Stabilization Grants and New Tax Changes for 2021: Webinar Recording
Here is the recording of my recent webinar, “Child Care Stabilization Grants and New Tax Changes for 2021.”
The webinar covered:
The tax implications of the Stabilization Grants
What expenses can be deducted in your business
How to calculate your Time-Space%
And more
Here’s a copy of the power point slides.
The webinar was sponsored by Early Childhood Investigations.
Here are the answers to the many questions raised during the webinar.
Stabilization Grant
Q: Is the Stabilization grant taxable income?
A: Yes.
Q: Can I apply for the Stabilization grant if I already received the Paycheck Protection Program loan?
A: Yes!
Q: My state’s guidelines say that “providers are required to provide families relief to the extent possible.” For example, charging less tuition to assist parents. Are you saying this is not deductible?
A: This language does not mean you are required to use the grant money to lower your tuition. You don’t have to if you don’t want to. If you do, the amount that you lower your tuition is not tax deductible. You would be replacing lost tuition with grant income.
Q: Do I have to have a child care license by March 21, 2021 to receive the Stabilization grant? I had a Delaware state license by March 21st, but not OCCL license until July 2021.
A: I don’t know the answer for your particular state, sorry. Check with your state agency about this grant question.
Q: How do I pay myself if I did not lose children during COVID, and how do I calculate it?
A: You can pay yourself with part or all of the grant money. It doesn’t matter how much or how little you are now earning. It doesn’t matter if you haven’t lost any children.
Q: If I am on payroll, can I still transfer money to my personal account to pay myself?
A: I assume you are on payroll because you are being treated as employee of a corporation. If so, the corporation must pay you with the grant money through your normal payroll process which means paying payroll taxes.
Q: Is a new roof a major or minor repair?
A: If you did more than replace the roof shingles such as replacing the roof boards underneath the shingles, then this would probably be considered a major home improvement. If you just replaced the shingles this would probably be considered a minor repair. Your state may or may not see this as a major improvement. If you can’t get a clear answer from your state, you should pay yourself with the grant. Once you do that, you can then spend the money on a new roof.
Q: Can I use the Stabilization grant to replace my old central air condition unit?
A: No, that would probably be considered a major improvement. But, you can pay yourself with the grant money and then buy a new air conditioner.
Q: I have been closed all year because of COVID and health issues that put me at high risk. Can I still receive the Stabilization grant?
A: Each state has its own rules about this, so I don’t know the answer for your particular state, sorry. You need to contact your state agency to get an answer.
Q: How do I know how much I can ask for the grant?
A: You won’t have to ask. Each state will determine how much a provider will receive based on a criteria they have developed. Once you apply, you will be told how much you will get.
Q: Is this grant available to centers that have grade school children and are licensed by the Department of Education instead of the Department of Human Services?
A: I don’t know. You’ll have to contact the state agency that administers this grant.
Q: Can I use the grant money to rewire my home?
A: I don’t know if you state would consider this a major improvement or not. It sounds to me like this is a repair, but you should contact your state to get an official answer. If they say you can’t use it for this purpose, you can pay yourself and then use the money to rewire.
Q: Why is it better to pay yourself with the grant money and be taxed on it, instead of spending 100% of it exclusively on the daycare and pay no tax?
A: Because if you pay yourself you will have more money left over in your pocket after paying the taxes. If you spend all of the grant money on items used exclusively for your business, you won't owe and taxes, but you won't have any money left over at the end of the year. If you need to spend the grant money on items for your business, go ahead. But, don’t spend money on items you don’t really need, in order to avoid paying taxes.
Q: You said I could offer employees a one-time bonus. Does that mean I cannot offer a monthly or quarterly bonus?
A: No, you can offer as many bonuses as you want.
Q: Is the Economic Injury Disaster Loan (EIDL) a Stabilization grant or is this a loan that must be repaid? Can I pay myself with the EIDL money?
A: EIDL is not the Stabilization grant. The EIDL loan you must pay back. You do not have to pay back the Stabilization grant. You can pay yourself with the EIDL loan.
Q: Are there any grants available to add on space to my home without getting a loan?
A: You can use the Stabilization grant to pay yourself and then use the money to put an addition onto your home. There may be other grant programs offered in your state. Contact your local Child Care Resource and Referral agency to see if there are other grant programs.
