Ask Civitas: September 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: I had a neighbor come to me as I'm opening a preschool. She says that her insurance agent told her that having a child care within 300 feet of her home would affect her ability to have coverage. She asked if I had a business license. I explained what type of licensing applies. Is this realistically going to impact her own insurance coverage?

Answer: So what you need to keep in mind is that different insurance companies have varying policies and different risk assessment models, so some could consider a nearby business of some type in their calculations for the cost of the insurance, others may not. So you have two options, a definitive response really, you could reach out to the Minnesota Department of Commerce. I believe this individual has noted they're from Minnesota, and that regulates insurance in the state. You also could find out who that insurance company is and reach out to them directly to ask what type of impact does a child care business have on surrounding home insurance there. If you reach out to the Department of Commerce, they can give you more specific guidance really on how local businesses might affect residential insurance policies. So regardless of which state you're in, it would be helpful if you reach out to the Department of Commerce.

Question: Can I deduct the cost of a generator all at once if used for business?

Answer: So the generator, how you would expense or deduct that cost depends upon the cost of the generator. So if you're using a generator for business, you have one of two scenarios. You're either using it a hundred percent for the business, and there's no personal use of it whatsoever, or the use is split between business and home. And if you are a family child care provider, you most likely have a generator that you'd be using for both business and home because electric would need to be throughout the home. So in that instance, you have to take a look first at how much did that generator cost? If the generator was over $2,500, you then need to start to think about depreciation. 

Now you could follow the standard depreciation schedule for whatever the cost of that generator is, or you can consider a method of acceleration for depreciation, which is called Section 179. And Section 179 allows business owners to claim an expense all at once instead of having to depreciate it over time if all of the expenses for that business are under $1,220,000. So that's a pretty high number, and a lot of child care businesses would not hit that amount of expenses and Section 179 would apply.

Now what I want to make clear, however, is if that generator is shared between business and home, you then have to determine, use your time space calculation, to determine what amount of that price could be included on your insurance, on your insurance, on your taxes, I apologize, it could be included on your taxes. So sorry about that. So we need to say, "Hey, how much of that cost really surrounds business?" And we're going to use the time space to take a look at that. 

Now if the item happens to be over $2,500, and we use the time space calculation for that, we then could decide if that amount, if we wanted to depreciate it over time or then use that amount with Section 179. So the easy answer is if it is truly used for business, yes, it is an allowable expense. The cost of it will determine how you go about expensing that.

Question: I'll be closing my daycare soon. I was wondering how that impacts my deduction for my daycare. Can I still claim deductions related to the daycare after I close? I'm talking about buying totes to store the toys and other items and things of that nature. I'm assuming I won't be able to deduct my time space for utilities and such once I am closed. Is that correct? Also, do you know anything I need to know about shutting it down in regard to my taxes?

Answer: So I'll just kind of break that down a little bit there. So when a business closes, the IRS does accept that there would be a reasonable amount of expenses for wrapping things up. So there would be expenses included even if the children, even if the business is not caring for children at that time. So there would be a small wrap up period where perhaps you are purchasing items for storage for the business because remember you're going to be filing your business taxes for that year anytime in which you were open. So if you were open from January 1st through the end of May, all of those expenses in that time are going to be your usual allowable expenses and then expenses that were needed to wrap up, the business would also be included.

 Now, I know you have a question about the utilities. So in order to wrap up that business, you would still need the lights on and things of that nature, so that small period of time, and I do caution that you make that a small period of time, would be something where we could then include those expenses as business expenses because there is a cost involved with ending this business. There are things that you need to do to end the business there, and you would of course, as a home family provider, you would need to apply time space to every expense that's shared between business and home. So I caution you in terms of how long you take to wrap things up as the business ends. So be very, very cautious of that.

And then you do ask about what you need to do with your taxes, and I'm just going to recommend that you speak to a tax preparer just so that they can give you some guidance about how you would end up addressing this closure in regards to your taxes because perhaps you have overpaid your taxes with estimated taxes. There could be a lot of different scenarios that could happen as you close a business in regard to your taxes. So that's an individual case by case basis, and we really would expect you to speak to a tax preparer.

Question: I was referred to Ask the Experts because I have back taxes totaling $61,000 from 2013 to 2015. I didn't do many deductions that year because I wanted to buy a home with my husband. Is there any way that I can get that back tax down lower? 

