Ask Civitas: October 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: We have a family home provider who is asking about renewing their home insurance. It was $5,000, but it was increased to $14,000 and they're finding many companies don't offer coverage because it's both for their home and their childcare at the same time. The second part of their question is whether their home insurance will be residential or commercial because of the business in their home.

Answer: So there's a couple of questions here to answer. And so first and foremost, I know this reader had asked, we have a list of insurers to share and that's something we get a lot. Unfortunately we don't keep a list of insurers. What I would say is we are seeing a lot more providers who are facing this challenge where they're seeing their rates being raised, they're seeing complications as they go to renew their policies. And unfortunately, at least right now, I don't know of any legislation around this or any really good solutions that we're hearing about other than shopping around.

In terms of the other part of the question around insurance, whether it's residential or commercial, it's hard to tell from just that language. But what I would say is there are three types of insurance that you want. One, you definitely want residential insurance that's going to cover the damage to your home. You want a business liability policy, so that specifically covers any physical damage or injury that happens as part of your program. And then likely you want an errors and omissions policy. That's also a type of business policy. And that covers any mistakes you may make. Honest mistakes that may cause some problems. So if you're offered a commercial policy, it's important to understand which one of those three buckets it fits into, and maybe it covers two of them. Sometimes you'll have policies that cover business liabilities and errors and omissions, but you'll want those three types of coverage.

Question: Here’s another insurance question. This one is about an insurance carrier who is denying the provider. And I think that means denying the claim after eight years because of one claim of $25,000 from a mom who claimed that a bite led to a fracture. They have had zero claims before this. Is there anything they can do?

Answer: I interpreted that as being denying their policy, like ending their policy. We do see that, but it could be either. So let's talk through both those options. If they're denying your claim, there's typically an appeals process. It depends on the insurance carrier, but you would want to pursue that appeals process. If it is that they're dropping you – and we do see that from time to time that insurance companies, especially going back to the last question, the insurance for family care in some places go up. Can they cancel you after a claim or cancel you because you had a claim and then the policy just sunsetted, right? Maybe you had a claim in June, it sunsetted in August and they don't renew you. Unfortunately they can. And there isn't much you can do with that carrier. You do have to unfortunately go to find a new carrier and that is just the way the insurance system is set up.

Question: Now we're going to go on to two related questions about taxes. One is from a person who received funding to replace all of their windows and a slider door. The question is this: I've heard if I replace half or less, I can write off that full amount for 2023. If I do all of the windows in the slider, how does that affect me for taxes? And then the second question is from a provider who has a French double door going to an outdoor play area, these doors have full length windows in them with blinds. The blinds have been an issue because of the cords, which have been an issue with licensing. I'm looking into replacing the doors entirely to the ones with built-in blinds where the door has a full length window, but there are two panels of blinds in between. Can I deduct these 100% on my taxes?

Answer: These are both great time/space issues. There isn't a 50% rule. If you go above 50%, it suddenly isn't deductible. That doesn't happen. And in terms of this one, I think the second one, what the person is saying is because it's leading to an outdoor area that is exclusively used for childcare and it's being driven by the children, can the door count as a hundred percent deduction? No. Everything is driven in time/space off of exclusive, regular, or no use spaces. In other words, if you're using it a hundred percent or close to it for the childcare business, that's exclusive use, likely everything within it is a hundred percent deductible.

Regular use means that your family uses it, but it's also used for business. No use might be the primary bedroom or maybe your kids' bedrooms, which are not used at all in the childcare business. So, let's say the door with the built in shade is an exclusive use area, then yes, that would be a hundred percent deductible. If it's in the kitchen that the family uses as well, that would be regular use. So it would be based on your time/space. And then certainly if in the example about the windows previously, if you're changing them in your primary bedroom and the kids aren't allowed in there, well that's not deductible at all.

Question: I am an in-home daycare provider who has to move. What should I keep track of for moving expenses for my taxes? This is for my family as well as my business.

Answer: Moves come up a fair amount and there's a lot of misconceptions and confusion around them. The challenges are twofold. One, you're moving your business and your family at the same time. It's not like you're just moving the office. The other challenge that you have is that under normal circumstances, a move for business that was over 50 miles would count as deductible with the Tax and Jobs Act. A couple of years ago that was suspended through 2025. So even if you're, let's say moving to another state, unless it is a military based move, maybe your spouse is in the military and you're going to have to move from Texas to Virginia, that would be a different story. If you’re a civilian and your spouse gets a new job and you move from Texas to Virginia, the personal side of thing is not deductible at all. So we'll put that aside. Now let's talk about the business side of it. You're going to want to keep very tight records around the business portion of it. So in other words, if you have things that you are moving that are specifically for the business, like let's say toys, records, what you may want to do is figure out how much of the truck, the moving truck, the percentage of the moving truck that's occupied by those things or something along those lines. I would be very cautious on the allocation. I've had providers say it's in the truck, can we deduct the whole moving truck? You can't.

