Will Your Food Deductions Be Lower After Joining the Food Program?
The Child ad Adult Care Food Program (CACFP) is one of the best programs in the country that serve family child care providers. All eligible providers should join and stay on the program because it is a valuable nutritional resource that can help beat obesity. The CACFP is also valuable because of the financial benefits is offers providers. Yet, some providers and tax preparers don't understand the positive financial impact of the CACFP. It has lead some providers to choose not to join or to drop out of the program. This is a major mistake.
This week by a provider wrote to me saying she was concerned that being on the Food Program would lower her food deductions. Unfortunately, this is a common misunderstandings about the Food Program. Here's why this fear is unfounded.
Let's use an example of Niki Provider who receives $5,000 from the Food Program and has no young children of her own at home. She uses the standard meal allowance rule to claim her food expenses that total $12,000. Her food expenses are so much higher than her Food Program reimbursements because she is receiving the lower Tier II rate. Niki's parent income is $30,000.
There are two ways Niki can report her food income and expenses.* First, she could report the full $5,000 as taxable income and the full $12,000 as a business expense.* Second, she could report only the net expense of $7,000 ($12,000 - $5,000 = $7,000). This means she would report no income and only $7,000 of food expenses.
In both cases, you can see that Niki's taxes will be the same. In the first situation her income is $35,000 ($30,000 + $5,000) and her food expenses are $12,000 - leaving a profit of $23,000 (before other expenses). In the second situation her income is $30,000 and her food expenses are $7,000 - leaving the same profit of $23,000.
The IRS clearly prefers that providers follow the first method and report all their Food Program income and all allowable food expenses. They say so in their Child Care Provider Audit Technique Guide.
Therefore, you should not be fearful that somehow being on the Food Program means you will have lower food expenses. The financial effect of being on the Food Program is that your profit will be higher (which is good!). Yes, you will pay taxes on Food Program reimbursements* ($5,000 in our example), but you will pay these taxes out of the $5,000 and still have most of it left over after paying your taxes.
In other words, you will always have more money in your pocket, even after paying taxes, when you participate on the Food Program.
* If you receive Food Program reimbursements for your own children, these amounts are not taxable income.
Tom Copeland - www.tomcopelandblog.com
Image credit: https://pixabay.com/photos/child-kids-children-food-eating-1566470/
For more about claiming food expenses, see my book Family Child Care Record Keeping Guide.
