Ask Civitas: November 2023 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: How much should I raise my rates per year? How do I keep it competitive?

Answer:  It depends a lot on a number of different factors such as your location, your operating costs, the competition in your area, inflation as we've seen this year in particular, any sort of local economic conditions. If more people are working from home or a new office building opened, those are things that can affect it one way or another. So there really isn't a fixed standard percentage or increase that I would say use this universally. It should always be 2% or something like that. You really want to crunch those numbers at least once a year. Go through them and set your rates accordingly. See: How Do I Set My Rates for My Child Care Business?

Question: I have a child with behavioral problems today. He bit me. I do not have a clause in my contract for immediate termination. I just want him terminated legally. What advice can you give me?

Answer:  A lot depends on the way you've structured that agreement and so without seeing it, it's hard to be able to tell you what you can do and especially without a clear clause around it, it may leave you open to a challenge from parents because there isn't clarity around it and that's a good reminder to everyone have a termination clause and make sure that you have it and that it's something that the parents are signing.

Question: This question is about the Minnesota earned sick and safe law. How does this apply to childcare employees? My husband works for me but does not get a separate paycheck. We simply split our profit. Would he qualify as an employee under this law?

Answer: So there's really two questions here. First, your husband has to be an employee. In Minnesota, you can't also can't have shared ownership of the sole proprietorship and I'm assuming that's your structure the way you're describing it. So you should really first take a close look at how are you addressing your husband's status within the business and likely he should be a W2 employee. If he is a W2 employee and then meets all the other criteria in Minnesota, then he would be eligible for the program.

Question: Our next question is from a provider who took some time off and is now doing interviews for families, looking for care, and has realized that she has no idea how to choose those families. Do you have any advice for providers about asking questions for families to see if they're a good fit?

Answer:  Having a questionnaire can be helpful. I'd focus on basic information around schedule and needs. Also some questions around parenting approach and expectations around what accommodations the child may need. But at the same time, I'd use a careful eye to it. You don't want anything that might be construed as being discriminatory against a parent. So I would say keep it at a very high level, keep it about the child as well as the parent and what they're hoping to get out of it.

Question: I'm in the early process of developing a business plan for a company to provide nighttime care to newborns in their homes while a parent is present. I'm curious for your input on how I should ensure my employees and my business.

Answer:  You’re likely going to need to talk to an agent about this, an insurance agent, and it's probably not going to be a very easy or simple path because technically you have multiple workplaces. So instead of you're a home-based provider, you're in your home, you may take the kids on a walk or on a field trip, but for the most part you're in that location. In the business model you're describing, you have a location that's shifting and certainly there are models for this, right? There's the home care world, there's visiting nurses, there's all these other models that you can look at, but it is likely not going to be as simple as just walking in and saying, I need a rider on my home insurance.

Question: The utility bills I received in January, 2023 were for usage for part of December and part of January. When I list my expenses for 2023, do I apply my Time/Space to the full amount of those bills given that I paid them in January? Or do I apply my Time/Space just to be amount related to the portion of the bill for January's usage?

Answer:  So typically you would apply Time/Space to the bill in 2023 when you pay it. So most providers that I know of, most small businesses by the way, are on the cash basis of accounting. That means you count the money when you receive it, you count the expense when you spend it. So whenever it leaves that checking account, your savings account, that's when you would count it. So in this case, they would be 2023 expenses.

Question: Who pays for CPR and/or first aid training? If it is a requirement by the state to be employed in childcare, what is the employer required to pay for? Does that include travel registration and any hotel food expenses for their employee?

Answer:  So if it's required for your licensing, yes, you would have to pay for the training and travel expenses, so whole shebang.

Question: I do not participate in the child and adult care food program. Do I have to record the specific time I serve my meals and snacks?

Answer:  You're going to want to be cognizant of when you're serving them. So it might not be, we serve breakfast at 7:06 AM but we serve breakfast between 7:00 and 9:00 AM which is the official timing. We serve lunch between 11:00 AM and 1:30PM dinner between 4:00 and 7:00 PM. So you'll want to track the timeframes that you have it in, and of course those are not transferable, so you can't claim a lunch because you didn't serve it for dinner, et cetera, or outside those timeframes.

Question: One of my employees is going to take over my childcare on October 1st, 2024. If I give her my daycare supplies, can she write those off if I give her the receipt?

