Ask Civitas: Reader Questions Answered!
You have questions, we have answers! Since taking over Tom Copeland’s blog last year, we’ve heard from a lot of you who have questions about the business of family child care. If you sent in a question (which you can do on the Ask the Experts page), you should have received an individual response.
What we've noticed is that a lot of these questions have common themes, so we thought it would be helpful for all of you to hear the answers to some of questions that have been sent in. Watch the video below to hear some of the most commonly-asked questions we get!
Can’t watch the video? Here’s a transcript of the questions and answers covered in this video!
Q: I just realized that I did not keep my personal food receipts separate from my business food receipts. Can I use my time space percentage to figure out the business portion of my food expenses?
A: It's a great question. The short answer is no. So remember that your time space percentage is very important and applies to a lot of things in and around your home. And when you have anything that's mixed personal and business use, you definitely want to segregate those costs. But the time space is not the way to do it with food.
There's a couple of ways you could do it. If you didn't keep the personal receipts, that becomes problematic. So in that case, what I would strongly recommend is try to certainly get the costs that you can from here on out, start keeping those receipts. But you can use the standard deduction and in that case, you're going to be using the Child and Adult Care Food Program rate, those are ones that you could then use to buy a meal. So you will need to have some sort of record as to who is in attendance, how many meals you serve, that sort of thing. But a lot of that you could be able to potentially reconstitute from your existing attendance logs and those sorts of things. But again, I wouldn't apply time space to that in particular.
Q: I like to have a celebration when a child is graduating from my daycare program and going off to kindergarten. I take the child who is graduating out alone with me for a meal. It could be breakfast, lunch, or dinner. Is any of this meal deductible?
A: This is a great question, and this is part of the fun of the questions that you all send in, is that there's some that really fall into kind of gray areas. And so I actually took a fair amount of time looking up the specifics around this one because they're not really your customer or your client because it's the child of, but it's the person in your care. So there's really two ways to do it. One is you could take it as a 50% meal, which means that you'd be deducting half the meal cost, but not the full meal cost. The other way that you could do it is if it's under $25, you could record it as a gift given. And both of those would be ways that would be in accordance with the IRS regulations.
Q: So I saw some information about a recent change in the tax laws that would allow family care providers to deduct most home improvements in one year rather than depreciating them over a number of years. I am planning to put an addition on my home so I can expand my childcare business. It's going to cost more than $50,000. Can I deduct that in one year?
A: Let's pull this one apart because this is a very dense question. First of all, there isn't, just to be clear, there isn't a law that just applies to family care providers when it comes to deducting improvements. In this case, what I believe we're being asked is around bonus depreciation. Now, as some of you may know, bonus depreciation is a temporary depreciation regulation that lets you do a much faster depreciation than you normally would.
Bonus depreciation applies to land improvements, personal property, which is a way of saying movable things. And by the way, those movable things can be quite large. So technically if you get a new oil burner or a new HVAC unit, that's considered to be personal property. I know it sounds weird, but it's true. Basically it's anything that's less than a 20-year depreciation can use bonus depreciation.
However, in this case where you're talking about this addition to the home, that would be considered part of a business use structure, it would be 39 years. So that wouldn't be eligible for bonus depreciation. A couple of other things on it related to depreciation before we move on to the next question. One is, do you know that some of your states do not recognize bonus depreciation? So for example, New York State does not recognize it. So even though you're depreciating a hundred percent in 2022, you might not be able to do it on your state taxes. And that's not a huge number, but it's something to be aware of. So certainly as you talk to your tax preparer, if they are going to use bonus depreciation, make sure there's no other option like Section 179, which usually is one that states like New York do recognize.
Definitely be aware of that mismatch around depreciation. The other thing to remember is bonus depreciation is temporary. And so 2022 is the last year it'll be a hundred percent. If we look at the tax year we're in now, 2023, it's only 80% accelerated depreciation, then it will go down over the next couple of years and eventually go away. So do know that bonus depreciation is not a permanent fixture and starting this year it's not going to be as much as it's been the past couple of years.
Q: I just wanted to confirm that any interior home improvement can be deducted in one year and does not have to be depreciated. Correct. So in 2022, we installed a new water heater for just over $5,000. The time space percentage of this can be fully deducted on our 2022 tax return, correct?
