Tom Copeland Answers Your Tax Questions

Here are some questions that I didn't have time to answer as part of my webinar, "The Tax Consequences of Coping with COVID-19" sponsored by Think Small.

Time-Space Percentage

Q: Does basement and garage with shared storage items count as regular use?

A: You can count a room as regularly used for your business if you use it two or three times a week for some business purpose. A basement and garage must be included in the total square feet of your home. Using these areas for storage of items used for both business and personal purposes does count as regular use for these areas.

Q: If you track the hours your are spending working in your home when children are not presents for several years and it is consistent, do you need to keep tracking it every year? Fortunately, I haven't had to close this year.

A: Ideally, you should carefully track for two months each year the number of your hours you spend on business activities when children are not present. Because these hours can vary from year to year, I would recommend tracking two months each year.

Q: If I was closed from March to August and spent that time redoing the space used replacing carpet, painting, also doing yard work to improve ability to stay outside more, how much of that time can be claimed.

A: You can count all of this time towards your Time-Space Percentage.

Q: Is a forced quarantine counted against you in calculating your Time-Space Percentage? 

A: If you are closed involuntarily or voluntarily, you can no longer count hours that children are present in your home for those weeks. However, you can start counting hours you spend on other business activities in your home even while you are closed.

Q: Is the only proof we need to document time working outside of business hours is to put it on a calendar?

A: You can put it on a calendar, on the KidKare software program, on a separate piece of paper, or anywhere else. Enter the time of day and what you did.

Q: For home square footage, do you count your garage square footage if you plan to claim it for regular use?  How about a detached shed?

A: You must include the garage as part of the total square feet of your home. I would only count a detached shed if it is permanently attached to your land.

Q: You have to take out days you are closed...vacations, holidays, weekends, etc.  right?

A: Right. You can’t claim hours caring for children in your home if you are closed. You can count any hours that you are closed if you are doing business activities such as cleaning, activity preparation, etc.

Q: Clarification: If we were open from January to March, but then closed due to COVID-19, and plan on reopening next year, do we still multiply 12 months of house expenses using our Time-Space Percentage, or just 3 months [January-March] of house expenses?

A: Calculate your Time-Space Percentage for the three months you were open and multiply by three months of house expenses.

Q: Are you considered to be closed if all of your families choose to keep their kids at home while they are working from home? We consider ourselves to be open and are simply waiting for them to start bringing them back to child care. Do you agree that we should be considered open since we're not turning kids away but are eagerly waiting for them to come back?

A: If you are ready to care for children, then you are open, even if no children are in your program. You can only count hours for your Time-Space Percentage if you do business activities when children are not present.

Q: When I make dinner in the evening for my family I make a double batch to use for child care lunch the next day can this time be used in my time space ratio?

A: No. You can only count time if you would not be spending the time if you weren’t in business. Maybe you could count the extra time it took to make the double batch, but I don’t think that would amount to much additional time.

Q: If the child care kids use your TV, stereo, and video game system, is that a time/space deduction for the value of those recently purchased items?

A: Yes.

Q: Cleaning...time/space %?

A: Yes, you can count the time you spend cleaning related to your business when children are not in your home.

Q: How does that work if we were saying we only working 15 hours with children a week for many weeks during the shutdown for unemployment. But we were doing online distancing learning, cleaning, taking classes and things that weren't counted hours. Is the state going to come back and say no you didn't claim all these hours in the spring, so you can't claim it for Time?

A: When calculating your Time-Space Percentage you can count all hours spent on business activities in your home when children were not present. This includes doing distance learning with the children, cleaning and taking online classes. This does not count as hours worked when claiming unemployment benefits.

Business Expenses

Q: Regarding "ordinary and necessary expenses" ...  are they subject to time/space %, right?

A: You can deduct any expense that is “ordinary and necessary” for your business. Then you can deduct the business portion of such expenses. Your business portion is usually your Time-Space Percentage. However, you can deduct the actual business expense of any item if you keep records showing how you calculated this.

Q: I want to improve our breezeway used by the families every day during the work day, I need to make it for drop offs and pick-ups. How do I pay for it? Personal or business?

A: You can pay for any expense out of either a business or personal account. It doesn’t matter.

Q: How do you record the dollar amount spent on toys/puzzles bought at a garage sale when you don't know who you paid?

A: Write up your own note that says, “June 10, 2022, garage sale at 123 Smith Avenue, paid $10 cash for a bunch of toys and puzzles.”

Q: Can we scan in our records and receipts and store them on the computer?

A: Yes! This is a good idea. Be sure to download your scanned receipts onto a flash drive for safe keeping.

Q: Well tank and water heater broke this year and softener all gave out this year. Is it deductible?

A: Yes. You can deduct your Time-Space Percentage of the cost in one year.

Q: If l put up a fence because I need it to care for children, does that count?

A: Yes, this meets the definition of an “ordinary and necessary” business expense. Deduct the business portion in one year.

Q: What category do those deductions go under? Furniture, pictures etc...