Answer: All right, and I understand if we want to stop and think about, "Well what was the strategy? Why did that person not do that many deductions that year because they wanted to buy a home?" That was because with our taxes as a home family provider, we basically, what's on the last number, line 31 of the Schedule C, is what a mortgage broker would consider to be your income to qualify for a mortgage. So in this instance, the strategy that was taken was she wasn't going to take as many expenses for the business that year because they needed to show the mortgage company a certain amount. They basically made that number on line 31 of the Schedule C, that number became higher because they did not claim expenses.

Basically, when something like that happens, and you choose perhaps to do something like amending past taxes, you need to keep in mind that amendments are only for returns within three years, including extensions. The fact that you had taxes from 2013 to 2015, that's where you owe that tax on, this amendments may not be possible. Now sometimes there are situations where an amendment could be possible if there was something having to do with a financial disability, a disaster, whole list of things. So again, we want to caution you that in situations like this, owing those back taxes, to get together with a tax preparer, please to have a discussion so that they can best help you manage that outstanding tax debt.

Question: All right, so we have a question here. At what dollar amount should we depreciate rather than deduct expenses for daycare, daycare equipment such as furniture and toys? When we started in 2005, the cutoff was about a hundred dollars. I saw recently Tom Copeland indicated the cutoff was $2,500. Is that correct? And if not, what is the cutoff?

Answer: So when it comes to depreciation for physical goods, physical goods purchased, there is anything more than $2,500 is subject to depreciation, for a single item costing more than $2,500. But earlier in this video we discussed, there is something called Section 179, which is a method that you can use to accelerate depreciation as long as the business has under $1.220 million in expenses. So the chance of most child care businesses hitting that is pretty small. And that in this instance, if they had purchased, let's say they purchased a large piece of furniture for $3,000, they would need to think first about what percentage of that is used for home versus business, which may at that point then be under the $2,500, and they would take it normally.

If they were to make a purchase for something that's over the $2,500, a hundred percent used for business, they do have the option of expensing that all at once using Section 179. But there can be different strategies involved with depreciation, and it is good to always speak to a tax preparer about depreciation, but know that that cutoff of a hundred dollars no longer applies. So it's when we have purchases of items, single items, starting at $2,500 that we need to start to decide what type of depreciation strategy we're going to take.

Question: I am a stay-at-home mom who's about to start watching a little girl in my home while I'm still at home with my own children. Her parents pay me through Venmo or PayPal. I have created my own spreadsheet to keep track of the income that I make, and I included spaces to record what snacks and food I provide. She makes a note that she'll bring her own lunch, but I provide breakfast and snacks. I'm really lost on how to do my taxes for this. I have another part-time job that I receive a W-2 for. Is that information at all useful? What form do I use? Can I use the standard meal deduction that she read about in one of Tom's blog posts or is that only for official daycares? 

Answer: So it is unclear from your question if you have researched the licensing laws about around when you are paid to care for a child in your home, and those licensing laws vary from state to state. So if you have not already done this, please contact your local child care licensing agency to determine what you need to do to remain in compliance with local laws caring for this one child. Because you need to keep in mind that if you claim any expenses, you are treated as a business for tax purposes. An individual would not be claiming expenses incurred for the care of someone else's child unless they were a business.

So now if you are going to be claiming expenses, you have to think about yourself as a business. Now, under business structure, you would be considered to be a sole proprietor, right? A sole proprietor is someone who owns their business. Sole proprietorships, however, are not looked as being separate from personal assets or personal tax filings. So what does that mean?

As a business, you would either use your own name, or you could create a DBA, right, a doing business as name, and then you would register that DBA with your state or your county. You can use your own social security number to file the taxes, or you can obtain an EIN, an employer identification number. You are going to continue to track all income and expenses as you are including food costs. And that means receipts that show the date, what was purchased, where was it purchased, the amount of the purchase, right? So you want to have very detailed records. And then as a business, what you're going to do when it comes to tax time is you're going to file on what's called a Schedule C.

So a Schedule C is where you list all of your income and all of your expenses. And as a family child care provider along with the Schedule C, you're going to fill out a Form 8829, which is for the business use of home. So the 8829 is where you list expenses that are shared between your business and your home. For instance, like utilities where you fill out the costs of these, there's a calculation called the time space calculation that you take into consideration that occurs on the 8829. You figure out what percentage of these shared expenses between your business and your personal use of home, what amount gets carried over to your Schedule C. So what amount of those expenses are allowable?

What happens then is that the information on the Schedule C then gets carried over to your personal 1040 form, and your personal 1040 is where you are declaring all of that W-2 income. So when you have a Schedule C, and you do all of the calculations that are necessary, all of the income, all of the expenses, line 31 of the Schedule C, that is considered to be the amount of profit for the business, and you basically pay 15.3% tax on that as a business, as self-employment tax. And then that same number on line 31 gets carried over to your 1040 form, and you pay income tax on that. So when you are a business, a sole proprietorship, you are claiming you are basically going to be paying self-employment taxes, and that amount of your profit for your business is also going to be on your 1040. 

