Common Mistakes Providers Make on Their Taxes
What are the most common mistakes that family child care providers make on their taxes?
Common Mistakes
* Not knowing what's on their tax return: Providers who use tax preparers often don't know where the numbers on their tax forms come from. This can be a problem if you are audited. S
* Not claiming exclusive use rooms: One provider's tax preparer didn't want the provider to claim two rooms that were used exclusively for her business because she was afraid she would get audited if her time-space percentage was too high. This is a mistake. If you are eligible to claim exclusive use rooms, do so!
* Depreciating items that shouldn't be depreciated: Any item costing less than $2,500 should never be depreciated on Form 4562. Instead, it should be deducted in one year on either Schedule C or Form 8829.
* Improper use of the Section 179 rule: One provider's tax preparer claimed her $3,000 fence on Form 4562, under the Section 179 rule in Part I. It's no longer necessary to use the Section 179 rule that allows providers to deduct items in one year if they use it more than 50% for their business. The problem with using this rule is that if you go out of business or start using it less than 50% in your business before the end of the normal depreciation period, you'll have to pay back some of the deduction you claimed. In this case the provider was going out of business in three years. She would be better off depreciating the fence and not use the Section 179 rule.
* Not deducting land when depreciating the home: Many tax preparers did not subtract the value of the land when depreciating the home on Form 8829, line 37. Land cannot be depreciated and must be subtracted from the purchase price of the home before calculating home depreciation.
* Not counting all the hours working when children are not present in the home: Most providers fail to keep at least two months of careful records showing how many hours they spent on business activities in their home when children were not present. These includes hours spent on cleaning, activity preparation, meal preparation, time on the Internet, etc. Some providers tell me that their tax preparer said they couldn't count these hours. Not true!
* Not counting all the meals/snacks that were not reimbursed by the Food Program: Providers can deduct up to one breakfast, one lunch, one supper and three snacks per day, per child if you serve that money. Many providers forget to keep records showing the extra snacks they serve that are not reimbursed by the Food Program. One snack a day for one child for a year is worth over a $200 deduction.If you make a mistake on your taxes you can always amend it to fix the mistake and get a refund.
My book Family Child Care Tax Companion is a tool providers can use to help educate tax preparers about the unique tax rules affecting providers.
Tom Copeland - www.tomcopelandblog.com
Image credit: https://www.flickr.com/photos/30478819@N08/50663260506