A: It doesn’t matter what category you put your expenses on Schedule C. I would probably enter furniture and pictures as an Other Expense on the back of the form.

Q: What about insulation?

A: You can deduct your Time-Space Percentage of this expense in one year as a repair on Form 8829.

Q: If we are building a new shop can we deduct that?  Is that the same as a garage?

A: Assuming you use the new shop for business purposes, you can deduct your Time-Space Percentage of the cost. You would depreciate the cost over 39 years as a home addition, just like a new garage.

Q: Can we count the items if we were closed due to COVID-19 when we bought them, but they are used for child care now?

A: Yes.

Q: Can body massages be deducted because of child care and stress etc....

A: No. This is considered a personal expense. Good try!

Q: I go to a chiropractor...is he deductible?

A: Good try again, but no, this is considered a personal expense.

Q: If you live in the country and you have a rodent problem, can you deduct a gun to use after hours to get rid of them? (I’m not making this up. 😊)

A: You can deduct the Time-Space Percentage of the cost of the gun!

Q: We put up a shed to store child care toys that we cannot use right now due to COVID as well as storing car seats. Can we claim the shed as 100% child care if all we have in it is child care items?

A: Yes.

Q: I bought all new appliances, are these considered 100 percent assets that I depreciate or just the business portion?

A: You can only deduct 100% of the cost of any item if you use it exclusively for your business. You can always deduct the business portion of new appliances in one year, no depreciation.

Q: What if the supplies I get for cleaning are given to me by my subsidy agency?

A: This is still considered income. Then you can deduct the business portion of the cost of the supplies.

Home Improvements

Q: Please explain the $2500 safe harbor way to deduct a large expense?

A: In recent years the IRS has established new rules on how to deduct larger expenses. Here they are:

• You can deduct the business portion of any item in one year that costs less than $2,500.

• You can deduct the business portion of any item in one year that costs more than $2,500, with these three exceptions: house, home improvement and home addition.

• A repair can always be deducted in one year, regardless of the cost.

• There is a difference between a repair and a home improvement:

  • A repair is painting, wallpapering, fixing broken glass, plumbing and electrical work

  • If you replace less than half the windows or flooring in your home, it’s a repair

  • A new furnace, central air, remodeling a kitchen is deducted in one year. A deck must be depreciated over 39 years

  • There is also a Safe Harbor for Small Business exception

Q: What about a kitchenette in the child care, child care expense or home addition?

A: You can deduct the business portion in one year, no depreciation.

Q: Can you define what you mean for replace half the windows? That you can claim as repair......I want to replace 7 windows and One slider door there is a total of 17 windows and 2 sliders in my house.

A: If you replace less than half the windows in your home, you can treat it as a repair and deduct the business portion in one year. In your case, treat all of these costs as a repair.

Q: Adding a bathroom to my basement for child care use only (4th bathroom in the home) are all costs deductible.

A: Yes, you can deduct 100% of the cost of the new bathroom as a repair in one year since it’s less than half of all bathrooms.

Q: I have to have my furnace replaced.  It keeps dying and parts cannot be found.  Can I write it out in 1 year?

A: A new furnace can be deducted in one year.

Q: What about the air conditioner that is 30 years old?  If I do furnace and AC together, does that then become HVAC system and have to be depreciated for 39 years?

A: See my answer just above.

Q: I renovated my basement and turned it to child care before being licensed. Am l able to count it as business expense? If so does that matter if it’s being paid from my husband's or my credit cards? 

A: This is considered a home improvement made before your business began. Add the cost of the renovation to the purchase price of your home, and depreciate it as part of the home. It doesn’t matter who paid for it, your husband or you.

Q: Can I replace all windows in my house for a 100% deduction?

A: No. Any expense that is used for both business and personal purposes cannot be a 100% business deduction. In this case, apply your Time-Space Percentage. Replacing more than half the windows in your home is considered a home improvement that must be depreciated over 39 years.

Q: If you replace your roof is that partially deductible?  How would you figure out how much if so?

A: Apply your Time-Space Percentage to the roof.

Food Expenses

Q: This question is about food receipts.  When we buy groceries do we need to keep all the receipts?  I have heard conflicting information on this. 

A: If you use the standard meal allowance method to claim food expenses, you don’t need to save any food receipts. If you want to claim the actual amount you spent on food you’ll need to save both business and personal food receipts.

Q: For clarity, you can or cannot claim the food deduction on the same meal you get reimbursed for from the food program?

A: You can deduct food expenses for meals and snacks you are reimbursed by the Food Program. Therefore, you are always better off joining and staying on the Food Program.

Q: Ok, so I have never saved any grocery receipts, you're thinking I’m nuts, but I had no idea I should have been saving for that particular expense since I am on the food program so I figured that the money I get for my monthly reimbursements were taking care of any of that expense.

A: If you use the standard meal allowance method to claim food expenses, you do not need to save any food receipts! The vast majority of providers deduct more in food expenses than they receive in Food Program reimbursements.