Q: Can I pay myself any amount? What if I am on payroll with my staff?
A: Yes, you can pay yourself any amount. Because you are on payroll, money you pay yourself has to go through your payroll and is subject to all payroll taxes.
Q: If I give my staff a bonus am I doing it through payroll? How am I doing that?
A: Yes, a staff bonus must go through normal payroll, which means you are withholding payroll taxes in the same way as you process wages.
Q: Can I give different amounts of a bonus to my employees? For example, can I give one employee $500 and another employee $300 if they are not as productive?
A: Yes.
Q: What criteria is my state using to approve the Stabilization grants?
A: Each state sets its own criteria. In general, every licensed or regulated provider is eligible.
Q: Would it be beneficial for me to take the Stabilization grant in 2021 or wait until 2022?
A: It depends on your family’s financial situation. If you will be pushed into a higher tax bracket if you take the money in 2021, you may be better off taking the money in 2022 when you will be in a lower tax bracket. Ask your tax preparer to advise you.
Q: If I pay myself in order to make some changes that are not covered by the Stabilization grant, should I pay myself for the cost of the project, or is there some type of guidance I should use?
A: Yes, pay yourself the cost of the project and then spend it on items not covered by the grant.
Q: May I decrease wages for employees during the grant period?
A: No, you can’t decrease wages or benefits to employees during the grant period.
Q: I understand I can’t lower my employee’s wages, but what if the employee wants to work fewer hours?
A: An employee can work fewer hours and that won’t impact the grant.
Q: Can the grant be used to fund my IRA?
A: Not directly. But you can pay yourself and then use that money to fund your IRA.
Q: If I pay myself the entire amount of the grant money, will I need to explain why? Or, will I need to show a loss?
A: You do not have to explain why you pay yourself and you don’t need to show a loss.
Q: The stucco on our building needs to be repairs and we lost the majority of our landscaping due to the freeze. Can we use the Stabilization grant to repair or replace these items?
A: Yes.
Q: Are the Stabilization grants available in Canada?
A: No.
Q: Can I use the grant to replace my rock driveway with a paved driveway? Replace worn out bedroom carpet and hallway with wood floors? Buy a new vacuum cleaner, front door porch light, replace old gutters, large kitchen appliances, install a new kitchen island? Paying for weekly house cleaner?
A: You can use the grant money for all of these items.
Q: Can I use the grant money to fully remodel my kitchen, put up new house siding, metal roof, new back deck?
A: No, you can’t use the grant money for these major improvements. But, you can pay yourself first and then use the money for these items.
Q: Do I have to take out payroll taxes to pay myself if I’m an LLC or does every provider who is not incorporated still have to deduct from the check before paying ourselves?
A: If you are incorporated and are being treated as an employee of your corporation, then the corporation will report the grant as income. Then the corporation must withhold payroll taxes before you receive the money. The corporation can deduct your wages and payroll taxes. You will then report your wages as income. If you are a sole proprietor (self employed), you do not take out payroll taxes before paying yourself. You will report this as income and pay Social Security/Medicare taxes as well as federal and state income taxes on this income.
Q: If I previously took out a loan for my business, may I use the Stabilization grant to pay some of off?
A: You cannot use the Stabilization grant to pay off a previous loan. You can use the grant money to pay yourself and then pay off the loan.
Q: Can I use the Stabilization grant to purchase a home?
A: No. But, if you pay yourself, you can then use this money to purchase a home.
Q: I need a new washer, dryer and water heater. Can I use the grant money for this or would have to pay myself first?
A: You can use the grant money directly for these expenses.
Q: My large vehicle that I use for business and personal purposes needs a new transmission. Should I pay myself first with the grant money and then make payments on the vehicle?
A: Yes.
Q: Can I call my employee back after receiving the grant, even if I only have two children in care?
A: Yes.
Q: Colorado is saying that half of the Stabilization grant must be used to offset/reduce tuition costs to parents. How does this impact my taxes?
A: I am sorry to hear this. The amount your reduced tuition would have no impact on your taxes. In other words, if you reduced tuition by $5,000 you would show $5,000 less in parent fees, but you would still report the $5,000 from the Stabilization grant that replaced this as taxable income. The parents got a benefit, but you didn’t.