Answer:  No. And in order to have that deduction on your side, it needs to be a nonprofit and it has to have a 501c3 determination letter. So the IRS has determined that you are a charitable organization. Without that, you cannot deduct it.

Question: Last year I filed income taxes and didn't receive the full EIC for my children. When hiring your children, it is tax-free money when you're under an LLC, correct? Is it possible to receive a tax write-off for hiring your children under the age of 18 and still receive your EIC as well?

Answer:  So hiring your children can be complex, and we do have a guide. We can put in the comments you need to make sure that you're engaging them in work. You have to document it, you have to provide AW two for them, and you have to run taxes for them. So I just don't want anyone, because I have heard people say it's just a simple deduction. It's an automatic deduction. If you're a sole proprietorship or corporation of any kind, whether you're an LLC S-Corp, C Corp, you can do this. If you use the standard deduction on their side of it on the child's side, then yes, there's likely to be no tax liability there, and you should be able to claim the EIC as long as you meet all the other criteria for getting that particular tax credit.

Question: I spent $360 to fix our backyard sprinklers. Can I deduct that expense?

Answer:  You absolutely can. You want to use your Time/Space for it. And, because I always get this question whenever there's anything in the backyard, the backyard space does not go into your time/space calculation. It is only the home, but you're using that factor outside the home to make a proration of the costs.

Question: The state of California came out and said they wouldn't tax some of the covid related grants and stipends. Do you know where we can look to determine which grants are and are not taxable in California?

Answer:  You should contact the state. I did some research on it because I've not heard this before. We've done some work in California and I have not heard that they were saying anything was not taxable. I could not find any evidence of that. Everything I found indicated they are taxable. So you may want to reach out to the state because I can't unfortunately find any evidence of that.

Question: I received a state grant in Illinois. 75% of the state grant funding is to be used to cover employee income. Should I pay that money as the employee's salary with wage enhancements or a bonus? I do understand that the grants may end and I will need to keep up with paying the wage if I raise it. So I have always opted to do the bonuses instead, but I'm unsure how that affects taxes.

Answer:  Likely there's going to be no tax difference for you. The one place where I have pause is wage enhancements, just in case that means fringe benefits. Sometimes fringe benefits are taxable. Most of the ones that you're providing are deductible for both you and the employee. So I would say very confidently there's a high probability of no tax difference in terms of any sort of temporary increase or bonus. Please do document it, even if it's just a one-time bonus. If it's a temporary increase, you could say, we're going to increase your pay by $1 an hour for the next six months. You can always raise it, make it permanent. But whenever you do anything that might be temporary, I strongly recommend documenting it, having you sign it, have the employee sign it so that it's clear.

Question: The next question is from a sole proprietor running a small licensed home daycare: My daughter is helping me with some communication with parents and some other administrative work. Can I pay her for the service? I'm thinking it will be about $6,000 a year total. So it is more than $600. Do I issue her a 1099 form?

Answer:  Assuming she meets all the other criteria for a contractor, and there are other criteria, yes. If they are a contractor, then yes, you would issue a 1099. It would be a 1099 NEC for non-employment compensation. However, I would look very carefully at that criteria. I'd also look at your criteria in the state of California when in doubt, because California does have specialized rules around determining who is a contractor and who isn't.

See: Contractor vs Employee App

When Is Someone a Contractor or an Employee?

Question: After closing my home childcare, if I sell my home many years later, how does that affect our capital gain, if at all?

Answer:  You're going to be subject to depreciation, recapture. You don't even have to take depreciation. Let me be clear because that's a big myth. Let's say 20 of those years you were running the business there, you will have to take depreciation recapture for those 20 years. Even if for 10 years you haven't done it for those 20 years that you were running the business, you would be subject to depreciation recapture. And again, that's whether you took it or not. So either way, you would be subject to that and it's taxed as ordinary income.

Question: My husband and I want to get a trust set up for all of our personal property. I'm a home childcare provider and have been using Time/Space calculations for my shared expenses for the past 40 years. If I put my home in the trust, can I still use these deductions for my childcare business? We also have a rental home we own. Can I put this in the trust also?

Answer:  SAll of these are questions you're going to want to ask your attorney. There are a number of different types of trusts, different way they could be structured. I'm hesitant about weighing in on it without knowing more details. So I would definitely consult your attorney on that.

Question: There are items in my home that I didn't previously use for my business, but I started using six years after I opened. These are toys and supplies that my daughter grew out of and a TV I didn't use. Can I claim these previously owned items as business expenses?