Now when it comes to expenses such as food expenses, I'm really going to recommend that you go to the Civitas Strategies YouTube channel and search child care tax opportunities, transportation, and food costs. And that's going to walk you through those two methods that which one you could choose. One is the actual expense method, one is the standard expense method, which I believe is what you read about, but if you watch that video, it will give you a better understanding about how you can go about organizing those expenses and what you actually are allowed to claim.

All right, so you're in a situation now as a new business because you are accepting income for caring for a child, but you do need to also discuss this with licensing to see, could be in your state or county, there could be a cut-out for the amount of children that you care for that are considered to be a business, but the IRS income that it needs to be declared on your taxes. As I can see, you have every intention of doing. Now it's, are you declaring that on taxes as income, but not considering yourself to be a business and not claiming any expenses? If you're not a business, you can't claim expenses, but you do still have to claim that income, or are you going to consider yourself a business now, file on the Schedule C, take all the allowable expenses, take the expenses that are involved with your home and your business because those can be pretty lucrative. That's a percentage of the expenses such as property tax, utilities, mortgage interest or rent depending on what you have.

But it does sound to me since you have another job that this is not a full-time situation. So in the time-space calculation, which you can find information on Tom's blog, on the TomCopelandBlog.com, you can find information on time space there, or you can search on the Civitas Strategies YouTube channel for time space, and you'll see that of course the amount of the expense that you're allowed to expense is dependent on the amount of time that your child care business is open, the amount of space that you use for your child care. But this might be a good time to just at first visit with a tax preparer. If you're interested, we also have information on the Civitas Strategies YouTube channel on business structure.

And as I mentioned, you are a sole proprietor. Basically, you can learn more about sole proprietorships and LLCs by visiting the YouTube channel or searching for a business structure document that is on our article that is on the Tom Copeland blog. So there up to 15, or there are at least 1500 resources on TomCopelandBlog.com, and you will find things on business structure and time space calculation.

Question: I do not understand this new law and how child care providers who are very small businesses, most making little money watching a few children in their own homes, have the ability to address the CTA. Do most of these providers, even though this exists, how will they comply? How is the IRS reaching out to this business to let them know of the change?

Answer: So what this question is referring to is a new change that started in 2024 where LLCs and corporations need to basically declare who are the beneficial owners, the ownership and decision makers, key decision makers of businesses. So what we're referring to here is what's called the B, as in boy, OI standing for beneficial ownership information. So I just want to first make sure that our viewers understand that those are only for LLCs and corporations. Sole proprietorships do not need to worry about reporting the beneficial owners of a business. Now if you are an LLC or a corporation, you had an existing business, you have up until the end of this year, 2024, to report the beneficial ownership of the business. Just so you know, there is no cost involved to report beneficial owners.

There is a FinCEN website. That website makes it very, very easy to go ahead and report beneficial owners. There is no reason for anyone to pay someone to file or to report your beneficial ownership unless you are a multi-level company. It can be done by individual LLCs and small corporations with no problem. Now what I would, it's very, very straightforward, but what I would like to suggest is that we have an hour and a half long video recorded earlier this year that is posted on the Civitas Strategies YouTube channel that addresses BOI, and it would answer any question you have because we could talk for quite some time about BOI. But what I really like to ensure small business owners is there is no reason to pay anyone. However, if your business is existing in 2024, you have until the end of 2024 to report the beneficial ownership as an LLC or a corporation.

Now the question also did refer to how do providers know that this exists? So FinCEN, which FinCEN, excuse me, which is the Financial Crimes Enforcement Network, they had a pretty large campaign to notify businesses that were LLCs and corporations. That was through digital and print ads, other forms of advertising, so they did a lot to advertise that this was a requirement. Now, if you don't file beneficial ownership, there could be fines and other recourse taken should you not comply with the beneficial ownership requirement, with the reporting. But you don't need to pay anyone. You may have received mailings, fraudulent mailings saying that you need to pay to file for the BOI. You don't. You don't have to pay your payroll company, your tax preparer, a lawyer to file the BOI for you. It is very, very easy to do. You go to the FinCEN website, which in my video I show you how you get there, and you fill out the information. It is not difficult.