Q: I use my deck as an outdoor classroom due to COVID. Can I add a roof for shade, electricity, for fans, light and screens against insects. Can I use the grant money for these expenses?
A: Yes.
Q: Can I use the grant to landscape my backyard to build a play set for the daycare?
A: Yes.
Q: In my state the grant money can be used to reimburse expenses back to February 2020. Do you advise doing this?
A: If you do so it won’t impact your 2020 taxes. Using grant money for 2020 has the same impact as paying yourself. Since you can’t deduct these expenses on your 2021 tax return, you’ll owe taxes on the amount you apply to 2020 expenses.
Q: Can I pay myself in a lump sum or spread it out weekly or monthly?
A: You can do either.
Q: I had a flood in my home. Can I use the grant to hire a clean-up crew?
A: Yes.
Q: We are a non-profit preschool facility in our church. Will we have to file a tax return? Should we spend everything that we receive with the grant?
A: All non-profits should be filing a tax return, unless your preschool is owned by the children. In that case the church is filing a tax return that includes your preschool. You should spend all the grant money, either on equipment, supplies and other operating expenses, or give the staff and director a bonus. If you don’t spend it all you will have to return the unspent money.
Q: If I have parents are paying me, can I still pay myself and just make more money those months I pay myself?
A: Yes.
Q: Can center owners pay themselves?
A: Yes.
Q: How to I calculate the percentage of mortgage payments?
A: Apply your time-space% to the monthly mortgage payment. You can use this amount with grant money. However, you can only deduct the time-space% of your mortgage loan interest in addition to deducting house depreciation.
Deductions
Q: Can I claim my couch as a tax deduction if it’s used by my daycare children?
A: Yes. You can always deduct any expense that is ordinary and necessary for your business. Clearly a couch meets that definition.
Q: How do I deduct a shed?
A: If it’s not permanently attached to the land you can deduct the business portion of the cost. If it is permanently attached to the land, you must depreciate the business portion of the cost over 39 years.
Q: I moved my child care business out of my home into a separate building. Can I still use the standard meal allowance rate or must they use the actual expense method?
A: You can still use either method.
Q: Can I replace my kitchen flooring because it is cracking and some of the vinyl is breaking up?
A: Yes! You can treat this as a repair and deduct your time-space% of this cost in one year.
Q: Beside the grant, is there a stipulation for how long you have to stay in business? Like if something happens and you have close or choose to close.
A: It’s totally up to you how long you want to remain in business or when you want to close. There is not law that requires you to stay in business.
Q: I use my car for my business. Do any repairs count as an expense for my vehicle?
A: You can claim expenses for your vehicle using either the standard mileage method or the actual expenses method. You can’t count repairs if you use the standard mileage method, but you can count repairs if you use the actual expenses method.
Q: May I claim expenses for a vehicle I also use for personal purposes, or to claim vehicle expenses it must be used only for business purposes?
A: You can use a vehicle for both business and personal purposes. You don’t need to put it in the name of your business.
Q: What is depreciation of my home?
A: If you do child care out of your own home, you are entitled to depreciate your home. You want to claim this large deduction.
Q: If I have been in business for 30 years and sell my home ten years after I close my business, do I still need to pay tax on the home depreciation I claimed while in business?
A: Yes! Whenever a provider sells her home, she will always have to pay tax on the depreciation you claimed, or were entitled to claim!
Q: You said we should only save our business records for three years. Did this change? I thought it was seven years.
A: It has always been three years.
Q: If I pay a neighbor to paint my daycare with cash, how can I record this as an expense?
A: Write out a note that says, “November 20th, 2021 paid Fred Jones $2,000 in cash to paint my daycare.” Try to get him to sign it. It won’t matter if he doesn’t sign it. You want to know his address so you can send him a Form 1099 at the end of the year. Take a before and after picture of the area he painted. Claim this as a house repair on Form 8829.
Q: We started adding more kitchen cabinets this summer. We are planning on finishing the kitchen after the first of the year by replacing the old cabinets. Is this a home improvement or a repair?
A: It’s a repair because you didn’t remodel the entire kitchen by replacing just the cabinets.
