Questions and Answers About Deductions - Part I
"Can I hire my husband to paint and install fire alarms?"
"If I give parents tuition relief, can I deduct that amount?"
"What is an example of an expense that costs more than $2,500 that would not be entered on Schedule C?"
These are some of the many questions I’ve received during my February 10th webinar “How to Save Money on Your 2021 Taxes.” This webinar was sponsored by KidKare.
In this article I answer the many questions asked about deductions during this webinar.
KidKare is a comprehensive record keeping program that includes an accounting section that allows you to keep track of all your income and expenses. You can use it for free during a 30 day trial period. Afterwards it costs $99.00 a year. If you do sign up, please use the referral code 0659. If you do so, this will help support the work I do helping family child care providers be more successful as a business. Get more information about KidKare.
Family child care providers are entitled to deduct all "ordinary and necessary" expenses for their business. Ordinary and necessary means: typical, appropriate, common, helpful or useful. Since a provider's business is to offer a home learning environment for children, she can deduct the business portion of expenses to clean, repair and maintain her home as a home. This can includes hundreds of household items: furniture, appliances, beds, tables, silverware, lawn mower, patio furniture, snowblower, towels, pictures on the wall, and so on. See my article, "What's Deductible in a Family Child Care Business?"
My book Family Child Care Record Keeping Guide lists over 1,000 allowable deductions.
Questions and Answers
Employees/Independent Contractors
Q: Can I pay my spouse to mow the grass, shovel snow, etc. and use it as an expense?
A: Yes. However, your spouse will have to report this payment as income and pay self-employment taxes on it. Therefore, your family won’t be better off. Think of some other way to reward him.
Q: My husband plows my driveway and shovels snow. Can I deduct the cost of the plow and his services?
A: You can deduct your time-space% of the plow, but you don’t want to pay him.
Q: My CPA says I cannot pay my husband to be my assistant because I am a sole proprietor. He has been working for me for free. Is there a way I can pay him?
A: Your CPA is wrong. You can certainly hire your husband to be your assistant. However, you don’t want to. See my article, “Should You Hire Your Child Who is 18+ or Your Husband?"
Q: Can I hire my husband to paint and install fire alarms?
A: Yes, but don’t do it.
Q: If I hire someone to mow my lawn, snow removal and house cleaning, do I need to give them a Form 1099-NEC to claim this as a deduction?
A: If you pay an individual (versus a company) more than $600, you should file IRS Form 1099NEC. You can deduct your time-space% of this cost.
Q: I’m not giving a Form 1099-NEC to the guy who cleans snow off my walkway. How do I legally deduct this? Where do I put it on my tax return?
A: Enter the expense on Schedule C, line 21 Repairs and Maintenance. If you get audited, you will have to pay a penalty if you paid the guy more than $600 and didn’t file Form 1099-NEC.
Q: How do I report the amount I paid an assistant who only helps occasionally. Do I give her a Form 1099-NEC since she is not a regular employee?
A: Anyone who you hire to help you care for children is your employee, not an independent contractor (with a few narrow exceptions). Do not give out a Form 1099-NEC to employees. See my article, “
Q: I paid a contractor who refused to give me his Social Security number. He has moved and left no forwarding address. Can I still issue a Form 1099-NEC? It was for over $20,000.
A: Yes. Send the Form 1099-NEC to the last address you have for him.
Q: Can I deduct the cost of a cleaning lady?
A: Yes. Apply your time-space% if she is cleaning business and personal areas of your home.
Q: Can I deduct money I paid my child without a Form 1099-NEC?
A: Yes. However, if you paid your child to help you care for children, you need to follow the rules depending on whether your child was age 18 or not. See my two articles, “
Q: Can I deduct 100% of what I pay my weekly gardener?
A: No. That’s because you use the garden for personal purposes as well as for your business.
Medical Expenses
Q: What can you deduct as a medical expense?
A: You can’t deduct medical expenses for yourself unless you set up a Health Reimbursement Account (HRA). See my article, “How to Turn Your Family's Medical Expenses Into a Business Deduction."
Q: Can I deduct my health insurance monthly premium if the insurance is provided by my spouse’s company that he retired from?
A: Same answer to the question above.
Q: I had an emergency and was treated at the hospital. Can I deduct the amount my medical insurance did not pay?
A: No.
Lost Income
Q: I lost $1,550 from COVID when parents didn’t pay me for two weeks in 2021. What tax form do I use to claim this?
A: You can’t deduct this as a business loss.
Q: If I give parents tuition relief, can I deduct that amount?
A: No.
Q: I have a couple of parents who did not pay me the difference between their subsidy and my rate. Can I write off this as a bad debt?
A: No.
Q: If a subsidy program does not pay me the full tuition that I am due, can I claim the nonpayment as lost income?
A: No.
Q: If a parent leaves owing me money, can I deduct this as a loss?
A: No.
Larger Expenses
Q: Can I deduct expenses that individually cost less than $2,500 in one year, without deprecating them?
A: Yes.
Q: Can I deduct costs of a new pool that will be used by the children to give them swimming lessons? Can I use grant money for this expense?
A: Yes. You probably cannot use grant money for this expense. However, if this is the Child Care Stabilization grant you can pay yourself with the money and then purchase the pool.
