Ask Civitas: October 2024 Reader Questions Answered!

You have questions, we have answers! Since taking over Tom Copeland’s blog, 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: A family that attended our center left with an outstanding tuition balance. What steps can I take to get that bill paid?

Answer: Well, of course we don't know what steps you've taken so far. Initially, what we would recommend, obviously, would be a phone call and a letter that details your policy taken from your family handbook, the amount due, and when that was due. You'll want that to be in a very friendly tone. You also could potentially send a email with the same information. Phone call friendly, email friendly, letter friendly, but with all relevant details.

Once you've done that once or twice, the next thing that you're going to do is to create a letter that is a little more stern and that letter will still include your policy, the program policy for late payments. It'll discuss any type of action that could be taken, which could be, for instance, a small claims court or some type of collection or reporting to a credit bureau. You can include that. You would include the date that the payment was due, the date for the services covered, what the services that were covered, what they were for, and you'll just want to make that a little more professional, a little sterner, right? Once you've sent that, I would recommend sending that letter, however, via certified mail so that they do have to send it.

After you've sent the certified letter, if it is received, your next option, if you don't receive payment by the date that you've set in the letter, you can go ahead and you could pursue legal action. You could speak to a lawyer, you could go to small claims court, you could put them into collection. Some of those things may involve some of your own money. Perhaps you could find a lawyer that could speak to you briefly about the circumstance and how much is owed if it's worth pursuing it legally. You can do some research on your own about your local small claims court, and you can contact a collection agency who could tell you what their fees are. But first we recommend starting off, if you haven't already, in a friendly tone. I would do that three ways, twice, and then you'll want to put together a more professional letter. You actually could Google something of the nature of professional letter, collection letter template, see what comes up there. There may be an option for you to use. That is our recommendation there.

Question: I have recently filed my home daycare as a sole proprietor, but I'm now looking to hire a part-time employee on Mondays. Does this mean I need to refile as an LLC since I will now have one employee that is not related to me?

Answer: Two different parts to that question. You do not need to become an LLC, but that person who is working for you every Monday is considered to be a W-2 employee and not a 1099 contractor. If you go to tomcopelandblog.com, you can search for our guide employee versus contractor. You also can go to the Civitas Strategies channel on YouTube and view a video on how you determine if someone is an employee or a contractor.

You can also go to https://www.civstrat.com/contractor-vs-employee-app, and find an app that we have at that particular location that will help you determine whether this person is an employee or a 1099 contractor. But based on what you've told us, that individual is a W-2 employee, and you would go through the process of making that employee a W-2 employee. You don't have to become an LLC, but under this circumstance, this is an employee and you will not be paying them via 1099. Again, visit tomcopelandblog.com, or the Civitas Strategies' YouTube channel to view our resources on employee versus contractor.

Question: The parent has breached the contract. The parent refused to answer in response to any emails, calls, or text messages that the contract is stated agreeing to all terms and conditions. They've signed that. I've sent her a copy of her signature stating she agreed to pay the terms and conditions that whether her child comes to the daycare or not, she has to pay for child care. She agreed this. Can I file a court case against her, which basically that she used the Tom Copeland blog to help her with writing her contract. Are there any other forms that I could download or how do I find a mediator that can help me with this parent?

Answer: Well, unfortunately we do not have any forms that you could download. However, the process that we discussed beforehand in our first question would be very relevant to you in terms of the process of whether it be putting them into collections, legal action or taking them to small claims court.

We do not have a form. However, a Google search can help you find forms for a more formal interaction and means of contacting that family. That is that there.

Question: I'm trying to find a good general tool that family child care providers can use to determine their hourly wage. Do you have a resource for this?

Answer: Keep in mind that hourly wages are not set throughout the country, right? Hourly wages are very much dependent on where you are in the country, what your local competitive child care businesses are paying and what services you are offering. Unfortunately, no, we do not have a resource for that.

My first suggestion would be to reach out to local child cares in your vicinity, reach out to some family child cares and find out what they are paying their workers. Good luck. I'm sure you'll be able to find that information there.

Question: They have a two-year-old that has been bitten by another two-year-old. Months ago it happened more frequently, then maybe it happened on and off. The understanding is that it's a communication issue with the biter is usually over frustration over toys and things of that nature. The parents, obviously the child being bitten are very upset. This provider has been in business for many years. They have not experienced anything like this. Now, the parents of the child bitten have contacted the provider asking for a meeting with the family of the child who is doing the biting, and this would perhaps lead to a mediation session.