Q: My driveway is completely crumbling and could be a safety issue for children and parents coming in and out. Is replacing this considered a repair or home improvement?
A: Installing a new driveway or repairing it would both be considered a repair, not a home improvement.
Q: On one slide it says that the PPP and EIDL programs are not taxable income. On another slide it says that state grants are taxable income. Why are the first two programs not taxable income? We have received grants from our city and our county. Are those grants considered taxable income?
A: The PPP and EIDL programs are administered through the Small Business Administration. Congress declared that these programs are not taxable income. But, your city and county grants are taxable. That’s just how the law works, some are taxable, some are not.
Q: Because of all my deductions I did not show a profit for three years. My CPA says if it happens again I will face the “hobby law.” What is that law?
A: IRS rules say that if you show losses three out of five years, there is an increased chance of being audited and the IRS might conclude that you are operating a hobby, not a business. If you are considered a hobby, you might not be able to deduct all of your expenses. Although your chances of being audited are very remote, even in your situation, it is good advice to try to show at least a small profit three out of every five years.
Q: My front steps/deck needs to be replaced because of rotted boards. Can I deduct this?
A: Yes, you can deduct this in one year as a repair. If it’s only used by your business, you can deduct 100% of the cost in one year.
Q: I have remodeled my kitchen and bathrooms. Is this a home improvement or a repair? Can painting the house be deducted as a repair?
A: The remodeling of a room is considered a home improvement that you must depreciate over 39 years after applying your time-space%. Painting is a repair.
Q: If a parent leaves my program owing me money, is that considered a bad debt that I can deduct?
A: No. You will report less income in this situation, but you can’t deduct anything that a parent owes you.
Q: I replaced the flooring in my kitchen. Can I deduct this?
A: Yes, deduct your time-space% of the cost in one year.
Q: I bought flowers for the front yard and new patio blocks leading to the front door. Are these expenses 100% business or time-space% deduction?
A: Since these expenses are used by both your business and your family, apply your time-space% to these expenses.
Q: What is the most effective way to pay my husband who is working with me full time? 1099, W-2?
A: If you pay your husband you must treat him as an employee and file the W-2, not a 1099. You will only save a small amount of money on your taxes when hiring your husband. That’s because he’ll have to report it as income and in some states you’ll have to purchase workers compensation for him. Therefore, it’s not a good idea to pay your husband.
Q: Can I deduct the business portion of any item in one year regardless of the cost?
A: Yes, with the exception of a home, home improvement or home addition.
Q: One of my bathrooms was flooded. It had to be decontaminated and repaired. Are these expenses tax deductible?
A: Yes, deduct the time-space% of this cost.
Q: I have two workers and pay them in cash and hope to give them IRS Form 1099. Is this correct?
A: No! You must treat people who help you care for children as your employees, subject to all the payroll taxes.
Q: Can I deduct the cost of pets?
A: You cannot deduct any costs associated with a dog or cat. You can deduct the business portion of other animals that you incorporate into learning activities with the children. This could include fish, gerbils, rabbits, and so on.
Q: I refunded two weeks of care for a family that had to quarantine. Is this a deduction?
A: No. Discounts, scholarships and refunds are not tax deductible. Report as income, the amount you received from parents.
Food Program
Q: I am on the Food Program and I spent $100 a month for food, but am only paid $68 from the Food Program. Will I have to pay taxes on what I am getting reimbursed for?
A: You must report Food Program reimbursements as taxable income. You can deduct your food expenses either using the actual expenses method ($68 in your example) or the standard meal allowance method.
Q: If I don’t use receipts to calculate my food expenses, isn’t the calculation a wash? In other words if I use the standard meal allowance to claim my food expenses, won’t this be the same amount as the reimbursements I received from the Food Program?
A: No! No! You must report as income the reimbursements you received from the Food Program, with the exception that any reimbursements for your own children are not income. This income will not be the same as your food expenses. This is clearly the case if you were receiving the lower Tier II reimbursement rate before July. Even if you received the higher Tier I reimbursement rate for the entire year, the rate went up in July, so it’s not a wash. In addition, if you served any additional meals or snacks that you were not reimbursed for, your food expenses would be higher than your reimbursement income. One extra snack per day, per child is an additional $202 deduction.
