Tom Copeland Answers 107 Questions About Your Taxes
Here’s your opportunity to learn more about how the accounting section of the KidKare online software program works. I recently conducted a webinar on “Best Practices for Tax Time with Tom Copeland and KidKare” that answered many questions about business deductions and using KidKare.
You can listen to a recording of this webinar here.
The webinar covered:
How to make sure your Time-Space Percentage is calculated accurately
How to ensure that you are claiming all your meals and snacks
What end-of-year reports you need to print out to prepare your taxes
And more
KidKare is the most comprehensive record keeping software designed specifically for family child care providers. You can try it for 30 days for free here. If you register for a new KidKare subscription, enter the code 0659. By doing so you will be supporting the work that I do.
If you are using KidKare and need help, go here.
Here are the questions and answers raised during this webinar.
The Time-Space Percentage
Time Percent
Space Percent
Exclusive Use Rooms
Business Deductions
Home and Home Improvements
Vehicle Expenses
Food Program and Food Expenses
Employees
Other
KidKare
Time-Space Percentage
This is the most important number to calculate correctly that will make the biggest difference in reducing your taxes. I’ve created an instructional video on how to track hours when children are not present using KidKare.
Time Percent
Q:Can I count the two- three hours I spend on training every Saturday as well as the cleaning I do every day, seven days a week?
A: You can count all hours spent on business activities in your home when children are not present. So, as long as the training is done in your home, you can count these hours. In addition, you can count cleaning time. However, you should only count cleaning time related to your business. Never count 100% of all cleaning you do in your home. Estimate how much of the cleaning time is because of your business.
Q: Can I count shopping time?
A: Only if the shopping is done online in your home. Traveling outside your home for shopping or other errands, even if they are strictly for your business (going to the bank), do not count as time in your Time-Space Percentage calculation. That’s because you aren’t using your home when you travel away from it.
Q:If I am closed for a week, can I still count my “operation hours” in KidKare?
A: No. If you are not open, you cannot count hours as if you were caring for children for that week. This is true even if you had parents that were on call. You can count hours you are doing some business activity during that week.
Q:Where do I enter the hours that I worked when I was closed due to COVID-19?
A: You should enter hours your worked in your home when children were not present under the heading “Other Hours.” You can go back and enter these hours from earlier in the year.
Q:What if offer 24-hour service?
A: Enter all the hours you work into KidKare, even if you work 24 hours a day caring for children. You can’t count 24 hours unless children are in your home for 24 hours, or you also work on other business activities when children aren’t present. I have represented two providers who worked 24 hours a day, seven days a week caring for children. They kept proper records showing these hours and the IRS accepted them.
Q:Can I go back and enter hours I spent on business activities in my home before I opened (setting up and organizing)?
A: I recommend only counting hours you work in your home after you open your business and are caring for children.
Q:Can I count the hours I spend on weekends doing business activities when children are not present?
A: Yes!
Q:I keep records of all the hours I work in my home when children are not present on a calendar. I then enter the total monthly hours without details into KidKare. Is this okay?
A: Yes. You can keep records of the hours you worked anywhere. Having the details in a calendar and entering monthly totals into KidKare is great.
Q:How does my continuing education hours play into my Time-Space Percentage?
A: You can count these hours if you do the work in your home.
Q:Can I count the hours spent on homework for college classes?
A: Maybe. If you already have a post-secondary degree and are trying to earn your second post-secondary degree, you can count hours spent on homework in your home. If you do not have a post-secondary degree and are trying to get your first one, then you can’t count the time.
Q:Can I count hours if I am open after 6pm?
A: Yes, if you are caring for children after that time or are doing other business activities.
Q:How many extra hours per week is allowed when calculating my Time Percent?
A: There is no limit. In a national survey, the average number of hours providers spent on business activities when children were not present in the home was over 13 hours a week.
Q:If I am open from 7:15 to 5:15 but the first child never shows up until after 7:30 and they are all gone by 5:15, can I still count all of these hours under my Hours of Operation?
