Questions and Answers About the Child Care Stabilization Grant
“Should I apply for the Stabilization grant?”
“Is the money I received from the grant taxable income, even if I didn’t receive Form 1099?”
“How do I pay myself with this grant?”
“Is it better to pay myself or spend it on my business?’
These are some of the many questions I’ve received during my February 10th webinar “How to Save Money on Your 2021 Taxes.”
I’ve created an instructional video that answers these questions and many more. See the video here:
[video width="1390" height="1000" mp4="http://tomcopelandblog.com/wp-content/uploads/2022/02/Questions-and-Answers-about-Stabilization-Grants.mp4"][/video]
Below is an additional series of questions and answers about the Stabilization Grant. If after viewing this video and reading these questions and answers, you still have questions, feel free to send me an email at tomcopeland@live.com.
The February 10th webinar was sponsored by KidKare.
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.
Child Care Stabilization Grant Questions and Answers
Important note: Although there is federal guidance on how the Stabilization grants are to be administered, each state may interpret this guidance slightly differently. Therefore, my answers below may not be the same answers your state gives you. If so, follow up with your state to make sure they are following their own rules.
Q: Is money I received from the Stabilization grant taxable income? Even if I didn’t get Form 1099?
A: Yes.
Q: Can I use the Stabilization grant for:
Pay my taxes? – No.
Pay my employees life insurance premiums? – No.
A concrete slab in the backyard used for basketball, skating, etc.? – Yes.
My student loans? – No.
A whole house generator? – Yes.
Purchase of a swim spa for physical therapy, exercise, relaxation? – No.
My health insurance premiums? – Yes.
Move to a new location? – No.
New sidewalk? – Yes.
Buy food for children? – Yes.
Prescription for massages? – No.
Replace a deck? – Yes.
Entire house generator? – Yes.
Improve a bathroom? – Yes.
Dental crown not covered by insurance? – No.
Contribute to a SEP IRA or Roth IRA? – No.
For all of the above answers that were “No”, you can still pay yourself and then use the money for these purposes.
Pay Yourself Questions and Answers
Q: Can I use this grant to pay myself? If so, how do I do this?
A: State applications will often use the word “personnel” when describing what the grant can be used for. Under federal guidance, this clearly language clearly applies to a family child care provider, even if she has no employees. Providers can therefore use all or part of the grant to “pay themselves.” This can be done by transferring money from one bank account to another, writing yourself a check, or leaving money in one bank account and make a note indicating that this is money to pay yourself. Paying yourself involves nothing more than making a record indicating this. Such a record could say, “February 23, 2022 - $4,000 pay myself with the Stabilization grant.”
Q: If I pay myself, is it taxed twice?
A: No.
Q: Is it better to pay myself with this grant or spend it on items for my business?
A: Assuming the money you spend on items for your business are used exclusively for your business, the tax consequences are the same as paying yourself.
Q: If I pay myself, how much will I owe in taxes?
A: It will depend on your personal finances. You will owe 15.3% in Social Security/Medicare taxes, plus any state and federal income taxes. For most providers, this would be about 30-40% in taxes.
Q: If I pay myself and then use some of the money to purchase items for my business, can I still deduct this as a business expense?
A: Yes.
Q: Would you need a separate account to pay yourself?
A: No.
Q: What if I paid myself with this grant and then later realize that I can use it for items used 100% for my business. Can I reallocate some of this money so I don’t have to pay income taxes?
A: If you pay yourself with the grant and then buy items used 100% for your business, you won’t owe any taxes on the amount you use the grant for this purpose. In other words, let’s say you paid yourself $5,000 and used $2,000 for items used 100% for your business. You would report $5,000 as income and $2,000 as an expense, and end up paying taxes on the difference, or $3,000.
Q: If I transferred money to pay myself earlier but sometimes forgot to make a note, can I go back and fix it?
A: Yes.
Q I’m receiving this grant quarterly through April 2023. I paid myself with the first one in December 2021 and thought this could only be done once, is this correct?
A: Depends on what your state says. Contact your state for the answer.
Q: Can we pay ourselves in 2022 with grant money from 2021?
A: Yes.
Q: Do we need to enter into KidKare if I am paying myself?
A: No, because paying yourself does not create a deduction.
Q: Can I pay myself in one lump sum or do I have to pay myself weekly or biweekly? How do you determine your salary?
A: You can pay yourself as often and as much as you want.
Q: How do I pay myself for the hours I work in the weekends or after work hours?
A: You aren’t paying yourself for any particular hours you work. The amount you pay yourself has nothing to do with how many hours you work or when you work. You just pay yourself because you are the owner.
