The Unique Tax Rules Affecting Family Child Care
When family child care providers seek help from tax preparers, too often they receive bad advice because the tax preparer doesn't fully understand their business.
Here are four areas in the tax laws that are unique to the family child care business. Make sure that your tax professional understands them.
Following these rules will save you a lot on your taxes.
Household Deductions
All businesses can deduct expenses that are “ordinary and necessary” for their business. The definition of ordinary and necessary is helpful, typical, appropriate and useful for the business.
Since your business is providing a home learning environment for children, you are entitled to deduct hundreds of household items used in your business. This includes furniture, appliances, kitchen equipment, cleaning supplies, cable television, lawn care, service contracts on your appliances, new door bell, bedding, towels, floor polish, and so on.
Because of this, you should save every receipt for items that have anything to do with cleaning, repairing, or maintaining your home as a home. See my article, "What's Deductible in a Family Child Care Business?"My book Family Child Care Recording Keeping Guide lists over 1,000 allowable business deductions.
Note: You can only deduct a portion of items used personally as well as for your business. Use your Time-Space %.
If your tax preparer says you can’t deduct a household item, respond by asking, “Where does it say in an IRS publication that I can’t deduct this?” You may need to explain how a particular item is helpful, useful or appropriate for your business.
Business Use of Your Home
You are entitled to deduct a portion of the costs associated with your house: property tax, mortgage interest, utilities (gas, oil, electric, water, garbage), house insurance, house repairs, house depreciation, and house rent.Claim the Time-Space % of these expenses on IRS Form 8829 Expenses for Business Use of Your Home.
Your Time-Space % is based on the number of hours you use your home for business and the number of square feet you use for business on a regular basis.
Time
The family child care business is the only one where you must add up all the hours you use your home for business activities.
You can count all the hours day care children are present in your home. Count from the moment the first child arrives until the last child leaves. Count the extra time if parents pick up their children late, children stay overnight, or children come to your home on weekends to play.
You can also count all the hours you use your home for business activities when children are not present. This includes hours spent on cleaning, lesson planning, parent interviews, record keeping, meal preparation, parent phone calls, time on the Internet, and so on.
Hours spent away from the home shopping or taking children to school cannot be counted. For more details, see my article, "How to Track Hours When Children Aren't Present."
Don’t let a tax preparer tell you there is a limit on the number of hours you can count. I’ve won a Tax Court case where a provider worked 98% of the year caring for children. I’ve won another Tax Court case where a provider worked sixteen hours a week in her home when daycare children were not present.
Space
Unlike all other home-based businesses, you can claim a room as a business room if it is “regularly” used for your business. Regular use means using it for your business about two-three times per week. Children do not need to be in a room for you to count it as regular use (storage room, office, garage, laundry room, etc.). Such rooms can still be counted as regular use even if your state child care licensing rules prohibit children from entering them.It’s not unusual for many providers to use all of the rooms in their home on a regular basis for their business.All other home-based businesses can only count rooms that are used “exclusively” for their business. However, family child care is the only business that can have both “regular” use rooms and “exclusive” use rooms. If your tax preparer challenges this, tell him or her to look at the Instructions to Form 8829, page 2 under the heading “Special Computation for Certain Daycare Facilities.”
Food Program and Food Expenses
Family child care is the only home-based business that has the CACFP Food Program. All providers are better off financially if they join the Food Program.Food reimbursements received from the Food Program are taxable income. Exception: reimbursements received for your own children are not taxable income.You can deduct up to one breakfast, one lunch, one supper, and three snacks per day per child (if you serve them). Food served to your own children is never deductible.
Meals or snacks that are not reimbursed by the Food Program do not have to be nutritious.
You do not need to save any food receipts if you use the standard meal allowance method for claiming food expenses. See my article, "How to Claim Food Expenses."
You must keep a daily record of all meals and snacks served to your day care children, particular those not reimbursed by the Food Program.Don’t let your tax preparer tell you that your food expenses should not be more than your Food Program reimbursements.
Depreciation
You always want to depreciate your home because house depreciation represents a substantial business deduction for you each year.You are entitled to depreciate your home if you are licensed, have applied for a license or are exempt from child care licensing rules. Therefore, even if you only care for one or two children and are not required to be licensed, you can still claim house depreciation.When you sell your home, you will owe tax on the depreciation you claim or are entitled to claim. Don’t let your tax preparer talk you out of claiming this depreciation. See my article, "Should You Depreciate Your Home."
You are entitled to depreciate all household items you owned before your business began that you later used in your business. This can include furniture, appliances, pots and pans, wall decorations, tables, chairs, beds, and so on. See my article on how to conduct an inventory of these items.
Summary
Take advantage of all of these tax rules that benefit your business.
My book Family Child Care Tax Companion is designed to help you and your tax preparer identify potential errors before you file your taxes.
Tom Copeland - www.tomcopelandblog.com
Image credit: https://www.flickr.com/photos/86530412@N02/8225639632
The Family Child Care Tax Companion is for providers who hire someone to do their taxes.
The Family Child Care Tax Workbook and Organizer is for providers who do their own taxes.
