Ask Civitas: September 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 really a law that states that disclosing our childcare tuition to another childcare owner is illegal? Is the act of disclosing my tuition against the law even if I am not conspiring to price gouge.

Answer: This can be very confusing, and I know I see this all the time, especially online you'll see providers will say, what are your rates in Southern California? As innocuous as it may seem, it is considered to be price fixing under federal law. So the Federal Trade Commission would hold you to price fixing. Some of the differences are, you can advertise your rates, that's not a problem. If you want to put them on your website, put them on your website. In some cases, either locally or at the state level, you are required under certain circumstances to have your rates presented on a searchable website. Perfectly legal. You can put the information out there like that. The problem is, is when one or more providers are doing this in a way that doesn't project it so everyone can see it.

So even if you say, well, it's our local association, or everyone in the association could see it, that still doesn't mean the public can see it. The FTC says this right on their website with price fixing: even if you are not gouging, it still counts. And the reason is, is because even if you say, look, I checked all the prices and I should stay level, that's not necessarily being fair to consumers because maybe otherwise you would've dropped your prices. Or if you do drop your prices, maybe that's not fair to the competitor who couldn't be in the room and to know that they're higher priced and so they have an unfair advantage. Be careful with it. It is technically price fixing.

Question: I have been in the process of getting licensed for four months. Now with school starting soon, I have families in need of care. With the county taking its time, I am wondering if I can legally take on these families as long as it's not more than 30 days and 12 months. I have heard of this exception, but I am unable to find it in writing. I have been providing care for one family since July, and I have all of my licensing classes done as well as my CPR certification. I just need a background study, but I'm unable to get that done until the county starts the process.

Answer: As you all know better than I do, the licensing differs from state to state and community to community. In some cases there's very restrictive licensing requirements and others, there are options that you have for being unlicensed and still caring for families. It's hard for me to say specifically without knowing your community and state what it is. Definitively what I would say is conform to those requirements. Just because you're close doesn't mean you're in, and if you're close, it means you can end up in a lot of trouble and that could derail your entire process because the state or the local body may say you got way too far ahead of yourself. So just make sure you're conforming. If you can't find it, don't know what to tell you, but please do make sure that you have some sort of confirmation before you go ahead.

Question: Why is it that you can replace all of your carpet with a new carpet and it's considered a repair, but if you replace it with anything else, it's considered a home improvement?

Answer: So, if you replace all your carpet with a new carpet, it may be a repair. Let's remember what a repair is. A repair typically means you are using materials that have a similar function and are of a similar quality. For example, if you replace that carpet with carpet that is of a similar quality, the IRS would say, yeah, that's a repair because it has the same function, it's carpeting and similar materials. When you start to go to a different material, let's say for example, you take the carpeting and you put in all new, bamboo wood flooring, the IRS then would likely have an issue with that because the flooring has the same functionality, but the materials may lead to an increase in value, and that's part of what the IRS is looking for.

Implicit in that is have you done something that increases value? We often talk about kitchen renovations. If you have that Formica, 1970s, 1980s countertop like many of us have had, and you replace it with something very similar, (though it’s hard to find Formica nowadays), but if you find something kind of a similar quality, they would say, yeah, that might be a repair, right? You're replacing with similar materials when you get that high-end imported Italian marble, now suddenly it's different because that has increased the value of your home even in a small way. So again, think about it when you do those replacements of items within your home that think about is it a similar material, is it similar function?

Question: And so, the reason this is a tax question, is because an improvement would have to be depreciated where a repair could just be typically straight up deducted in that one year. Is that the key?

Answer: That's absolutely correct. And again, we've talked about depreciation in the past. It might be able to be depreciated through accelerated depreciation one year, but you would have to then go through that flowchart and say, where does it fall in depreciation versus a repair? Even if it's above that $2,500 number where we then start looking at depreciation, you'd be able to say it was fully replaceable. And I should say, and that also brings up another point, which is Time/Space is still in effect, so don't forget that exclusive use and regular use.

Question: My wife does in-home daycare and we have three children under the age of 11 that count against our numbers. Is there any way to claim the wage loss for these spots or claim them for childcare expenses when doing our taxes? Obviously we don't pay for their daycare out of pocket, but we are losing those three spots for income, and I can't find anywhere if we could claim daycare expenses like other families do with their children.