Q: If I pay myself will I need to give myself a W-2?
A: No.
Q: If I use the grant money to pay myself and then use the money to repair my home or fix my basement, can I deduct this as a business expense?
A: Yes.
Other Questions and Answers
Q: In your opinion, if I don’t need the grant, should I take it? I feel like it’s just more income I have to claim and pay taxes on.
A: You should absolutely take it. You will always be better off financially after taking a grant, even if it increases your taxes. You will probably owe no more than 40% of the grant in taxes. Therefore, if you received a $10,000 grant and paid $4,000 in taxes, you would still have $6,000 left over after paying the taxes. Take the money!
Q: If someone takes the grant and decides they no longer want to be in daycare, will they have to reimburse the money received?
A: Each state has its own rules about this. Contact your state to get the answer.
Q: Where does the grant go on Schedule C?
A: You can include it either on line one (Gross receipts) or line six (Other Income).
Q: I “gifted” some of the grant back to parents because of COVID. Is this deductible?
A: No.
Q: Does it matter how much income I made this year to use the Stabilization grant to pay myself?
A: Some states have different rules about this. Consult your state for the answer.
Q: Are the Stabilization grant requirements the same from state to state as to what I can use the money for?
A: They can vary.
Q: If I was closed because I had COVID and didn’t have parents pay during that time, how do I record “using” some of the grant to cover the lost revenue?
A: You can apply some of the grant money to cover lost revenue, but you can’t deduct lost revenue as a business expense.
Q: If I was audited, would they just audit my grant or my entire business?
A: If your state audits how you spent the grant, it is not likely they will audit the rest of your business.
Q: Can I get the grant even if I don’t have any helpers?
A: Yes.
Q: If I only have one child, can I still apply for the grant?
A: Yes.
Q: My state (Colorado) is requiring that 50% of the grant be used as tuition discounts. I plan to discount the current family tuition evenly. How do I treat this on my taxes?
A: Colorado says they “encourage” providers to give 50% to parents. So, this is not a requirement in Colorado. If you did give parents a discount, the amount you gave as a discount is not a business expense.
Q: Does the federal guidance for this grant require providers to gift any of it to parents?
A: No! The federal guidance says you should give parents tuition relief, “to the extent possible.” This is not a requirement.
Q: How do I create an emergency fund with this grant?
A: Pay yourself first. Then put aside some money in a place that is low risk (bank savings account, short-term bond fund or money market account).
Q: How do I find out where to apply for this grant?
Q: What impact will receiving this grant have on my Social Security benefits?
A: If you don’t spend all of the grant money on items used 100% for your business, it will increase your business profit. This means you will pay some additional Social Security taxes, but it also means your higher profit will potentially increase your Social Security benefits.
Q: On my grant report I listed mortgage and utilities as expenses. Can I still deduct them as expenses?
A: You can deduct your Time-Space% of your utilities. You can’t deduct your mortgage payment, but you can deduct your Time-Space% of mortgage loan interest and you can depreciate your home to account for mortgage principal.
Q: My son is a part-time assistance that I don’t do payroll taxes for him. Can I give him a $500 bonus?
A: You can’t use grant money to pay someone who is not treated as your employee. You can pay yourself and then give him a bonus.
Q: If I use the grant for my IRA, can I deduct 100% of this on my taxes?
A: No. Contributions to an IRA will not reduce your Social Security/Medicare taxes. But, they will reduce your federal and state taxable income.
Q: My business is an S Corporation. Is this grant counted as income?
A: Yes.
Q: I did not include the grant I got in 2020 on my 2020 tax return. Can I put it on my 2021 tax return?
A: No. You should amend your 2020 taxes and report it as income and pay taxes on the amended return.
Q: If I pay my assistant with the grant, do I still have to pay taxes on it?
A: You report the grant as income. You can deduct the amount you pay your assistant. You will have to withhold and pay payroll taxes on these amounts.
Q: When you give a bonus to your staff, do you treat the deduction the same as payroll deductions?
A: Yes.
Q: If I have staff can I still pay myself the whole amount?
A: Yes.
Q: Will getting this grant put me in a higher tax bracket?
A: Maybe, depending on how much of the grant you don’t spend on business items. However, even if it does push you into a higher tax bracket, it only means you will pay more in taxes on the grant amount that is in the higher tax bracket. No other family income will be affected, meaning you won’t pay higher taxes on any non-grant income.
Tom Copeland – www.tomcopelandblog.com
Image credit: https://californiahealthline.org/news/everything-you-need-to-know-about-block-grants-the-heart-of-gops-medicaid-plans/