A: I wouldn’t. You could add up all the hours in the year using your Hours of Operation and then reduce the number of your Other Hours by a half hour a day.
Q:If my husband helps me during child care hours, can I count his time as extra time?
A: No, because he is doing this work while children are present in your home. If he does work for your business (cleaning, etc.) when children are not present, you can count this time.
Q:During COVID-19 I am working an hour in the morning and an hour in the evening. I have logged in these hours into KidKare. Is this amount okay?
A: It’s okay if it’s true! This is not an unusual amount of time to be cleaning because of COVID-19.
Q:I take a virtual Zoom CDA class every Thursday from 6pm to 8:30pm. Can I count this time?
A: Yes!
Q:My Time Percent is 53%. That seems high to me, but last year it was 51%.
A: There is no limit on how high your Time Percent can be. If you have the records to show this, then don’t hesitate to report it. Don’t listen to someone who says that it’s a red flag for an IRS audit if your Time-Space Percentage is over 50%. It’s not.
Q:When tracking hours when children are not present in the home, you recommend carefully tracking the hours I work for two months and use the average from those months, for the other ten months of the year. This never made sense to me because my activities vary so much over the year. I track hours one week every month or so and then enter the other weeks as estimates.
A: This works. By the end of the year, you probably have at least five or six weeks of careful records. Basing an estimate for the year on this is reasonable.
Q:Can I count all of the time I spend cleaning?
A: No. You can only count time spent cleaning because of your business. If you clean the kitchen or living room or bathroom, count some of this time. You can guess the business portion: 50% of the time as an example.
Q:I was closed for months due to COVID, can I still count all the cleaning and work I did in my home while quarantined?
A: Yes! Reconstruct these records if necessary by writing down your hours on a calendar.
Q:Do I need to enter my hours each year into KidKare?
A: Yes. The same goes for entering your space. Your Time-Space Percentage may change each year.
Q:Can I count the hours I’m watching news on television or my computer about COVID-19? This has to do with the regulations affecting family child care.
A: This would be a stretch. Counting hours watching general rules about COVID-19, no. Watching a news conference dealing specifically with child care rules, yes.
Q:If I’ve tracked the hours I spent on business activities when children were not present for two months in 2020, I know I can use this average for the other ten months. Can I then add to this total the number of extra hours I spent on cleaning because of COVID-19?
A: Yes
Q:Can I count the time I spend doing yard work, even if it’s not part of my designated play area, since I want it to look nice to attract customers?
A: Yes. I wouldn’t count all of this time. Maybe half of the time or so.
Space Percent
Q:Does a shed count as part of the space of my home?
A: If a shed is not permanently attached to the land, I would not count it as part of the space of your home. If it is permanently attached to the land, I would count it.
Q:Do I count my detached garage as part of the space of my home?
A: Yes, all garages, detached or not, should be counted as part of the square footage of your home. Most providers would be able to count their garage as being regularly used for their business.
Q:If I never included my garage or basement in my Space Percent calculation, can I do so on my tax return now? Will it cause a red flag if I do so?
A: Yes, you should include these areas as part of your Space Percent calculation. It won’t create a red flag.
Q:If I am renting an apartment on the second floor, can I count the basement where I store child care supplies?
A: Yes.
Q:Is my driveway included in my space calculation?
A: No. Driveways, patios, lawn areas and outside play areas are not considered part of the structure of your home and should not be included in the space calculation.
Q:If I don’t live where I do business, can I deduct the whole house as business or do I need to have a personal room?
A: Since you are doing child care in a building where you don’t live, you can deduct 100% of the cost of the building and the items in it, assuming you don’t have any personal use in the building.
Q:I use a closet in one room for my business. Does that make the entire room regular use?
A: I think it does.
Q:I have a shop that I use to store child care supplies. Can I count that room as regular use?
A: Yes.
Q:I use a building across the street for storage. How does this count?
