC, but also a sole proprietor. I think they mean a single member LLC. I have a payroll service I use for my staff and never know how to pay myself random debit money. This year ATM withdrawals are approximately 15,000, some were from my personal draws and others were things I purchased for the business. My tax guy says I will owe the IRS a huge amount of money, how do I get taxed so much?
Answer: I would take a really close look at where that money flowed. Because if you did take out some of that money for purchases that were made for the program, then those expenses should be offsetting it right? If I take out $100 and I buy something for the business, that's a valid expense for $100. The revenue will be offset by the expense. So I would take a quick look at what those expenses are. It just sounds like something's really off there. The other thing I would say, not that you asked for this, I'd take a real look at some basic cash flow tools. We have a number of them if you go to Texas.childcare.gov. If you go to the Wisconsin Early Childhood Association as another site, we could throw these in here. There are some simple tools that we have on judging your cash flow and that may help you to not have to take these random withdrawals, but maybe get on a plan where you know how much you should be paying yourself, and you deserve it right? You deserve some stability in this.
Question: I purchased my new home in 2022 and reopened my family care in March 2023 and spent several thousands on furniture, to furnish the bigger home. My question is: can I deduct all my furniture, decor, etc, that I purchased to make my daycare family friendly and nice for prospective daycare parents and children? I was told by other providers we can deduct everything used for the home or daycare space. Is this true? Where did these deductions go when using TurboTax? Are these even deductible?
Answer: It comes down to time/space. If you have specific furniture and decor that were put in a room that's exclusive use, like let's say you took one bedroom and you made it into a nursery for the children, then you are looking at 100%. If you have regular use rooms, time/space. If you have rooms that are not used at all for the business, you can’t take it out. Just remember also, depreciation may come into play especially if some of those large purchases, like anything over $2,500. Make sure you don't have to depreciate it.
Question: What percent of tax do I hold back monthly and is it the law in Kansas to pay quarterly taxes?
Answer: I don't know offhand. Typically, what we say is if your state has an income tax, whenever you take profit out, take 5% of it. Pay your estimated state taxes with that 5%. So if I take $100 out, $5 of that should be set aside and send to the state for quarterly taxes.
Question: It was my understanding that I wouldn't pay state and federal taxes on my grant? Is this true? I live in Minnesota.
Answer: I have not heard anything otherwise that it's anything but taxable in Minnesota, and 99% of the time, it's going to be taxable.
Question: My wife runs a small family home daycare here in San Diego, California. Last year, she received a minor infrastructure grant and we received a 1099 G for the money received for tax purposes. Do I show the grant money we spent on home improvements? I'm using TurboTax Home and Business Edition.
Answer: One is yes. So with a grant, typically, as I just said in the last one, is revenue. So what's on the 1099 should go into revenue. They don't send you a 1099, but you still have to put under revenue by law. What you spent it on should be deducted. Now remember, you have to deduct it in accordance with the IRS. So for example, they may have said we're fine paying you 100% For your HVAC. However, the IRS is going to want you to time/space that so the deduction might be a little lower, so keep an eye on that. That's one thing.
The other thing is you're going to be confounded a little bit in Turbo Tax with 1099-G, it's interesting. Some of the states have used it for reporting grants, because it's G for government payment. It's really supposed to be unemployment payments. So you know, we've always recommended that the government's use 1099-NEC and unemployment compensation. It's not a big deal. But some people have been thrown off in Turbo Tax by that a little bit because 1099-G is usually reported in Turbo Tax under your unemployment payments if you've had them. In this case, I would put it under your revenue.
Question: If I opt for the standard deduction for food expenses for daycare kids, can I still claim snacks and drinks for my assistant? Or would I need to choose the actual expense method to do so? Similarly, if I choose the standard deduction for vehicle expenses, then I can I still claim things like tire changes and mechanical work, or do I need to use the actual expense method for those deductions? Under what category do I deduct assistant pay?
Answer: Okay, a few things there. One, for those meals for your assistant. Usually they're subject to 50%, so only half of that is deductible and that's half of the actual cost. You can't use the standard food deduction there. Often vehicle expenses is either actual or their mileage, you can't do both. So if you use the actual method, yes, you can do those repairs. If you're using mileage you cannot, but you can by the way, on mileage ,do things like parking fees, tolls, don't forget that. Assistant pay goes under wages.
Question: Purchased solar panels. There are some numbers here: was financed through a company, my time/space is 19.25%., we take the standard deduction. It goes on. And then she asked if she could do some of it as a depreciation write off.