Answer: Unfortunately, no. And so here's the challenge, right, is there's no revenue to deduct, and I know you're foregoing revenue, but the IRS would say, well, but you're caring for your own children, so you're saving money by not having to pay somebody else. Could you theoretically pay your own business to care for your children? Theoretically, yes. The challenge would be then you'd have to report the revenue for the business itself, right? So it becomes kind of a zero sum game. So the easy answer is no, unfortunately, you can't. I understand the frustration with it, but those are the rules.

Question: How do I calculate my Time/Space percentage when the home daycare is not in my house, but it is on my property right beside my house. We have a 900 square foot building the utility water and all bills are tied together with our house and the building.

Answer: This is a great question and there have been a lot more conversation about this at the IRS because we're seeing a lot more people have separated buildings, usually sheds, believe it or not, that they're converting into home offices on their property. And this is for not, of course for childcare, you're not a pack at all 12 kids into the shed. But this is coming up a lot more. What you would need to do is you would need to include the Morton building in your full square footage. So as you do your Time/Space, this becomes additional space, so you're going to want to handle it accordingly. So what that means is you're going to want to think about is it regular use, is it exclusive use, et cetera, how does it fit into that equation? And then of course, ultimately the costs are going to be prorated based on that equation.

Question: We have been awarded $882,000 for the accelerator grant to build a new childcare center. It will all go to the contractor. Will I have to pay income tax on this?

Answer: Typically, yes you do have to report the income. However, if it's all going to the contractor, you should then have a deduction for the expenses associated with it, right? Those payments to the contractor. So it should be a wash, and a lot of times we do see that with the grants when it's going to things that are refurnishing or expanding the operations. But yes, you would have to put the money down under revenue, but you still get that expense.

Question: I received some grants due to being a daycare provider here in Minnesota, some stabilization monthly grants and a revitalization grant that purchased 50% of a new water heater and a sandbox cover. Do I add these grant payments to my childcare income or as general income?

Answer: There's really two things here that I want to make sure that we cover, right? One is yes, you would add it to your business income. This money comes into your business, you add it to your business, and if you have a DBA, doing business as, and that's the way the state money came, definitely it's clearly business. But let's say you don’t have a DBA and it's just in your name, then in that case, even though it's in your personal name, you would want to account for it as business income because technically it's coming to your business. The other thing to be aware of is that remember, you're still subject to Time/Space and that could work for you or against you. The grant rules aren't always the same rules as taxes. In this case, yes, they paid for 50% of the water heater, but my first question would be, what is your time space? And that might be less than that. It also might be more, it wouldn't be unreasonable to say, oh, I have a 75% time space. So in that case, your deduction may even be bigger than what the grant paid you. So keep that in mind, just because the grant said 50% of this doesn't necessarily mean it supersedes the normal rules for taxes.

Question: We did our home improvements over two years. It was a kitchen remodel, new floors throughout two levels of our home, all new trim and doors, painting, new ceilings, et cetera. My question is, can I just lump it in altogether when I go to depreciate or do I have to do things separately like kitchen cabinets, counters, flooring, I'm doing my 2022 business taxes now. Oh, and the things we purchased to do this improvement like paintbrushes, small tools, et cetera, should they be separate or with the improvement?

Answer: This is a great question, so let me break it down. Can you put it all in together? You can. Very likely you're going to end up in a situation where you're going to have to depreciate that over time. The IRS does allow you if there are distinct kind of sub-projects as you're describing, to break those out for depreciation purposes. It may not be in your best financial interest to do it that way. So I would strongly recommend if you do have, let's say a cabinet company that came in and it's a separate bill to look at that as how does that affect my chances of depreciation and accelerating it versus I want to lump it all together in terms of the paintbrushes, small tools, et cetera, could they be included? Yes, the theoretically I would again, think about how you're prorating it. What is the business use versus the personal use? If you're buying a new power drill, is it really just for the business? And maybe you can justify that. You can say, well, if the IRS comes tomorrow, they'll see, I never use this power drill anywhere except for work, or is it mixed use in which case you are going to want to prorate it.

Question: I remodeled part of my home, I know this needs to be depreciated, but what about the things that we purchased to do the projects that are not actually part of the remodel, like the tools needed to spray the new doors, drill bits, etc. I think this is kind of what you just talked about. Do we include these in part of the whole project?