Answer:  For items that you start using in your business, you have to determine their value. And you're going to want to understand what the fair market value is, as well as what might've changed over time. So if you're putting them in service, you do have to recognize the value in some way, and that means that has to go somewhere on your tax return in another place. So in other words, it's not as simple as just saying they're there. So for example, if the company buys it from you, and I hear that a lot where you have providers saying, I'm just starting up. I'm going to pay myself a thousand dollars for all the stuff I need from the home. If that's the case, then that's a thousand dollars of income that you're going to have to report separate from your business that you've now taken in as income.

Question: Earlier this year, I bought a dishwasher. Can I deduct the entire amount or do I apply my time/space? Which tax form do I include this on?

Answer:  You would want to include it in your time/space. It could be under Schedule C, under equipment, because this is a relatively small amount of money.

Question: I thought I read that there's a new law that allows daycare providers to expense instead of depreciating repairs. For example, I did work to my basement so that it could be used 100% for childcare. What do you know about that?

Answer:  I think you might mean bonus depreciation, but that does not apply to your home. You can also be talking about whether you have an area that's exclusive or regular use in your home, but again, you'd still have to depreciate anything that would normally be subject to depreciation, even if it's exclusive use.

Question: We were advised in opposite ways about a $60,000 expense. I was doing childcare on my first floor, but then fixed my basement (added a kitchen, bathroom and flooring, and did painting in the basement). My tax advisor told me to depreciate the expense, otherwise it would be a red flag for the IRS. But another helper told me to file it as an expense because the basement is 100% daycare use.

Answer:  So I think what we're talking about here are two different concepts, right? And from what it sounds like both are correct. So for an exclusive use space, you can attribute a hundred percent of the cost to the business. However, at the same time, if an item is over $2,500, it may require depreciation and you're going to want to look at it. So again, two different concepts. Is it allowable as a hundred percent business expense? Yes, it is likely, but at the same time, some of those items may require depreciation over a few years.

Question: Can you tell me if a roof driveway in an HVAC system qualifies for bonus depreciation, not section 179?

Answer:  So with each one of these, I would take a look at our depreciation guide. We have a simple flow chart look for each one of 'em because they're going to be treated in different ways for bonus depreciation. And remember, bonus depreciation is subject to the same rules as section 1 79. So if they don't qualify for section 1 79, they're not going to qualify for bonus depreciation. The other thing is sometimes people have the misunderstanding that bonus depreciation is not subject to recapture. It's

Question:  In 2022, we made major renovations, finished our basement so that my wife could move her daycare to the basement. She read that we could deduct most of these expenses in one year instead of using depreciation. My tax advisor said that’s not true. Do you know if this is correct?

Answer:  I think what you're referencing is the law where you can have minor renovations totaling under $10,000 that can be deducted, and that's the business portion of them. You cannot exceed that $10,000 in total, nor can you exceed it on a single item. So for example, if you have an item that's $11,000, you can't use it. You can't just say, the first $10,000 is on this and the $1000 isn't. If you have, let's say, three $5,000 items, the third item would not be able to be subject to this. And again, you'll see it in the depreciation guide. It explains that particular program. And also there is a little statement that you're recommended to attach to your taxes on it.

Question: This last question has two parts. One, please explain to me what is the difference between section 179 and bonus depreciation, and then two, if I used a truck for my business and it is fully depreciated because I claimed section 179 on it, can I now gift it to my daughter? What would the tax consequences be?

Answer:  The reason they feel very similar is they are very similar. We've all been talking about bonus depreciation, including myself, because for the past few years it's been 100%. In 2023, it starts to phase out; it's 80% this year. The idea behind bonus depreciation is it's when you exceed the limit for section 179, which is $1.08 million, and I've never seen a provider do that. Then this provides you with additional depreciation. The only other time that it might work for you right now that it's at 80% is if you have a car that you're depreciating. So it's got to be more than 50% business use documented, and you're depreciating the cost of the car and not just doing mileage. Then bonus depreciation may be a better option because it lets you just accelerate it just a little bit faster than section 179. In terms of the question around the gift, if you've used section 179 depreciation, even when you're gifting the vehicle, it's going to trigger depreciation recapture. So you'll need to think about that. You're also going to want to consider the fair market value for reporting the gift on that part of your personal return.

Thanks for all of your questions. We will be back next month with more answers for you, so keep sending your questions in!