Answer: One, your time space is really low, like very low. I’d take a close look at that, make sure you're calculating it correctly. Are you getting all the time you're spending on the business? So like, Sunday, when you're dealing meal prep, kids aren't even there, are you counting that time? Are you counting cleanup? Are you counting meal planning, lesson planning? Think about those things because 19%, that's low. Two, you can depreciate a portion of it based on your time/space. So that yes, you can make part of it a business deduction, you'd have to depreciate it potentially over a number of years. And just keep in mind, because she does ask about the energy credit, the portion that is business use cannot be used for the tax credit. So if you have $100,000, $20,000 is going as business expense, then you only can do the tax credit on $80,000. I just did that as simple numbers.
Question: I will need to do my taxes differently a year before I decide to close my business. Do you know what that might be?
Answer: Typically, you need to do a final return if you're closing. A lot of providers at that time are also retiring. So when they sell their home, there's often depreciation recapture. That might be what they're talking about. But typically it's the final return, it's a return where you check a box that says to the IRS and the business is ending.
Question: Where can I get a milage tracker?
Answer: The App Store. Mile IQ is a good one, Everlands is a good one. I've used both. I've liked them both but happen to be using Everlands. Now, why did I leave Mile IQ? I don't know. I think I just wanted to try every Lance. They're both fine, very, very similar, strongly recommend that you have one, it's so much easier than doing a paper log. Which is okay, if that's what you're doing, that's fine. But just want to make sure that you know, if you have a phone, you're taking it with you. These are some easy solutions.
Question: My sister will be moving in with me and I run a California FCC licensed for 12. She has a learning disability and is not able to support herself independently. Can she watch one family to make up her income? And then it goes and she says: Do you see any negative tax ramifications for doing this? By the way, she has her own EIN.
Answer: She could definitely work for you. I think on the tax implications, you know that income for her would be deductible and she will have to report it. On the EIN front, that makes it sound like you want to make her 1099. Sounds like an employee to me, especially in California because California has special rules around this. So I would think about that part of it as you proceed.
Question: Do you know if the home loan for childcare providers in the state of Ohio was considered a noncommercial loan with a higher interest rate or regular mortgage mortgage?
Answer: Typically, they are regular mortgages. So that may be something you want to take up with your mortgage broker, because I have not heard that. If you're living there, and I'm assuming you're living there, I have heard that with homes that are being used for childcare where there's nobody actually living in the home. But the way you described it sounds like you are.
Question: I've never had my parents use a sign in sign out, I've always kept time on my calendar keepers. Is that okay if I get audited?
Answer: Talk to your state childcare regulator about that, they have some rules usually.
Question: How long do I have to keep files on the children in care?
Answer: Again, that's one for your state childcare regulator.
Question: If I'm making a doctor a trip to a doctor appointment, but stop at Sam's Club and Aldi for daycare and grocery shopping, since we don't have either store locally, while on the trip, can I write off other expenses? I incurred hotel, gas, and meals.
Answer: So the general rule is if the majority of the trip is for your business, you could write off the trip. If not, then no. So for example, let's say you went four hours away from home, and two hours of that was going back and forth, and the actual time on there was an hour and a half at the doctor's and half an hour shopping. That case, it would be a personal trip. If you flipped it and it was an hour and a half shopping and only half hour at the doctor's, that could be construed as a business trip. What trips me up here is you're talking about hotel, gas, and meals. I'm wondering if you're going to an out of town physician. I would be very cautious about this because when you're out of town, and I know some of you have asked this especially as we get around vacation times and you start thinking about the summer and people can tag things on it, remember: if you have to work while you're away from home, on a primarily personal trip, it's eight hours on the day that you have to actually be working and it can't be work that you could do at home. So like, if our person asking this question pulled into a diner and decided to do her meal planning and lesson planning from a diner that day, doesn't count. It would have to be stuff like Sam's Club and Aldi, which you can only do on site, and even then you only prorate it. So if you're on a five day trip and one day is spent doing work, we only get 20% of those costs. So I would just be very cautious when you start getting into hotel, gas, and meals.
Question: I had full time childcare in my home from 2023 January through July. Then I went to work outside of my home but continued after school care in my home, August through December. How would I calculate my time/space percentage?
Answer: Same way as always, total time, total space. So yes, it'll go down. So your average for the year will go down a bit. But that's how you calculate it.
Question: I operated my family care five days a week through May. Beginning in June, I began operating four days a week and I had to close the business for about six weeks. How do I calculate time and space?
Answer: Same exact way, just total everything up. And you still have to have that period of time that you were open. That's what you divide it by. So total time, total space.
But what I should say by the way, like during the six weeks that you're off for surgery, you would still count that time as operating. It would be one thing if you closed for the year, like entirely, but since you were still open, that would be treated like a vacation where you'd still count those hours as part of the total time for the year.
Question: My home daycare moved from one place to another in May of last year. The size and rent of the two houses are different. I would like to ask you how to calculate the time space.
Answer: In this case, it's two separate forms because of your two separate locations. You do time/space for apartment A, and time/space for apartment B.
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!
