How to Cope With Subsidy Cutbacks
The current recession has resulted in some states cutting back on the financial assistance program (Child Care and Development Fund) that helps low-income parents pay for child care. This has led to some states raising the parent co-pays or dropping parents entirely from the program. As a result, family child care providers are in a serious bind.
Providers are faced with uncomfortable choices: raise rates on low-income families, drop them from their program or continue to provide care for a reduced fee or no fee. For providers who care for a substantial number of subsidized families this creates an even more serious problem that can drive some providers out of business.
Let's look more closely at the consequences of these choices.
You could decide to continue caring for the child but accept less than your full pay. Some providers give parents a “scholarship.” But regardless of whether you call this a scholarship or discount or something else, you cannot deduct as a business expense the amount of free care that you deliver. You will report less income on your tax return and pay less in taxes as a result of this, but the free care is never deductible.
You could decide to charge low-income parents your regular rate. Many of these parents may not be able to afford your rates and might leave your program. You could decide to offer part-time care or odd hour care at a reduced price to enable these parents to use your program for at least a few hours each week.
Some providers may turn in their license but continue doing care as an unregulated caregiver. If you are exempt from your state's licensing rules (not required to be licensed but are operating legally) you can deduct the same expenses as a licensed provider. But there are drawbacks. You may lose the ability to get business liability insurance because some insurance companies will only insure providers who meet their state’s highest regulation standard. You may lose your ability to participate on the Food Program and this will result in a loss of income of either $500 or $1,000 per year per child. This is a major financial loss. You may no longer be eligible for grant or loan programs offered through your local Child Care Resource & Referral agency and you will not be able to participate in your state's Quality Rating and Improvement System (QRIS).
If you operate your business in violation of your state’s regulations you will also lose the ability to deduct business expenses associated with your home (property tax, mortgage interest, utilities, house insurance, home repairs and home depreciation). The loss of these substantial deductions means you will pay more in federal taxes. You will not be able to get business liability insurance or participate on the Food Program. We strongly recommend that you do not operate illegally for it puts you and the children in your home at risk for fines and lawsuits.
Bartering
To cope with state cutbacks you could decide to barter with the low-income parent. This involves exchanging services without exchanging money. You could provide child care in exchange for the parent fixing your car, cleaning your home, or working as an assistant for you. Although this may sound like a good way to keep a child in your program, beware of the tax consequences of bartering.When you barter you must report the value of the service you receive as income even if no money was exchanged. This service may or may not be deductible as a business expense depending on what was done for you.
For example, let’s say you provided two free days of care a week in exchange for the parent cleaning your house once a week. If you normally charge $40 a day for care, you must report $80 as income each week even though you didn’t receive any cash. You could deduct only part of the value of the house cleaning if she cleaned business and personal portions of your home. If we assume the value of her cleaning service is $80 and your business use of the home percentage was 40% you would only be able to deduct $32 as a business expense ($80 x 40% = $32). As a result, you would show $80 as income and $32 as an expense. If the parent cleaned your day care children's toys (and assuming the value of this service was $80) then you could deduct the full $80.In all cases, the parent would be required to report the value of the amount she got "paid" for her cleaning services ($80) as income on her tax return. She could also claim the value of the amount of child care services she received ($80) towards her federal child care tax credit.
If you exchange two days of free child care for the parent working as your assistant for two days a week the tax consequences are more complicated. You would still have to report as income the value of the services you provided (let’s say $80) and the parent would still have to report as income the value of services she provided (let’s say $80). However, because the parent is helping you care for children you now have to treat her as your employee and pay all the federal and state payroll taxes: Social Security, unemployment, and possibly workers’ compensation insurance. This can be a major headache to handle.
The risk to you for failing to follow all of these rules when a parent works for you is that you could be stuck with a major medical bill if the parent ever gets injured while working for you.
Clearly, there are no easy answers for the problem of state cutbacks of their child care subsidy program. It’s a time when many providers try to do what they can to help out these families, even if means accepting less money for their work. Whether or not you decide to help out in this way I support your efforts to offer quality care for all children, regardless of parent income.
An earlier version of this article appeared in the August 2010 e-newsletter of the National Association for Family Child Care (www.nafcc.org).
Image credit: www.ccisinc.org
Tom Copeland - www.tomcopelandblog.com
