Estimating Food Expenses Can Be Risky

Is it reasonable to claim 40% or 58% of your total food expenses as a business deduction?

One provider did so and now is faced with defending this in an IRS audit. And it is not easy to defend.

Most family child care providers use the standard meal allowance rule to claim their food expenses. They find it simpler to calculate and it almost always generates a higher deduction than using the actual expenses method to claim food expenses.

There are some child care providers who will be better off using the actual expenses method: those who buy more expensive, harder to find foods and those who live in areas with high food prices.

In my book Family Child Care Record Keeping Guide I describe six different ways you can estimate your food expenses when using the actual expenses method to claim food expenses.

The most accurate way is to estimate your own average cost per breakfast, lunch and snack by pricing out 3-5 different servings and then multiplying your averages by the number of meals and snacks you served.

The tax preparer of the child care provider being audited used a different method. He took her total food receipts and multiplied it by 40% for one year and 58% for another year.

Calculating your business food expenses based on a percentage of your total food receipts can be an acceptable way to do this, but only if it's done carefully. The best way would be to identify the number of meals and snacks each person ate, including every member of your family and the day care children.

Then you would need to estimate whether each person ate an equal amount and whether the meals and snacks cost the same or not. In other words, do you and your husband eat more than your own children or the day care children? Does the cost of breakfast served to the day care children equal the cost of a breakfast eaten by your family on weekends? You would probably have to assign a higher cost to meals eaten by adults and a lower cost to snacks.

As you can see, this type of calculation is not an easy one to make. Without careful tracking of meals and food costs, it cannot be done accurately.In the case of the child care provider who claimed 40% and 58% of her food costs, she doesn't know how her tax preparer came up with these percentages. Even though she saved all her food receipts, it will be a difficult job to defend these percentages. In the end, she may have to use the standard meal allowance rate, accept a lower food deduction and pay more in taxes.

The Moral

Don't let your tax preparer put any number on your tax return if you don't understand how it was arrived at. It can cost you later in an audit.

Tom Copeland - www.tomcopelandblog.com

Image credit: https://www.piqsels.com/en/public-domain-photo-oqbaq/download/320x568

For more information about claiming food expenses, see my Family Child Care Record Keeping Guide.