But you can deduct a portion for business items only if it's shared business and personal, you could allocate them. Time/space would not be the way to do it. You may want to come up with some other percentage. Let's say it's toys that are used roughly 50/50 by your kids and the business, then say the truck, 10% of the truck was devoted to toys. They're used 50 50. So I'll deduct 5% of the cost of the move related to the truck itself. Three important points: One, have a clear method. And two, you can't deduct everything, only what’s business related. Three, keep those records because if you're asked, the IRS isn't going to just want to see receipts, they're going to want to understand. They will ask how did you calculate this? Where did you come up with this number?

Question: Another question from a home provider. My friend and I opened a family daycare this month. We are a 50/50 general partnership. Two questions. How should we pay ourselves? And the daycare is located in my friend's house. Can the business pay monthly rent to my friend for using her house?

Answer: With a general partnership, what you're going to do is withdraw the funds as an owner's draw. Which means essentially you're paying yourself. However, know that those are going to be subject to self-employment tax just as if you were a sole proprietor. So 15.3% of that money is going to go to the federal government and the state you're in may take money as well. At the end of the year, instead of just having it on your Schedule C, you'll get what's called a K-1 for your partnership. That form will list the money that you made and again, that's going to be reported. Then on your personal taxes, you'll get self-employment tax and then you'll also get taxes taken out for your income. This is why, just as a little footnote, when people do have a partnership, I often say take a look at an S Corporation. It could be beneficial to you, more beneficial than a 50/50 general partnership.

In terms of paying rent, you can pay rent to the general partner. However, the general partner needs to report that rent. Whether it's on a Schedule C or anything else, it’s considered business income. So don't just write the check to rent and say we're done here because the federal government is likely to pull that thread and say, okay, where's your partner's end of this? Where did they pay taxes on it?

Question: Two questions, both about taxes. One is from a person who owns a family home: I'm thinking of adding an assistant. I might have to pay this assistant. Do I have to go through a payroll service or can I hand her cash at the end of the day? Also, how much would she need to make to be required to claim it? She does not have any other income. Her husband works and they file jointly. Also, how do I go about claiming it on my taxes as outgoing money and do I need to provide her with anything at the end of the year? And then a similar question: I have worked by myself for over 30 years and have filed my taxes as a sole proprietor on my Schedule C. I do not have any idea about the proper way to pay an assistant or how they and I will then file our taxes. Can you help?

Answer: We're seeing a lot of family care providers who, through the funds that have been provided by the government, are getting to the point where they can have an assistant. And that's huge. It's great. I would always recommend using a payroll service if you can, because all of the normal wage deductions have to come out. Even if you're paying them cash at the end of the day, they're still an employee, which means that you need to withhold their side of their income tax and their taxes. You need to withhold your state and federal taxes, your payroll taxes, and you also need to do a quarterly form 941.

We're seeing a proliferation of inexpensive sites. We use Gusto. I don't make anything from promoting it, but we know a lot of providers use Gusto. A lot of them use Wave. I've never used it myself, so I can't tell you firsthand, but these are some easy sites that are out there to get that payroll going. That means you don't have to do all the forms, but if you're going to do it yourself, you still have to do the form. So even if I hand my employee $100 in cash, I still have to do a 941 and I still have to withhold taxes. The salary portion as well as your side of the payroll taxes are deductible. And those are things that you would put on your Schedule C under the wages line. The employee would then report the W-2 income on their taxes.

Question: Would you be able to point me in the direction of a tax professional that knows about in-home childcare? It's been hard, and I have not found one that has even heard of the time/space percentage.

Answer: It's a huge problem, and unfortunately, we don't recommend tax professionals because for the most part, I haven't found ones that do it well. We have so many questions around how the tax industry is just not built for small providers, but it is what it is. Many of them are unaware of the rules, unfortunately. We will link to our page on taxes where we have a number of free items for you. You may want to consider self-preparation. We're finding a lot of providers have success. We have guides that tell you how to do your business taxes using TurboTax, H&R Block, or TaxAct. That may be an option for you. If you don't feel comfortable with that, look at some of those guides we have and bring them to the tax professional with you. We do include a lot of them in a lot of them, the citations and such that your tax preparer can feel confident that it's the right information.

Question: Here's a related question. My tax person will not let me take any hours unless the kids are here. I've heard that you can claim time for cleaning interviews, bookwork, grocery shopping, etc. within reason. What am I allowed to claim for tasks associated with my child care when children are not present?