Q: If I use the actual expenses method to claim food expenses in one year, can I switch to using the standard meal allowance method in another year?
A: Yes. You can choose which method to use each year.
Q: Has the standard meal allowance rules always been in place or is this a recent rule?
A: The standard meal allowance rate has been in effect since 2003.
Q: May I use the standard meal allowance rate to claim food expenses for an employee that eats food while working in my home?
A: Yes.
Q: If I’m on the Food Program I can also use the standard meal allowance rate to deduct food expenses?
A: Yes. You can deduct all of the reimbursed meals and snacks as well as un-reimbursed meals and snacks.
Time-Space Percent
Q: How to I calculate my Time Percent when children are in my care 24 hours a day?
A: You can count all the hours children are present in your home. If they are present 24 hours a day, five days a week, that represents 120 hours that you can count. Keep enough records to show that children are present 24 hours.
Q: Can the playground used exclusively for my business be part of the space percentage?
A: No. Outdoor space is not considered part of the square footage of your home. The same answer would be for a patio or driveway or any outdoor play space.
Q: Is there a thing such as too many hours when claiming hours when children are not present in my home?
A: No. As long as you keep records showing you worked these hours, claim all the hours. There is no upper limit on how many hours you can claim.
Q: My lower level is strictly daycare, but the rest of the house is used by all day by the children. What does that do to my time-space%?
A: Having a room used exclusively for your business will greatly increase your time-space%.
Q: If I store all my children’s books on shelves in my son’s room (he is too old for them), do I count the square footage that the shelves take up, or do I count the entire room in my time-space% calculation?
A: Count the entire room as regularly used as a daycare storage room.
Q: You said that almost everything in your home is a deduction (welcome mat, chairs, flowers in your front yard), can you clarify if these are 100% deductible or time-space%?
A: The cost of any item that is used exclusively for your business can be deducted 100%. If the item is used for business and personal purposes, use your time-space% to determine the amount of the deduction.
Q: Do I include the square footage of my garage that is not attached to my home as part of the total square feet of my home?
A: Yes.
Q: Does going back to college count as hours?
A: Only if you already have a post-secondary degree.
Q: I have a separate building for child care on the same property as my home. The utilities and internet are combined. How do I figure the deductions?
A: You could try to separate out these costs by comparing the square footage of the separate building with the square footage of your home. If the separate building is 40% of the size of the home, then deduct 40% of these costs.
Q: I work nights. How can I deduct that?
A: You can count all hours that you work in your home, either caring for children or doing other business activities.
Q: Do I claim the same time-space% I used last year?
A: No. You must recalculate your time-space% each year. It may be the same or may not.
Q: We store a lot of our décor and child care stuff in our attic. Can I add the attic space in my time-space% calculation?
A: Yes.
Social Security
Q: How are my wages reported to Social Security?
A: If you are self employed, you are filing IRS Form 1040SE which calculates how much Social Security/Medicare tax you owe. If you are an employee, your employer is withhold Social Security/Medicare taxes and sending them on to Social Security quarterly.
Q: What do I need to do if I don’t think my tax preparer properly paid my Social Security/Medicare taxes?
A: If you are self employed, look to see if you file IRS Form 1040SE. If he did, then you properly paid your Social Security/Medicare taxes. If he did not, have him amend your tax return and not charge you for doing so, since it was his mistake.
Q: Can I claim Social Security on my ex-husband?
A: Yes, under certain circumstances. See this from the AARP website.
Q: If my husbands is disabled and collects Social Security Disability Insurance, will it change to regular Social Security when he reaches age 70?
A: I don’t know. You’ll have to contact Social Security directly.
Q: If I start claiming Social Security before my full retirement age, does Social Security look at my gross income or net income to determine if my benefit will be reduced?
A: Social Security will look at your net income.
Q: How can I build up my Social Security benefits before I retire when my profit has not been very high?
A: Don’t reduce your business expenses to show a larger profit, even if that might slightly increase your Social Security benefits. Instead, start making contributions to your IRA.
Other
Q: Is the Paycheck Protection Program (PPP) taxable income?
A: No.
Q: Are the EIDL loans forgivable?
A: The EIDL loan is not forgivable, you must pay it back over 30 years.
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/