A: I feel like there's a couple of questions here; there's really two questions that are being asked. One is, can an improvement be deducted in one year? Typically they cannot, repairs can. So let's keep in mind what the difference is because very often, I know I do it sometimes too, we say improvement, repair, same thing, renovation, all the same thing. Under tax law, repair has to be something where it brings the same function and materials into play.
The other thing is it's limited in extent, that second part is fuzzy. Let's talk about the first part. So when we talk about function of materials, so for example, let's say you're replacing your countertops in your kitchen and you have Formica seventies countertops and you replace them with something that is maybe a man-made material reasonably priced. Yeah, it's probably a repair, same function, same countertops, not very flashy, but if you come in with Italian imported marble and a whole bunch of beveling and such, and you're talking about a much more complicated project than you would likely not be considered to be in that repair land anymore.
So the first thing is to think about is it a repair or is it an improvement or renovation? If we think about those choices, in this case, you're installing a new water heater, that's not a repair. That falls into, in this case, it's a new item that we just learned is personal property. Now, the other party is, and I'll talk more about that in a minute on this particular one, but let's keep it this idea of improvement and renovation. One of the things that you do want to think about is that there's a few different options around depreciation, but when it focuses on these improvements and renovations, you want to think about the safe harbor for small business.
If it's under $10,000, so let's say for a minute, this wasn't a water heater, but it was that countertops that we just replaced in your kitchen. It was under $10,000 (your time space portion), then you could use the safe harbor for small business and depreciate in one year. In this case though, there's kind of a third element coming into play because as we were just talking about, the water heater is not being repaired and it's not technically a home improvement, it's actually personal property that's being replaced. So in this case, even with the $5,000, it would be something that they could depreciate using Section 179 in one year, or bonus depreciation in 2022, still a hundred percent for 2022. And those would be two options they have for definitely depreciating that in one year.
Q: Is it better to offer an employee free childcare or pay them a higher wage and then charge them for that care? And a related question: my employee would like her child to attend my home daycare. She asked if the tuition could be deducted from her check, but I'm not sure if that's an allowable deduction. If it is, is it pre-tax or after? And I know I can do a dependent care FSA deduction, but that seems like an unnecessary step.
A: I would agree it is. So let's take these scenarios because they're coming up a lot, of one by one. So if you're paying them higher wages, the downside of it is that remember, you're still paying higher payroll taxes. So as we know, payroll taxes are 15.3% of the check. You're paying half of that, your employee's paying half of that. Well, in this case, if I give Liane more money so that she can then pay it back to me while I still have to pay those payroll taxes, so it's getting cut before it comes back to me. So not necessarily the way you want to do it, you're going to end up losing.
You can provide a dependent care benefit that would be tax-free. Absolutely. And you don't need to do it as the second question is pointing out, you don't have to do it in a dependent care FSA. The advantage of the dependent care FSA is that then your employee could do tax-deductible contributions. So if let's say you're only going to pay for half of it would give them a vehicle to get half of it tax-free. That's another whole thing we could put aside.
But at least for this dependent care benefit, could you just do straight cash? Absolutely. I'd have a policy in place. I would have a way to monitor it. So be able to show that you're tracking that amount, and that will help you know that you're doing it in accordance if you're ever audited, that you do have some sort of thing that says, yes, this is a policy we have. It wasn't just a handshake or something. It's a policy we have for employees. It's only one, and I should say in all of this, make sure it's an employee and not a contractor. Very different relationship.
And again, you can deduct that amount then it would not be taxable to you nor the employee. Not a bad way to go. However, certainly one of the easiest ways to do it would be to have a free care benefit in place. If you say it's just going to be free, then you don't need to worry about, you'd have to have policy in place, but it wouldn't necessarily be monitoring any sort of payouts or anything along those lines. Maybe a little easier.
The last thought I would have is, and this is going to be rare for you family care providers, but it's just something to be in mind because I do get questions on this one a lot. There is a tax credit out there for 25% of your related costs if you're doing employee childcare. As a childcare provider you actually have to have 30% or more of the kids be employees' children. So for example, if you had six kids in your care and you had an assistant and two of the kids were theirs, then you could theoretically tap into that benefit for 25% of those related costs.
So again, not a common occurrence, but one of the things we're seeing is with more family care providers and small to mid-size centers offering childcare as a benefit for employees, we are seeing some that are coming to this 30% tipping point. So just keep it in the back of your mind.