Answer: My recommendation would be that you would want to gather all three parties via Zoom or a Team meeting and record it. Have everybody, rather than have everyone there in person, you should basically create a Zoom meeting, invite the parents of the child that is biting and the parents of the child that is being bitten and have a calm, rational discussion. Obviously, the developmental stages of children is something that comes into play.

You do also make a note that you have suggested to the parent that perhaps they find other childcare and you may have to resort to that, but bringing everyone together but recording that meeting for your own protection would make sense. It is a mediation situation if you are going to continue to care for that child. Good luck. I know that's a very, very tough situation there.

Question: I received a grant of $75,000 in 2023 to build a new classroom. It did cost me $89,000 by the time it was finished, we added a sunroom on the porch area. It is 100% used for daycare. Can I deduct all of the dollars spent on the classroom or what can I deduct on this project doing my extended taxes now?

Answer: That leads me to believe that they have an extension and they're doing their 2023 taxes.

Remember that grant of $75,000 had to be recorded as income. You are paying taxes on the $75,000. However, you can take the expenses for that addition if you have taken things such as depreciation into consideration. You did say that this is used 100% of the time for the daycare, so time space would not come into consideration. But also if some of this improvement carried over from 2023 to 2024, you may not be able to claim all of the expenses on your 2023 taxes. There's a lot going on here. Basically, meeting with a paid tax preparer would be a very good idea because there probably are expenses and such that exceed the $2,500 that would need to be depreciated. You may not be able to take all of those expenses all in 2023. We do recommend that you meet with a tax preparer.

Question: Can you deduct a portion of your mortgage on your taxes? I know you can write off the interest paid. What about the actual cost of your mortgage?

Answer: No, unfortunately you cannot write off the cost of your mortgage if you are a family child care provider. Mortgage interest at the portion which applies using time space is an allowable expense, an allowable deduction, but you cannot deduct your mortgage, actual mortgage payment, mortgage interest, yet please use a time space calculation. You can go to tomcopelandblog.com and find more information on the time space calculation. Or you can go to YouTube, look for the Civitas Strategies YouTube channel. You can search time space calculation and you'll see some great videos there on how to perform the time space calculation if you aren't already familiar with that

Question: If I hired my child as an employee in 2023, and I am just getting my taxes finished and didn't issue any forms to her, will the penalties be more than the deduction? I paid her about $3,000. If I do deduct, what do I need to do for her?

Answer: Again, very good question for a tax preparer, however, you are able to file retroactively to pay a person who should have been paid via W-II. You would be amending, you would be doing a 941X, you would be doing an amended W-2, you would have to pay the employment taxes and such. A question please for a tax preparer. Can you do it? Yes. If your child is working for you on a regular basis, as we discussed before, very good chance that your child should be paid on a W-2 and not via a 1099 as a contract. Please, once again, you can go to the Civitas Strategies channel and search employee versus contractor. You can go to the Tom Copeland blog and also there are resources on employing your child.

By all means, please do that. It would also be a good idea because of the tax forms that need to be filed that you speak with a tax preparer.

Question: I'm curious, if someone were to purchase a home to do family child care but did not live in it, does this change the tax deductions the provider would be eligible to claim? And then would it be an exclusive use of space? 100% of the space, meaning all the space all the time.

Answer: If there is a building purchased as a home, however it is not lived in and all of the space in that home does apply, the children, excuse me, are being cared there. All of that space is exclusive space. Yes, you would not be applying time space and it would be 100%.

However, 100% of that space in that home has to be used for child care. Now if it turns out that it is less square feet, as you're saying this is exclusive use space, I would recommend actually once again a tax preparer. Would it be 100% use if every portion of that home is being used, then yes, it would all be considered to be exclusive use space. Good question though. I'm not sure if you're using that entire, entire home there.

Question: Is a childcare subsidy considered taxable income?

Answer: Answer is yes. Childcare subsidies are considered taxable income. You would have to claim those on whether it is your schedule C if you are a family home provider or obviously if you are an LLC declaring to file as an S corporation or a S corporation, you would be claiming that on your 1120S tax form.

But yes, that is considered to be income. However, any of the costs associated with your childcare business are legitimate deductions. You'll want to keep that in mind there. And you most likely are receiving either a 1099 or you're receiving something stating the amount of that payment, the subsidy payment that you're receiving because that subsidy payment is reported to the IRS.