A: It’s not part of the square footage of your home. You can deduct the business portion of the cost of the building, but it’s not part of your Time-Space Percentage calculation.
Exclusive Use Rooms
Q:What if I used three rooms exclusively for my child care?
A: Enter the square footage of these rooms into KidKare under the tab “Time/Space Calculation.” An exclusive use room is a room that is never, ever used for personal purposes. Having such a room will significantly increase your Time-Space Percentage.
Q:Can an office that I use just for my business count as an exclusive use room?
A: Yes, but you need to be able to say that you never, ever use the office for personal purposes.
Q:I have two decks. One is used exclusively for my child care. Is it exclusive?
A: Yes, assuming it is never used for personal purposes.
Q:My child care is in the first two rooms in my home, at the entry of the house. Would this be considered exclusive use space?
A: Yes, if it’s never used for personal purposes. You can walk through an exclusive use room for personal purposes and not destroy its exclusive business use.
Q:My whole main level is used for child care as well as our living space when the child care is closed. Is this considered exclusive use or regular use?
A: If a room is never used for personal purposes when your child care is closed, then it’s an exclusive use room. Otherwise, it’s a regular use room.
Q:I began using a room exclusively in February. Is this an exclusive use room?
A: Unfortunately, not. You must use a room exclusively from the beginning of the year.
Business Deductions
Q:When can I deduct expenses that were less than $2,500 or more than $2,500?
A: IRS rules have changed in recent years. You can deduct the business portion of any individual expense that costs less than in one year. There is no limit on how many items you can deduct that cost less than $2,500. You can deduct in one year any expense that costs more than $2,500 with the exception of a home, home improvement and home addition.
Q:I bought a laptop that I use often for my business (emails, finding crafts on Pinterest, classes, etc.). How do I determine the business portion of this expense?
A: You can either use your Time-Space Percentage or an actual business use percent. If you use an actual business use percent, you should track the business and personal use for a month or so to determine the business percentage.
Q:I buy a large pack of paper towels, use half for my business and half for personal use. Can I deduct 50% of the cost?
A: Yes, using the actual business expense method. However, you should keep all paper towel receipts.
Q:Wouldn’t I be able to deduct 100% of my toy expenses and use my Time-Space Percentage for cleaning supplies?
A: Yes, assuming you only use the toys for your business and you use the cleaning supplies for both business and personal purposes.
Q:How do I report business insurance if it is paid in an escrow account with our mortgage payment?
A: You should get a statement at the end of the year showing how much you paid for the insurance. Enter that amount into KidKare.
Q:I have a receipt with food and cleaning supplies on it. Do I need to break out these expenses?
A: No. Never break out expenses on a receipt. If you use the Standard Meal Allowance method to claim food expenses, you don’t need to save any food receipts. When a receipt has more than one expense category on it, choose one and put the expenses from the receipt under that expense category. As a general rule, it doesn’t matter what expense category you put expenses under.
Q:Once we log an expense into KidKare, do we need to have paperwork to back up that expense (receipts for heating, cable television)?
A: Yes, absolutely! Always save receipts for your business expenses.
Q:Can I enter into KidKare expenses while I was setting up my child care and before I got licensed?
A: Yes! See my article on the Start-Up Rule.
Q:How do I deduct a dishwasher?
A: Furniture and appliances can be deducted in one year, using either your Time-Space Percentage or an actual business use percent. Enter the dishwasher under Household Items.
Q:How do I deduct a new computer?
A: Same answer as above.
Q:How do I deduct a cot?
A: Same answer as above.
Q:When I go to Walmart, can I put the entire receipt in one category, minus the food?
A: Yes.
Q:How to I file or a create a proper receipt when buying second hand item without a real receipt?
A: Write out your written record showing the date, who you bought it from, and cost. Then take a picture of the item.
Q:What If I pay a person to do work around my home? Can I deduct that?
A: If the person is not caring for children and is doing work such as cleaning, lawn mowing, snow plowing, gardening, etc., then this person is a independent contractor. If you pay this person more than $600 in a year, you must issue IRS Form 1099-NEC. Give a copy of this form to the person and another copy to the IRS.