But I detailed that in an hour and a half video. So I do recommend that you go there to the Civitas Strategies YouTube channel, go there and just search for either BOI or beneficial ownership information, and the hour and a half video that I recorded is there with all of the information that you need. If you're viewing this, and you're starting a new business in 2025, please do watch the video because you don't have all of 2025 to report. There are times you have to do it within a certain number of months in 2025. In 2026, that amount of months that you have to file becomes even less. So I really encourage you, if you are an LLC or a corporation to please view the video on beneficial ownership on the Civitas Strategies YouTube channel. I think you'll find it very important.

Question: I'm looking to have an air filtration system added to my furnace that is supposed to use UV lights and filters to purify the air of allergens, odors, virus, bacteria, and improve the overall air quality of my home. Would this be counted as a business expense? Obviously, I would be using my furnace during non-child care hours, but I would not be installing this if I did not have a daycare in my home. Does that matter? Is it a hundred percent business use or time space?

Answer: So I would like you to just remember that any time that you are doing any type of that you've made a purchase or an improvement in your home that is involving an area used for the child care, but also used for home, time space applies. So I can't imagine that this air filtration system is only used for the area that the business occurs in, right? It's going to be used throughout the home. So even though you only bought it because you have a child care business, your entire home is getting the benefit of that equipment, and that means that the time space calculation would have to be taken into account.

I do encourage you just to keep depreciation in mind, if this filtration system itself, you would want to speak to a tax preparer because is it considered to be an improvement, which in which case your tax preparer can walk you through something that's called safe harbor accelerated depreciation. It all depends on how much that filtration system costs. So the filtration system, you want to speak to a tax preparer because would they consider it to be an item that would go under the Section 179 we discussed, or is it an improvement to the actual furnace, right? So that is something that I would definitely leave up to a tax professional to decide, and then they can walk you through there. But that is an item that is used between business and family use of home, so that time space would apply there.

Question: I understand that we can use training hours that are completed online within your home child care business as part of the time space percentage. But what about professional development training that you have to complete outside of work? Wouldn't those hours count towards business hours with no children? If not, why wouldn't it be counted?  

Answer: You are completing hours for your child care business. So with time space, you are allowed to count the hours that you are doing business activities directly related to your child care business. So when you do the time space calculation, basically you're not just adding the hours in which you care for children, you're also adding the hours in which you prepare before the business opens, the hours that you use for cleanup, the hours that you use for administrative duties, and this would be no different with any type of professional development. You would include those hours as well. 

Remember that means that your time space calculation is going to change a little bit from year to year depending on the total amount of hours in a year that were dedicated to your child care business. But yes, the time spent on those hours for your professional development, those would be included within your time space calculation because you have devoted those to the business.

Question: I am a daycare provider in Montana. I'm on a food program, therefore I report my income and expenses, so the balance is zero. I want to make sure that I understand the next part. Can I report on Schedule C the entire breakfast, lunch, and snacks, which would most likely be more than the food program, or since I am already reimbursed for the breakfast, lunch, and snack, can I report the two extra snacks?

Answer: So this is something that I had referred to the video that we have on our Civitas Strategies YouTube channel about transportation and food costs. Because as a family child care provider, you do have two options. So you have the option to use what's called the standard method, which is where you use, regardless of whether you accept the CACFP food program, you actually use tier one of the CACFP to determine how it sets an amount, tier one amount, for how much you can claim for the meals and snacks. You also have the option of doing the actual expense method, which is the amount of the actual food for the child.

Now, both of those obviously have some reporting that needs to be done, some recording of the expenses. Actual expense method, there's more recording and more paperwork and record keeping involved in that than there is the standard expense method. But what I would for you to do is to go to that video on the Civitas Strategies YouTube channel and watch the one on food and transportation costs, and that's going to walk you through that. I think the key in your question is, "Hey, I'm receiving a certain amount of funding. Do my expenses have to be the same as the funding I'm receiving?" And no, they do not. But you do have to use one of those two methods.

As a family home provider, you are able to use both methods, either of the two methods. If you are a center, you can only use the actual expense method. But as a family home child care provider, you have your choice of how you would like to expense your food and snack, your meal and snack expenses, as well as anything needed to prepare those meals. So you have the ability to choose which method you would like, and that amount of that expense is not related to the amount of money that you receive from a food assistance program. So those two numbers are often different.

That wraps up our September 2024 questions from the Tom Copeland blog's Ask the Experts! Remember, with over 1,500 resources available at TomCopelandBlog.com, many of your questions may already be answered within those guides and articles! Don’t forget to also check out the Civitas Strategies YouTube channel, where you'll find over 600 helpful videos to guide you.

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