Answer: Your taxpayer is incorrect. You're right. You can include time with children and you should, right? But you can also include other time related to the operation of your business, including cleaning up, food prep, lesson planning, shopping. These are all times that are related to your business that are important. And certainly if you're doing an online training from home, it counts, right? These things add up and this is perfectly legal. We do find a lot of tax preparers are used to the traditional home office. So when you start talking about being able to deduct 75% of your home expenses, they get nervous, but their anxiety shouldn't be your anxiety. And again, if you look at our tax information page, you’ll find some guides that you may want to bring with you and just say, look, these people just really look at these taxes. They've looked at hundreds if not thousands of tax returns from providers. This is what they say.

Question: Can people receive a tax write off from making a donation to my childcare?

Answer: If you are a nonprofit corporation and you have your 501c3, then yes. If you're not a nonprofit? No, they cannot.

Question: Another question about deductions: I have a car lease and I'm wondering if the monthly amount can all be deductible.

Answer: As with any other vehicle question, everything's driven by mileage – the mileage you drive for business versus the mileage you use personally. The business deduction is a percentage of that or it's based on the mileage rate. If you use the standard IRS rate, you use that rate based on the number of business miles, that's your deduction.

If you use actual costs, you would include the lease there. You'd include other expenses, too, maybe oil changes, fuel costs, etc. And then you take a percentage of that based on the business portion of the overall miles driven. But there's no way you can make it all deductible unless it's 100 percent. I know sometimes we get some people who are kind of bold about this one, but you should know that the IRS specifically says they look for cars that are 100 percent, especially from a home-based business. So if you're going to do it, just make sure it’s accurate. I've had a couple of providers where they said we have an old van that we use just for moving the kids. Nobody ever drives it, otherwise it's fine. Just make sure you have the proper documentation.

Question: I am going to start my own in-home childcare. My friend loaned me a copy of Tom Copeland's Record Keeping guide. I got to the part about deductions and couldn't find a clear answer for this: I have no children of my own, so all toys, books, baby items, etc., have been exclusively for business. Does that mean they are 100% deductible?

Answer: If they are for the business specifically, maybe there aren't grandkids or nieces or nephews and stuff, then yes, they would be startup costs. They would be deductible as such.

Question: I'm wondering about travel and being able to deduct the cost of the trip. My question is, does the trip have to be business related only or can it be a general trip and I purchase or do something childcare related? Am I then able to deduct the cost or part of the cost of the trip?

Answer: This is an interesting opportunity, but one where I would say proceed cautiously. I think sometimes we do have providers who say, I'm going out of town. I'm going to pick up some credits while I can, some continuing ed credits, that sort of thing while I'm out there. There are ways that this can become deductible. If you're traveling in general, the rule is you have to spend at least half of an eight hour workday working on bonafide work-related tasks? So, what the heck does that mean? That means they have to be ones that can only be done on site. And depending on if you go beyond that point, that half day point, then that day becomes deductible. So let's say for example, Liane takes a trip to Orlando, she brings the whole family with her, and one of those days they all go to Disney without her and have a fun time while she's doing a training.

Well, the training is six hours, so that breaks the halfway point that day and the costs associated with it for her are deductible as they would be normally, right? So she has a meal, there's the 50% rule that's now back in play this year. There are some other things that are going on, but generally about 20% of her trip, one of those five days would be deductible.

Now, let's say instead that Liane's family goes to Disney without her, and she's stuck miserably in the hotel room catching up on her bookkeeping. In this case, it's not deductible because she could have done that bookkeeping at home. It's wonderful that she chose Orlando to do it getting some sun, but unfortunately that would be considered something that didn't have to be there.

Question: I run a small and home childcare. I'd like to apply for a loan. What is the best way to show my income besides my taxes? I write off the time/space percentage of my household expenses, which most loan officers don't understand.

Answer: Unfortunately, this is a major issue and I think it's one that as a field we haven't done any policy work on, and it really desperately needs to be done. What happens is underwriters by process, look at line 31 of your Schedule C if you're a sole proprietor. Very often, we talk about how to minimize your taxes as much as possible. But unfortunately, for purposes of a loan, whether it's a business loan or a mortgage personally for you, they look at line 31 as being your salary. And there really isn't unfortunately anything to do that because if you look at the household expenses, those are considered deductions. Now, you and I both know you're getting an outsize benefit of that, and that's wonderful.

We always talk about the importance of time/space in because you are getting an outsized deduction, and that's not a criticism. I'm all for it. Laws are there, you're paying attention to the law, you're doing it right and you're benefiting from it. Unfortunately, that's considered an expense, not revenue. Even though you're doing well by it, the underwriter is going to look at that as an expense, so it can't be used. So this is something unfortunately where a lot of providers, when they're looking to buy a home or looking to refinance, they have to pump the brakes on some of their deductions, unfortunately, to push that line 31 net profit up, and there's unfortunately no way around it right now.