Q:Do I need to send in my receipts with my tax return, or can we just send our tax preparer the KidKare reports?
A: You do not attach receipts to your tax return. Showing your tax preparer the KidKare reports will suffice. Keep copies of all your receipts.
Q:What expense category do I put the $1 that I paid to allow the parents to use Stripe EPay?
A: Put it under Office Expense.
Q:How can I deduct credit card interest?
A: You can deduct the business portion. Either include it in the cost of the items, or enter it as a separate expense under Interest.
Q:When entering expenses into Kidkare, when should I enter something in the Notes area?
A: It’s not a requirement that you make notes when entering expenses. It’s a good idea because it will remind you, and the IRS, what the items were that you purchased. This helps you make the case that the expense was business, not personal.
Q:In August in Iowa we had a Derecho and had moderate damage to our home. How do I know what is a repair and what I need to depreciate?
A: If the damage was covered by insurance, you can deduct the business portion of your insurance deductible and any other out of pocket expenses in one year as a repair. You would not have to depreciate any expenses.
Q:We had to remove dangerous hanging trees. How do I deduct this?
A: Treat this as a repair. Deduct your Time-Space Percentage of the cost in one year.
Q: Our electric, sewer and garbage bill appears as one expense in one bill. Do I have to separate the costs when entering this into KidKare?
A: No, treat this as one expense. Call it Utilities Other.
Q: What if I have already split up a receipt? Should I do anything?
A: No, leave this alone. It’s not going to affect your taxes. In the future, save time by not splitting receipts.
Q: How do I deduct my cell phone and cable bills? I was using the actual expense and guessing the cable was 30% business
A: You can only deduct the business portion of a second phone line (land line or cell). If you are using the actual expenses method, you can’t guess. You need to track the actual use on a calendar or some other written record to back up you estimate.
Q:How do we enter gifts for the children?
A: If you give a gift that is only used by a child, you can only deduct up to $25 per child per year. Examples would be gift cards, and presents open up by a child in their home and never brought to your home. If you give a present to a child that is shared with the other children, then it’s an “activity expense” and there is no limit on how much can be deducted in one year. Example: a child opens up his present in your home and allows the other children to play the game, or read the book before taking it to his home.
Q:How can I deduct uniforms or clothes in general?
A: You can deduct a uniform. However, a uniform is something that is not suitable to be worn outside your home. The only example I can think of for a family child care provider is scrubs. Clothing you buy and only use in your business (shoes, pants, shirts, etc.) cannot be deducted because it is suitable for you to wear these outside your home. You can deduct sweaters or shirts that have a child care message on them. Deduct these items as Advertising.
Home and Home Improvements
Q:I have not depreciated my home using my Time-Space Percentage for four years because my tax person said I would have to pay it back when I sell my home. Is that right?
A: No! No, again! You want to claim depreciation on your home because it gives you a big tax deduction each year. When you sell your home you will owe tax on the depreciation you claimed. But! If you don’t claim this depreciation you will owe tax on the amount of depreciation you could have claimed! Yikes. Therefore, you can’t avoid paying taxes on depreciation when you sell your home, even if you didn’t claim it. So, claim it! You can use IRS Form 3115 to recapture all four years of depreciation and claim it on your 2020 tax return. Call me at 651-280-5991 and I can explain this in more detail. You must depreciate your home.
Q:What is the difference between a patio and a deck?
A: A patio is attached to the land and a deck is attached to the house. You can deduct the business portion of a patio on one year, whereas you must treat the deck as a home improvement. In general, a home improvement is depreciated over 39 years. However, there are two exceptions to this rule.
Q: How do I deduct a new roof?
A: There is a difference of opinion on this. Some tax professional say that if you only replace the shingles on your roof, you can treat this as a repair and deduct your Time-Space Percentage of the cost in one year. If you also replace the boards underneath the shingles it is a home improvement. Other tax professionals say that the replacement of shingles is a home improvement.