Answer: This is an important reminder. They wouldn't be lumped in, and I should have made that clear with the last project, is that even though you did it together, this is equipment and supplies versus the remodel itself. So they would be separate expenses, and again, you would want to use Time/Space or a similar method that's defendable in terms of what is the business versus personal use for them.

Question: My driveway is falling apart and I'm afraid a client will fall and hurt themselves if I repay the driveway. Is that 100% deductible on my taxes?

Answer: Unfortunately, no. I hear that there's a health hazard for the kids and families, but ultimately it would be considered a common area improvement and subject to Time/Space, and even potentially depreciation.

Question: I purchased a childcare facility with a business partner in January, 2022. We were using the same QuickBooks account as the previous owners when we realized all of our payroll taxes, etc were going toward the old owner's EIN number. We have tried to straighten things out with our tax professionals and I do not believe it is there yet, and then my business partner decided to walk away. So I'm now trying to figure out how to restructure the business, the EIN, straighten out taxes and open a new location, which is in my home. I'm considering getting a new EIN number for the in-home location and just doing business as the name of my other location. Is that an okay idea?

Answer: Wow. So this is a complicated one, and I do not envy you being this situation. I'm sorry, you have to be in it. I can only imagine how dizzying this is and how disconcerting, especially if your partner walking away. So again, let's break it down though into pieces. You shouldn't use the same EIN. That's correct. Even if you buy a business, it still should have a separate EIN. That helps signal to the IRS that it's now under new ownership. As for the partner, yes, you're going to need to restructure, you're going to need to close out the partnership. This is one of those times where you're going to want to talk to a tax and or legal professional about doing that because as it will vary in your state, and there will be some requirements on the new location. Again, that's going to be a separate EIN that's going to be, and likely you're going to want to structure that as its own separate business. It sounds like you may have. So that may be a moot point.

Question: Since 2018, our daycare was under a 50 50 partnership between me and my older sister. Earlier this year, she suddenly died. My question is now what? I assume the partnership ends, but I'm still continuing in the same business. I'm guessing I would need to open up under a sole proprietorship. Also, since she died in April four months into the tax year, how does that work? Do I file 2023 under my new sole proprietorship or file as a general partner under the partnership for the first four months than sole proprietorship? For the remaining eight, I did apply for and was given a new EIN under a sole proprietorship with the starting business as of April, 2023. Is that or was that okay to do?

Answer: First of all, our condolences for your sister's passing. We just talked about how difficult it must be to have this partner who left this other business to lose your sister so suddenly and have it impact not only of course, your personal life, but your business life. I can only imagine how difficult it is what you're going through, but at the same time, you're doing the right thing, which is that you're thinking about, okay, I still need to make sure I'm complying with the business. This gets a little bit tricky because we don't have all the information. So first thing I want you to think about is how you settle your sister's partnership shares. This may be very easy. This may be something where you say, well, Gary, we had a buy sell agreement. We had something in writing that said, I get the shares.

However, if there's no succession plan, no agreement in place, then it's something where you may need to work with the estate and her heirs to work out the disposition. In other words, the shares don't go away, they have to go to somebody. And that might even require probate. I'm not trying to freak you out, just trying to be honest with you. And then at that point, the question is what happens to the partnership? And so what you may end up with is if let's say I died and one of my kids said, yeah, I'm going to keep the shares, then you may have to say, what do we do with the business from here? Or it may be something where my heirs say, we really don't want to be a part of this, or we're not old enough to be a part of this, let's just liquidate it. But in that case, if the partnership is ending, you have to liquidate the assets. It's like any other business going out of business. That would then require what you're doing: starting a new business. But there has to be something accounting for what happened to the old business and its assets. And it could be that maybe you have some sort of deal where the errors say, you know what, auntie, we don't want it. We're glad for you to move forward. We'll create an agreement that says you can sell everything to your new business for a dollar and we'll move on. But there should be that moment where you not only shut down the partnership, but where you say what happened to everything with the partnership.

Question: We have a question about a retention of childcare staff federal grant. We're a 501c3 tax exempt non-profit. When we disperse these payments to our employees, do we run it through payroll for it to be taxed or do we run it through as non-tax payment since it is a grant for retention?