Employees

Q: I have a couple quick questions. I know we are able to use the money we pay our own children for our business but wondering if there are limits on how much you can pay them?  When they were younger I would pay them a minimal amount but now they are getting older and doing much more work and want to make sure I pay them appropriately.  

A: You can pay your children a reasonable amount to do work for your business. The federal minimum wage of $7.25 or your higher state minimum wage is reasonable. Paying a child $20 an hour seems unreasonable. You can pay a child under age 18 up to $12,950 a year (2022) before they will owe any federal income taxes. Be sure to keep careful records showing when you paid the child, what the child did to earn the money, and how much you paid.

Q: Where do I go to find more information on paying into social security for my daughter who is my co-provider.

A: If you pay your son or daughter to help you care for children and they are age 18 or older, you must withhold Social Security/Medicare taxes on their wages. My Family Child Care Tax Workbook and Organizer has a chapter on how to fill out all the federal tax forms when hiring employees, including your own children.

Paying Your Spouse

Q: I've never paid my husband for all the work, home improvements, repairs, and maintenance that he's done through the years. Now that I have some grant money to use on COVID-related expenses, can I pay him for the work he's done in rebuilding a deck to make it safe for children and increasing our outdoor play area?

A: Whenever you pay your spouse to do work for your business, you can deduct this expense. However, he will have to report this as income and pay federal and state taxes. In the end, you and your husband will come out the same as if you didn’t pay him. So, don’t pay him.

Q: Husband's has been snow blowing child care driveway for 36 years how can I, if at all deduct this?

A: If you pay him, he’ll have to report it as income. Don’t pay him. You can count the hours he spends snow blowing as part of your Time-Space Percentage.

Q: My husband has a hardwood floor business. He did a buff and coat on our floors. How do I account for this?

A: Deduct your Time-Space Percentage of the cost of the supplies. If you pay him you can also deduct this cost, but then your husband or his business will have to report it as income.

Unemployment

Q: You said unemployment won’t count as our business income right? So, will that affect us for qualify for health insurance?

A: Unemployment benefits are taxable income. This could impact your eligibility for health insurance.

Q: Our food program sponsor in Portland OR just went out of business due to COVID-19. We are down from 14 to 3 children, so it doesn't seem worth the time to record and submit, unfortunately. 

A: You should apply for unemployment benefits. I can’t guarantee you will qualify, but if you do, the benefit can be significant.

Retirement

Q: Suggestions on the best retirement savings options for a 38-year-old who has not been putting away for the last 9 years of doing child care.

A: I’ve written an article that should help.  Also, I’ve written a book, Family Child Care Money Management & Retirement Guide.

Q: What are my retirement options for self-employed?

A: You are probably eligible for the Regular IRA, Roth IRA, and SIMPLE IRA..

Q: Do l file as a child care center or as a family, i.e. myself and husband, do you deduct money that you put to IRA?

A: In almost every case you are better off filing jointly with your husband. Contributions to a Regular IRA or SIMPLE IRA will reduce your federal and state taxable income. They won’t reduce your Social Security/Medicare taxes.

Q: What other ways can we reduce or offset our grant money to reduce our taxes?  I thought an article mentioned adding to an IRA.  Advice?  For some who got more grants...

A: Contributions to a Regular IRA or SIMPLE IRA will reduce your taxable income. Otherwise, don’t spend money just to try to reduce your taxes.

Vehicle Expense

Q: Last question is about milage....do we need to track all mileage or can you go by your receipts and MapQuest the mileage at the end of the month?

A: You can keep records of your business trips in many ways: save receipts, cancelled checks, credit/debit card statements, calendar notations, MapQuest print outs, etc. You could also use mileage apps on your phone to track this.

Q: How much was this year’s mileage amount? 

A: $.575 per business mile for 2020.

Other

Q: I’m nervous about the lack of record keeping because this is my first year and I have no idea what heck I’m doing, and tax time is going be a whirlwind of newness for me!

A: Try to stay calm! The three most important recording keeping tasks are: Save all receipts (if you don’t have a receipt, take a picture of the item and guess how much it cost), track all the meals and snacks you served, track all the hours your worked. Go here for more information.

Q: If you use PPP loan for self-payroll, won't it be taxed then?

A: We don’t know. I’m trying to get an answer to this question.

Q: If we are getting the $1,200/month grant for emergency supplies is it wise to raise prices? is that considered gouging?

A: It’s not considered gouging. You can always raise your rates if you want.

Q: We cared for a family member's child and were being paid for child care services for a period. But, they decided to stop coming after the stay at home order. Several months later they provided a $1500 financial gift to help out with our loss of income. Is this income? They are not going to claim it as a child care payment.

A: Yes, this is taxable income to you. Any money a parent pays you because of your business relationship is income, even if you didn’t provide care for the money.

Note: If you have additional questions you may contact Tom Copeland at tomcopeland@live.com.

Tom Copeland - www.tomcopelandblog.com

Image credit: https://www.americanprogress.org/article/new-child-care-regulations-are-a-step-in-the-right-direction/