Q: Can I deduct windows that in a lower level where I use it 100% of the time for my business?
A: Yes. As a general rule, if you replace less than half the windows in your home, you can treat this as a repair and deduct the business portion of the cost in one year. In your case, since the windows are in a room used exclusively for your business, you can deduct 100% of the cost in one year.
Q: Should I be entering my home under the expense category “Home”? I haven’t used that tab since I opened, think it was only to be used if I recently purchased a home.
A: All providers should enter information about their home under this expense category, even if they haven’t recently purchased a home. All providers must depreciate their home to take advantage of the large business deduction.
Q: We are finishing our basement that will be used in my business, but it won’t be finished until January 2021. Do I deduct this expense in 2020 or 2021?
A: Deduct a home improvement expense such as this in the year you finished the work, or 2021.
Q: Would solar panels count as a utility or home improvement?
A: Home improvement.
Q: How do I deduct a fence I put in my backyard for child care purposes?
A: Treat this as a repair and deduct the business portion in one year. If you only bought the fence for your business, or you were required to put up the fence by child care licensing, deduct 100% of the cost.
Vehicle Expenses
Q: Can I count a trip as a business trip if I buy items that are not used 100% for my business?
A: Yes! You can count a trip as a business trip if the “primary” purpose of the trip was business. That means that if more than half the cost of the items you purchased were for your business, this counts as a business trip.
Q: Where do I enter business miles into KidKare?
A: After entering an expense, KidKare will ask you if you want to enter the miles. Enter your miles here.
Q: Can I deduct a jeep that I buy to plow my driveway?
A: Yes. You can use the standard mileage rate ($.575 for 2020) or the actual expenses of the jeep. You can also deduct the business portion of the cost of the plow, using either method.
Q: Can I claim multiple vehicles for mileage when driving places for my business?
A: Yes, you can use more than one vehicle for your business, including a vehicle your spouse may drive occasionally for your business.
Q: Can I deduct vehicle registration fees, repairs, maintenance costs of my vehicle?
A: Only if you use the actual expense method for claiming vehicle expenses. Using this method means you cannot deduct the standard mileage rate of $.575 for 2020.
Q: Do I use my Time-Space Percentage for vehicle mileage?
A: No. Your Time-Space Percentage has nothing to do with vehicle expenses. Either chose the standard mileage method or the actual expenses method to claim vehicle expenses.
Q: Where do I put the odometer reading at the beginning of the year?
A: Go into the Accounting section, then the Expenses section, then click on a vehicle you have entered. If you haven’t entered your vehicle, you can enter it here.
Food Program and Food Expenses
Q: Will CACFP COVID meals be treated as regular meal reimbursements?
A: Treat all reimbursed meals the same.
Q: Do I report as income reimbursements I receive from the Food Program?
A: Yes. The exception is that reimbursements for your own children are not taxable income.
Q: Can I deduct the snack I serve to children that is not reimbursed by the Food Program?
A: Yes. You can deduct up to one breakfast, one lunch, one supper and three snacks per day per child, when you use the Standard Meal Allowance method to claim food expenses. Meals and snacks you serve that are not reimbursed by the Food Program do not have to be nutritious.
Q: I have a child that comes after I have already served breakfast. Can I count what I serve this child as a snack?
A: You can count this as a breakfast.
Q: In the end of year report, Standard Meal Allowance, it shows that I served meals that were not reimbursed by the Food Program. Can I deduct these meals/snacks as a business expense?
A: Yes. The bottom number on this report will tell you how much you can deduct as a business expense.
Q: Should we separate food items?
A: Only if you are using the actual expense method to claim food expenses. Using this method you must save all business and personal food receipts. There are many ways to estimate your food expenses using this method. See my article, “How to Claim Food Expenses.”
Q: How should I record the non-reimbursed meals and snacks I serve since I cannot enter them into KidKare?