Answer: In this case it's considered payroll. You should run it as you would any regular pay that you would do and move on from there. There's no basis for it being non-taxed.

Question: Can you tell me if it is better to be on food program where they reimburse us tier two for two meals and one snack per day? I know we can add another couple of snacks per day on our tax claim. Is it best to keep track of all meals and snacks and add to our tax expenses? And then specific questions, how much money can I claim as expense for a breakfast lunch and each snack per day per child, which is better?

Answer: Number one is remember, you always need to keep track of snacks and meals, whatever you're doing, whether you're on the food program, as long as you are using, if you're in the food program or if you're not in the food program and using the standard rate for your deduction, you do need to keep tracks of snacks and meals. And it's so funny because this week on a Facebook site, I saw a similar misconception that I can charge up to the max every day, whether the kid is there or not, whether they ate or not the case.

And what I would say is, and without going deeply into the numbers, because we do have a lot of questions today, generally, and I could even say more absolutely than that, I have yet to meet a provider who didn't make money off the food program, which is not to say because they're shortchanging the kids, it's because the government is wrapping IP into that fee payment for your time and effort doing menu prep and doing the training and doing the paperwork. So I've yet to meet a provider who doesn't get more from it than they do than their cost of food. So I would say in general, go for it. (Note: Here are the 2023-2024 Child and Adult Food Program reimbursement rates.)

Question: There was a bit of a dispute with the family that I had to terminate. They weren't happy and started throwing accusations at me. I'm wondering for the future to keep my bases covered and to keep me safe from accusations if we can use recording cameras in the licensed home daycare.

Answer:  I would be very careful about this. Most states do have rules about when you can record conversations and when you can record them and use them in legal action without notification. And even with notification, it could be tricky if you had something blanket that said you agree that we'll always be recording you. So I would tread very, very carefully on that because you could easily have this whip around on you and cause you more problems. I think better yet, have clear parent contracts, have clear policies, and enforce them fairly and effectively.

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

Answer: Gosh, this is a very complex one as well, and a lot of it depends on your personal financial situation. At time of closing the businesses situation, very similar to what we discussed in the partnership a couple of minutes ago. You will need to liquidate the assets. So remember when the business goes out of business, that's it. Now that means there's potentially depreciation recapture. You might have to pay taxes on that liquidation of it. Maybe you have one really big yard sale where you sell everything. On the other hand, there may be things where you say the useful life of this toy is done right, and so it really has no value. But you do want to go through the process of marking that. And you do want to also make sure that on whether it's a corporate return or whether you're a sole proprietor that on that last return you do note that it is the final return for that business.

Question: I received a form delegating flowers of guardianship from mom to mom's parents, the baby's grandparents. This form is only notarized and not filed through our county. The grandparents do not want mom to pick the child up from daycare without their permission. Since this form is notarized and is signed by mom, signed, but not filed through the county, what happens if she shows up to pick up? Can I hold the baby if the grandparents aren't okay with her going with the mother? Is that legal?

Answer: I'm sorry you have to go through all of this. This is extraordinarily complicated. Unfortunately, my recommendation is to seek legal counsel. There are several issues that could be in custody agreements that could be enforceable with the courts, some that may not. And so this is a place where you do want to seek legal counsel. And I know we're seeing more and more of these very complex custody situations. And in some ways it's heartening that these children have different adults in their lives who want to care for them and be engaged with them. But I know that navigating what is legal and what isn't can be difficult. And unfortunately, I'm always given the same answer, which is seek legal counsel because these can be very complicated. And of course, as you all know just as well as I do when it comes to families and children, those emotions can get very high very quickly.

Question: I am a large family childcare and I have 12 children enrolled. I have one assistant. Our numbers are lower than expected and I may need to lay her off until I can increase our enrollment this year. We may change to a school age program. I do pay into unemployment, but I'm worried how this will affect my unemployment insurance. I do expect it to increase, of course, but I don't know by how much I currently make under $80,000 total per year. I have been reading how unemployment insurance operates, but the figures are based on million dollar companies.