Question: Our next question is from a family childcare provider who notes that they file their taxes and receive most of their payments by personal checks and cash. Here’s the question: I save up my cash payments as much as possible for emergencies. And now with attractive savings rates, I'd like to deposit that cash into my bank account. Will there be any tax implications that I need to worry about?

Answer: The tax implications are that, even if the payments are in cash and checks, Venmo, whatever, it's income, it's taxable income. So if you are reporting it on your taxes as you should, then there's really no issue of putting it into your bank account. However, if, let's say, you forgot to report that income last year or you were saying, gosh, it's cash, so maybe I shouldn't report it this year, no. You do have to report it legally.

Question: Next question is from a licensed home child care business who closed at the beginning of September. They have reached out to licensing that they no longer have kids, and licensing has closed down their license, but since that time, the provider has still been working on things related to the business and will soon start working on their taxes. They want to know if they can use that time toward time/space. Also, if they purchased anything such as a couch or desk and use them while working on tax and other business things, can they still be used as a write off?

Answer: Let's break this up into two questions. First question, can you use the time in shutting down the business and some of the related costs that might be associated with it? Absolutely right. The second part of that question is, can you deduct these purchases for the business? Well, if they're ordinary and necessary, yes. So in other words, if the couch and the desk are absolutely needed to shut down the business, then yes. But I do wonder about that, and I think the IRS may as well. So I would make sure these are clearly ordinary and necessary. For example, maybe you are shutting down your business and you need some boxes to ship them to a friend who purchased them in Florida. Those boxes are deductible. But do know that if you take on assets, if you have assets that you've been deducting, they do need to be liquidated and accounted for as you close it out. So for example, if the business donates those toys that we were talking about, so maybe you buy those boxes to bring the toys down to goodwill, boxes are deductible. The toys she can get a deduction on. If, let's say, she just gave them to her kids and said, why don't the business anymore? Technically, you are supposed to know how much are they worth right now and report that as part of the income of the business.

Question: I would like information about closing my licensed childcare when I retire. How will it affect my income taxes?

Answer: The biggest things here are remembering to liquidate those assets. If there are significant assets, you just can't make them disappear or sell out a garage sale and say that's that. Technically it is revenue for the business as you're retiring. The other thing I would think about is if you sell your home, and I know you're retiring, so you may not be, but a lot of providers we know sell the home at that time. There's going to be depreciation, recapture. We've talked a lot about that in the past, but just be aware that that's going to happen.

Question: I'd like to remove my maternity/layoff policy from my handbook. Can I just remove it and tell my families that I did, or do I need to type up that I'm removing it and give them a copy?

Answer: It depends on how you structure the handbook. Your handbook will typically have a clause that says it could be changed at any time without notice. If it doesn't, then certainly you do want them to sign it, even if it does. My suggestion would be any major policy you have, have them receive it and sign it. It's just good practice. It's not something you want to do under the table, even if you can then point to a clause that says, well, you signed something that said it was okay, they may feel really bad about that, and it may feel like it was deceptive.

Question: The next question is from the director of a nonprofit childcare center in Texas who has been trying to find legitimate food reimbursement programs in her state. She says, some of them seem overly complicated and like they're not worth the time. Can you point her in the right direction?

Answer: Within your state, there’s the child and adult care food program. There's usually a state agency or coordinating organization where you would find your local agency. I would talk with them very carefully and really hear out what the pitch is and what's required of you. Typically this works out well for providers – and by typically, I mean, I've yet to find a provider who doesn't have a positive gain. So I would look at that very carefully.

Question: If I'm using Standard Meals claim for my taxes, I am on the food program. Do I need to save my receipts for food shopping and proof of mileage?

Answer: I would recommend keeping them for proof of mileage, especially if you have combined personal and work shopping. If you go to Target, for example, the majority of that trip has to be for business to make it deductible. That would be your proof. You'd be able to say, look, here's the receipt and everything, but this one item I threw in was business related. So I would keep it for those purposes.

Question: I'm curious what the rates are for 2023. The food program rates. I see the food program reimbursements, but not what we can deduct for taxes.

Answer: Those are the tier one rates. I know everyone says like, well wait, the food rates change. So what do we do? It's the rates enforced on January 1 of the given tax year. So for 2024, it will be the 2023 - 2024 rate. So the ones right now will be the ones you'll use all through 2024 for this tax year. For 2023, you're going to go back to the 2023 rates.

Question: I have sole custody of my daughter and her dad has visitation every Wednesday and some Saturdays, I work in retail, so my schedule is all over the place. My fiancé has weekends off to be able to pick her up, but her dad does not want my fiancé picking her up. In the court papers, it does not say mother or father must pick up. Should I go back to court and have on paper a list of people to pick her up if I cannot?

Answer: For custody agreements, I always say the same thing. They can be really, really tricky. And unfortunately, this is something where I strongly recommend that you seek advice of legal counsel and not their legal counsel, your own.

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