Q: Is it fair to deduct 100% of an expense that I wouldn’t incur if I didn’t have a child care business, such as an upgrade to my HVAC system to prevent COVID spread?
A: Yes.
Q: How do you claim upgrades on your kitchen on your taxes?
A: Multiply by your time-space% and claim this as a repair on Form 8829 Expenses for Business Use of Your Home.
Q: Can I deduct window replacements?
A: If you replace less than half of your windows you can deduct your time-space% of the cost in one year. If you replace more than half of your windows, it’s a home improvement you must depreciate over 39 years. See my article, "How to Deduct a Home Improvement."
Q: I had our duct work professionally cleaned at a cost of $500+. Is that 100% deductible or a percentage?
A: Apply your time-space% because it’s used for both business and personal purposes.
Q: Can I deduct expenses for remodeling and updating my master bathroom? I do use it as a back-up for the daycare.
A: Yes.
Q: If I’m finishing my basement to use for my daycare, is that all deductible?
A: Yes, if the basement is never used personally. Otherwise, apply your time-space%.
Q: What is an example of an expense that costs more than $2,500 that would not be entered on Schedule C?
A: New driveway, patio, deck, furnace, kitchen remodeling, new addition. All of these expenses would be entered on IRS Form 4562 Depreciation on line 14. Then the expenses from this form would be transferred to Schedule C, line 13.
Q: I replaced the roof on my home and insurance paid for most of it. Can I only deduct the portion I had to pay, or the full amount?
A: You can only deduct the portion you paid, not the full amount.
Q: How would I deduct a whole house generator?
A: If it cost less than $2,500 deduct your time-space% of the cost in one year. If it cost more than $2,500 I’d probably treat this as a home improvement.
Q: I had my kitchen cabinets painted by a professional. Is that considered a home improvement when the cost was over $2,500?
A: No, painting is a repair you can deduct in one year.
Q: How do I deduct a small front porch to make my home more accessible for parents and children?
A: Depreciate this as a home improvement over 39 years.
Q: If I pour concrete for kids to ride their bikes on, play basketball, etc. is this something I must depreciate?
A: No. This is a repair you can deduct in one year.
Q: We will insulate our garage, build a partial wall with storage built in and install a heater. This is so we can use it in the winter in 2022. Is this an expense?
A: Yes. Multiply by your time-space% and deduct in one year as a repair.
Q: Can I deduct a fence to keep children safe, or a walkway?
A: Yes to both.
Q: Can I deduct a patio and retaining wall that I built so families can use the patio when I host a BBQ?
A: Yes, to both.
Q: I’m having a new wood stove installed next month. The cost is $9,200. Is this a repair or improvement?
A: It’s a home improvement you must depreciate over 39 years.
Q: How do I deduct a new furnace and ac?
A: You can deduct your time-space% in one year.
Q: I put a kitchenette in my basement. How much of it can I deduct?
A: Assuming you use it for both business and personal purposes, deduct your time-space% in one year.
Q: How much can I deduct for a new roof?
A: Your time-space%. You can deduct this in one year.
Q: If we build a tiny house or duplex on our property as an option for an employee to live in at a reduced rent, to what extend is this a business write off?
A: If it’s only used by your employee you could depreciate 100% of the cost over 39 years as a home addition.
Q: Can I deduct the repair or replacement of my concrete floor in my garage? The children enter through the garage?
A: Yes. Apply your time-space% and deduct in one year.
House Depreciation
Q: If we plan to move in a few years, should we not depreciate our home?
A: No. You always want to depreciate your home.
Q: Do I need to depreciate my home as I’m retiring in a year?
A: You always want to depreciate your home. If you have not previously depreciated your home, you want to recapture your previously unclaimed depreciation before you retire.
Q: How do you claim house depreciation?
A: See my article, "How to Depreciate Your Home."
Q: I paid off my house in 2021. How does this work as a deduction both last year and going forward?
A: You claim depreciation on your home based on the purchase price of your home. Therefore, it doesn’t matter if you have paid it off or not, you still claim house depreciation the same way each year. The only difference once you paid off your house is that you no longer have any mortgage interest. Congratulations!
Q: I’ve been in business for 38 years and will be closing this year and selling my home. How should I prepare for the 21 years of depreciating my home when I sell it? Who will help me figure this out?
A: You will owe taxes on the depreciation you claimed over the past 21 years. I would strongly recommend hiring a tax professional to do your taxes.
Pets
Q: If I have pets that were involved as part of my child care and they have illness expenses and we had to put them down, can I deduct any of these expenses, besides the required shots by licensing?
A: I’ve never won a deduction for a dog or cat, so don’t try to do that, even if they are involved in your business. You could only deduct required shots if you were not required to give your pets the shots before you were in business.
Q: Can I deduct the cost of pet supplies like flea medicine or dog/cat food?
A: No.
Q: I do therapeutic horseback riding with my daycare children on my farm. The child work with our dogs. Can I deduct special equipment/saddles and feed/vet bills?
A: You can deduct a portion of the expenses associated the horse, but not the dog.
Tom Copeland – www.tomcopelandblog.com
Image credit: https://www.flickr.com/photos/wwworks/4612030724