Question: I'm a small family childcare provider. I received a grant for HVAC and fences in the amount of $39,000 in July of this year. I spent all of the grant plus $6,000 to complete the project. What information do I tell my CPA when preparing the taxes?

Answer: You're going to be obviously declaring all of that grant as income. You're going to be taxed on that. And then you will be expensing the allowable expenses. I don't see here if you are a family childcare provider or if you are a center, I'm going to say that you probably are a family childcare provider needing to use the time space calculation for the expenses for the HVAC.

You can use also if the fence is being used for childcare, you can use your time space calculation. However, you don't include the physical space of the fence, outdoor space, the feet of the space of the fence in your time space calculation. Yes, you can use the time space percentage, but you would not be actually including that square feet in your time space calculation. When you visit with your CPA, you will have the 1099 that you received or whatever you received for the grant, and then you'll have documentation of all of the expenses because it is entirely possible that some of the expense that you incurred for these improvements exceed the depreciation or need to be depreciated due to depreciation laws.

You may have to depreciate some of those expenses, meaning you will not get to take them all in one year. I would go to your CPA with all of those receipts as well as your time space calculation. That does not take the space that the fence encloses, does not take that into consideration. You'll use the time space percentage if that fence is needed for child care, but you'll not include those measurements in your time space.

Question: Can I write off the cost of a new washer and dryer that's used for my daycare?

Answer: They mentioned California. Keep in mind that is another situation that if it is being used 100% for child care and nothing for the business, that could be an allowable expense, that could be considered to be an exclusive use. If it's used between the daycare and the family use, that would then time space would apply. And once again, depending on the amount of the item, you may want to speak to your tax preparer because is there a possibility that it needs to be depreciated? Or you can ask your tax tax preparer if you would be able to use what's called section 179, which is a way of accelerating depreciation. But yes, that is used for business purposes. Either it'll be an exclusive use if it's a hundred percent or it will end up being a regular use item that you would apply time space to.

And again, you can go to tomcopelandblog.com to find out more information about the time space calculation. You can also find videos at the Civitas Strategies YouTube channel.

Question: Someone's 17-year-old works for the child care, you paid him $9,000. Do you need to file a 1099 or would it be more beneficial to gift him that money rather than filing a 1099?

Answer: We have a couple of situations here. We have that situation, employee versus contractor and employee versus contractors, very, very strict IRS rules. And the majority of people, even your child that are working for you on a regular basis would be paid via W-2 wages. Now 17 years old, there are certain ways that you would be able to claim that child as a deduction and then the child not have to expense that if they fall under the threshold of the tax bracket not having to pay taxes.

My recommendation here is to look into the resources that we mentioned for employee versus contractor and to search the Civitas strategies YouTube channel for employing your child. You will see that there's a video there that will walk you through what this looks like, what you need to do to employ your own underage child, what that does in terms of affecting taxes and expenses. A lot going on with that. It's a simple question, right? But a lot going on there.

Question: We have somebody here who basically has given us the square feet exclusively used for daycare and the square feet regularly used for daycare for across many, many years. But the main part of this question is: I'm considering selling the home in early 2025. Could you please help me understand how these daycare use percentages might impact the tax of the sale, especially in terms of capital gains expenses or any other relevant tax deductions?

Answer: This is very much a case, most likely, I should say, where depreciation plays a part. And this is a perfect question for a paid tax preparer. This is something that whenever you are involving depreciation of the home, capital gains tax, anything of that nature, you're going to need to speak with a licensed or a paid tax preparer.

Question: I'm in the process of getting a child care license. I'm having a hard time getting workers' comp and general liability insurance for my center. I was told that the requirements for center insurance have changed within the last two weeks. What are the requirements for a new starter like me to get insurance for my center?

Answer: Insurance does vary from location to location. What's the same in one state or in one county could be different in another state. At the tomcopelandblog.com, there is a resource to find insurance agents that work with liability insurance.

And our suggestion would be, I know that it's very, very frustrating, but there are businesses out there that are still insuring child care businesses. I don't know the requirements for your particular circumstance. However, if you go to tomcopelandblog.com, you can search for liability insurance and find a list of 10 very valuable questions to ask when shopping for liability insurance. And you can print those out or keep them up on your screen when you talk to an insurance agent over the phone. You can basically use those to determine, it discusses the amount of coverage, as does you can go to the Civitas Strategies YouTube channel and search liability insurance, and you're going to see that we have resources on liability insurance there. A lot of resources to help you, but the circumstances do change depending on where you're located.

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!