Answer: Unfortunately, and again, I feel like it sounds like I'm on Facebook all the time, but just this morning I was looking at one of the Facebook groups for childcare owners, both centers and family care, that this is a scenario that we are likely to see coming up as we hit the end of ARPA funding, that stimulus funding ending. And so I think this is one where even if you're not there yet, if you have an assistant, you have an employee of any kind, listen carefully. If they are a W2 employee, yes, they are eligible for unemployment. If they are a 1099, many times we'll hear providers say a 1099 employee. There's no such thing. There's a 1099 contractor. Contractors are typically not subject to unemployment, but if they go to ask about unemployment, this could lead to questions for you about their employment status, so be mindful of that. In terms of the increase you may be subject to an increase. There's always that chance. It isn't automatic. It isn't like for every time a person shows up at unemployment, it goes up. There's a number of factors that come into play, such as your business size, how many people you've laid off in the past and those sorts of factors. My guess is I think it would be very likely that you would not see an increase, but I can't guarantee it. I can't say you never will not, but on the other hand, I can't say you definitely will get one. I would be very surprised if you did.

Question: I built a home with an unfinished basement after moving into the house. We finished the basement. Half of that basement is 100% childcare use. How should the expenses of finishing that space be handled?

Answer: Again, I would do this as you would any other Time/Space. If it is a hundred percent childcare use, then yes, you have costs that would be entirely deductible against the business. Again, you want to think about opportunities for or depreciation may be come into play. The question here is I do want to remind people, because this does really happen in real life, that if the IRS audits you, the official audit guide from the IRS will go through the house and check all the spaces. So in a case like this, if you're claiming that half the basement is a hundred percent childcare use, I would make sure that it is clearly denoted. For example, maybe you have a half wall and a gate going across your basement, that's a great way to do it. But if it's just the basement is entirely open and there's some of your stuff here, some of their stuff there, and you're just saying half the space is childcare, a hundred percent, I'd be very careful about that. Again, I always say to people, if you're claiming exclusive use and you should, wonderful, do it. Don't ever pull punches if you don't need to. But if there might be a question, if somebody else who doesn't know you, doesn't see your operations every day walked in, would it be clear to them that this is exclusive use?

Question: I have a family who met with me over a year ago and agreed and signed my contract to start when their baby was born. The baby was born three months early and was in the hospital for nine months on oxygen. The baby is home now and is a year old, but still on oxygen. The parents would like to bring the baby to my home childcare. They did pay a holding fee of $50, and the handbook states that the holding fee will hold this child's spot until childcare is needed. However, I do not feel comfortable in taking this child on oxygen with additional health issues as well. The reason for that is I have other children I need to tend to and cannot give this child the one-on-one intention I feel he'll be needing. I also am not trained for the medical issues that this child has. What would you suggest I do? I feel the family will go after me for discrimination.

Answer: This is another very complicated case and I absolutely get why you're worried about it. There are parts of it that worry me. However, I don't have all the facts in front of me, and I don't even know which state you're in. So again, I would suggest seeking legal counsel and talking to an attorney about it. They can help you understand what the ramifications are for state and local laws in this particular case. And again, they can look through all of the evidence you have, all the paperwork you have to make sure that you're covered.

Question: I have a small family childcare business in my home that's been here for 29 years. I have never paid business property tax. It was my understanding that childcare providers were exempt from this tax. Recently, I received a grant for $18,000 for improvement to my childcare. The check had to be written to my family childcare business name. My bank said I needed to open a business checking account to deposit the check, and I had to file a DBA. After filing the DBA, I received a letter from the assessor's office that I needed to fill out a form and pay business property taxes. Before I do this, I wanted to get your advice.

Answer: Without knowing the details and the type of tax, it's hard to say definitively if you would be exempt or not. I can't really think of a reason why you would be just exempt right off the bat. So for example, in some states there are, you either are subject to residential property tax or commercial property tax. In a case like that, yes, if it's a commercial property, then yes, you're subject to commercial tax. If you're residential and you're an in-home care provider, that would be your tax. But without really knowing it, I couldn't say definitively, here's why you would be exempt. And I have a lot of questions as to whether you would be, it would be very unusual. What I can say is that, yes, we saw this a lot with the funds that were going out during the pandemic. If it has a name other than your personal name on it, yes, the bank should be asking for a DBA. Sometimes they don't, which is even more surprising. But yes, you'd have to have a DBA needed to deposit it. If it isn't in your name, you do have to have it registered that this is my business name, and that would have to be on file with the bank.

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