A: Some Food Program sponsors allow providers to enter their non-reimbursed meals and snacks into KidKare, some do not. Since yours does not, you need to keep your own records outside of KidKare. You may want to record them on a calendar or other written record.
Q: I am not on the Food Program. Do I still enter my meals and snacks served into KidKare?
A: Yes!
Q: Is it better to claim food expenses using the Standard Meal Allowance method, or the actual expenses method?
A: The vast majority of providers claim higher food expenses using the Standard Meal Allowance method.
Q: Is there a maximum number of meals and snacks I can deduct?
A: You can deduct up to one breakfast, one lunch, one supper and three snacks per day per child.
Q: How do I enter food expenses into KidKare?
A: If you are using the Standard Meal Allowance method, you only need to enter the number of meals and snacks you serve. The Standard Meal Allowance report will show you how much you can deduct. If you are using the actual food expenses method, enter all the business and personal food expenses under Food: Actual Expenses. You will then need to estimate your own business food expense.
Employees
Q: Should I pay my spouse or partner as an employee?
A: No. If you do, that person will have to report the money received as taxable income. You will have to withhold Social Security/Medicare taxes, file a series of payroll tax forms, and may even need to purchase workers’ compensation insurance.
Q: What forms do I give to an employee?
A: The federal payroll tax forms you need to fill out are Form 941, Form 940, W-2 and W-3. You must give your employee Form W-2 at the end of the year. You will also have to fill out a variety of state payroll tax forms.
Q: Can I pay my own kids as employees?
A: Yes. If they are age 18 or older you must withhold Social Security/Medicare taxes. If they are under age 18 there are no payroll taxes to pay.
Q: How should we pay ourselves as an employee?
A: You don’t. Any money you earn is yours to do with whatever you want. You can’t deduct money you earned.
Other
Q: Are grants that I receive taxable income?
A: Yes, grants are taxable as business income, even grants you received for COVID-19 relief. You are always better off getting a grant. See my article:
Q: You I have to report unemployment benefits as taxable income?
A: Yes, unemployment benefits are taxable as personal, not business, income.
Q: Must I pay taxes on loans I received from the Small Business Administration (SBA)?
A: Money received from the Paycheck Protection Program (PPP) is not taxable income. We don’t know if money received from the Economic Injury Disaster Loan (EIDL) “advance” is taxable income or not. Money received from the EIDL “loan” is not taxable income.
Q: I received a stipend. Where do I enter it into KidKare?
A: Enter it as Other Income.
Q: If someone donates money to you, is this income?
A: If a parent gives you money as a reward for your work, this is income. If they give you a birthday or Christmas present, it’s not income.
Q: How do we handle money we earn with a fundraiser?
A: It’s taxable income just like money earned from parents. You can deduct the costs associated with the fundraiser.
Q: If a parent owes me money at the end of the year and never pays, where do I enter this loss into KidKare?
A: You don’t. Money you don’t collect is not a business deduction. You only report the income you received each year.
Q: Should I look into become an Limited Liability Company (LLC)?
A: Probably not. It’s a complicated decision that most providers should not make.
Q: I am a single person LLC. How should I pay myself?
A: You don’t need to pay yourself since all the money you earn is yours.
Q: If my child care program had a decrease in revenue this year, how will this affect what I owe in taxes?
A: You will owe less in taxes because you earned less income.
KidKare
Q: Do you recommend getting the KidKare program at the beginning of the year, or before the year is over?
A: I’d recommend getting it as soon as possible. You can always go back and enter income and expenses from the beginning of the year. Or, you can start practicing and getting used to KidKare so you will be more comfortable using it once the year begins.
Q: Does KidKare scan receipts like Neat Receipt?
A: No.
Q: What reports do I give my tax preparer?
A: Form 8829 Detailed Expenses, Schedule C Worksheet, Standard Meal Allowance, Vehicle Mileage, Depreciation Worksheet, Time/Space Calculation
Tom Copeland - www.tomcopelandblog.com
Image credit: KidKare.com
